Macro Analysis /
Egypt

EGP strength: Winners and losers in light of EMPI drop – update

    This report updates our exchange rate outlook for 2020 and corrects minor discrepancies from the original article. 

    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 existed since 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, slightly closing in the gap. 

    The drop in EMPI is partially explained by:

    • Rising foreign holdings of Treasury Bills, recording US$22bn in December 2019, compared to an all-year low of US$13.24bn in January 2019, especially after three interest rate cuts undertaken by the Fed in July, September and October; ending 2019 with a fed funds rate in the range of 1.5-1.75%.
    • Egypt offers an attractive risk/reward balance for fixed income investors among EM peers (see chart on slide 4 and table on slide 3 of the full report).

    Going forward, we see the exchange rate averaging EGP/USD 16.37 in 2020, without ruling out some strength over the year in the range of 5%, whereby we end 2020 at EGP/USD 15.00

    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 emerged as winners, due to exposure to the USD on the cost side, while Construction/BM/Industrials and Chemicals/fertilizers/petrochemicals emerged as losers due to exposure to the USD on the revenue side. See the table on slide 6 for full details.