Exchange Market Pressure Index drops with FPI inflows
The widening gap between the Exchange Market Pressure Index (EMPI) and the actual nominal exchange rate, which has existed from February 2017 post flotation until now, has previously allowed some stability in the exchange rate. However, starting 1Q19, the exchange rate started responding to the drop in EMPI, albeit at a slower rate.
The drop in the EMPI is partially explained by:
- Rising foreign holdings of Treasury Bills, recording USD 22 billion in December 2019, compared to an all-year low of USD 13.24 billion in January 2019, especially after the Fed’s four consecutive interest rate cuts in the period from August to November 2019.
- Egypt offers one of the best risk-reward balances for fixed income investors among EM peers (see the chart on slide 4 and the table on slide 3 of the full report).
Going forward, we believe that the exchange rate will remain broadly stable at USD/EGP 16.4-17.3 over the forecast horizon.
EGP strength: Winners and losers
In light of the current strength in the EGP, drifting away from our initial assumption of EGP18.50/USD on average in 2019 to an average of EGP/USD 16.81 by the end of 2019, we ran a FV sensitivity theoretical exercise on our models to determine the key winners and losers from the strength in the EGP.
Consumer goods and healthcare/pharma players emerge as winners, due to exposure to the USD on the cost side, while Construction/BM/Industrials and Chemicals/fertilizers/petrochemicals emerge as losers due to exposure to the USD on the revenue side. See the table on slide 6 for full details.