“We Remain Cautious On Investing”
As US dollar reserves rise, Egypt and Nigeria have become attractive, but proceed with caution, says one emerging market analyst.
Egypt has just received a fresh tranche of International Monetary Fund (IMF) aid, while Nigeria has issued $3 billion of 10-and 30-year foreign currency debt. While investors are warming up to both sovereigns, caution is still warranted, explains Win Thin, global head of emerging market currencies with Brown Brothers Harriman.
Now that the IMF and Egypt have signed off on the next trance of aid, Egyptian officials expect the money by year-end or early 2018. Of the 3-year $12 billion program, $4 billion has already been disbursed.
Egypt’s foreign reserves have risen to all-time highs after falling over the course of 2015 and 2016. This is due to a combination of IMF aid, debt issuance, and foreign investment inflows. At $36.7 billion in October, they cover close to five months of import and are nearly three times larger than the stock of short-term external debt.
Foreign holdings of Egyptian T-bills reached $17.5 billion at the end of September, according to central bank data. This is up significantly from more than 5 billion in April. External debt has also been climbing, rising to $79 billion this year vs. $56 billion last year. While the external debt/GDP ratio remains relatively low at around 40%, it is up sharply from below 20% in 2015.
Egypts economy is now recovering. The IMF recently noted that “Egypt’s economy continues to perform strongly. Reforms that have already been implemented are beginning to pay off in terms of macroeconomic stabilization and the return of confidence.” GDP growth is forecast by the IMF to decelerate modestly to 3.5% in 2017 from 4.3% in 2016, before picking up to 4.4% in 2018.
Price pressures across Egypt do remain elevated, though CPI decelerated to 30.8% year over year in October from 31.6% in September. Much of this year’s spike, according to Thin, was caused by the pound’s weakness after being floated. “It’s important to note inflation was elevated beforehand.” Inflation remains stubbornly high, just below the peak of 33% in July. 12-month local currency T-bills are currently yielding around 17.8%.