By Paul Wallace
Egypt has managed to tame its black market, unlike Nigeria
Nigerian bonds, stocks are underperforming Egypt’s this year
Back in early November, Egypt and Nigeria were in the same situation, crying out for dollars to revive their sinking economies and trying to curb rampant currency-trading on the black market.
Egypt’s tactic was to ditch a currency peg, leaving its pound open to market forces. The move helped secure a $12 billion International Monetary Fund loan for Africa’s third-biggest economy. This week, Managing Director Christine Lagarde praised the government for restoring “economic sanity.” Egypt is still short of dollars, but the situation is changing, and investors are gradually returning.
Nigeria, in contrast, isn’t letting the naira trade at its market value, insisting that’s the only way to protect the poor from a further surge in inflation, which is already at the highest level since 2005. Traders argue it’s left the currency overvalued and say they’ll avoid Nigerian local markets until it weakens. While the government managed to issue a $1 billion Eurobond last week, its first in almost four years, it is struggling to raise money from the likes of the World Bank, which first wants to see a more flexible exchange-rate in place.
Here are five charts showing how the two nations have fared since Egypt’s devaluation.
Egypt’s pound lost more than half its value against the dollar after officials let it float on Nov. 3. But it has started to rebound, gaining 16 percent this month, which is the best performance among 154 currencies tracked by Bloomberg. While Nigeria’s naira has fallen almost 40 percent versus the greenback since it was weakened in June, analysts say the central bank needs to let it drop further and is back to its old ways of holding the exchange-rate.
Taming the Black Market
The gap between the pound’s black-market and official rates has all but closed since the devaluation as investor inflows have eased dollar-shortages. In Nigeria, it’s widening. The naira fell to a record 510 against the greenback on the black market this week. That’s 38 percent weaker than the official rate of 315.
Egyptian Assets Rallying
Egypt’s stocks, local-currency bonds and dollar debt have all performed better than Nigeria’s this year. The EGX 30 Index has climbed 11 percent in dollar terms, the best performance in Africa. Nigeria’s benchmark stock index is down 6.2 percent since the end of 2016.
Bleak Outlook for Nigeria
Investors’ optimism about Egyptian stocks has soared and continued to slide in Nigeria. The latter’s equities are the cheapest in Africa, with the price-to-earnings ratio based on estimates for the next 12 months falling to 7.5, below even that of the main gauge in Zimbabwe, where a liquidity squeeze has left some companies and government departments unable to pay their workers. In Egypt, the ratio has risen to 11.3 from 7.8 in June.
Not All Good for Egypt
Prices have rocketed in Egypt, with inflation reaching 28.1 percent in January. The pace is now faster than Nigeria’s rate of 18.7 percent. Still, the IMF said on Feb. 15 that Egyptian inflation will start to dip as the effect of the devaluation wears off, helped by the strengthening pound. In Nigeria, investors say a growing scarcity of foreign-exchange in a country that imports most finished goods will only add to price pressures.