Thoughts from a Renaissance man: Egypt letting the currency appreciate
By Renaissance Capital’s Global Chief Economist, Charles Robertson.
It’s a new fiscal year in Egypt (it runs from 1 July) and the authorities have let the currency strengthen by about one per cent today. This is the strongest since April.
I gave up on EGP appreciation to 15.5/$ in 2017 about a month ago, and instead have pencilled these numbers into my macro model: 18/$ by end-2017 and 17.5/$ by June 2018.
We assume current account trends are supportive of the currency (the data only comes out quarterly). Letting the currency strengthen may be about putting downward pressure on inflation, or it may be that the authorities feel FX reserves are high enough to allow appreciation. A third factor could be that there is an implicit target for the currency in the 2017-18 Fiscal Year and the CBE is now going to edge the currency towards that level.
Fair value for the currency is 14.2/$ based on our 22 year REER model, and our assumption is the authorities will want to maintain a level weaker than this to help with jobs (I’d still see 16/$ as the maximum they would let the currency appreciate to).
Hard to know where the currency goes from here. But in the meantime, all good for equity and bond investors (five year local bonds now yield 21 per cent).
Turkish inflation and the lira - supportive of our overweight view
Turkish YoY inflation fell for the second month in a row – it’s now down 1pp on the April high of 11.8 per cent to 10.9 per cent in June.
Turkish food prices (about 24 per cent of the CPI basket) remain volatile, but if our forecasts are right on this, then this figure can drop another 1pp in July to 9.8 per cent.
This is part of the reason why Dan Salter made Turkey “overweight” in the June report The Fifth Element.
Meanwhile our latest REER model shows the Turkish lira is five per cent cheap (at TRY 3.55/$) to its long-term fair value of TRY 3.38/$ rate.
Turkey does better when the Euro strengthens, as they tend to import more in dollars, but they often export in Euros. As a currency that trades 50/50 with the euro and the US dollar, a stronger euro means imported inflationary pressures are falling when the euro is getting stronger, while Turkish exports to Europe are getting cheaper.