By Srinivasan Sivabalan
Earnings at record, estimates highest since 2016 devaluation
Success sets example for currency-peg regimes, says Investec
If anything Nigeria needs is understand the economics on currency float and its effect on driving profitability for quoted companies and the local economy. its needs to learn from Egypt’s style of removing currency float.
Signs that Egypt is starting to reap the economic benefits of a currency float almost three years ago came last week. Nigeria, which took a different path when faced with similar problems, is still struggling.
Egypts model of Currency float
Economists say removing currency controls brings short-term pain and long-term gain. Egypt is proving them right.
Three years after the north African nation let markets set the pound’s value, its companies are reaping the benefits. Profits have surged to a record in dollar terms, and earnings estimates have rebounded to levels last seen before the float.
Egypt is also looking the healthier of the two in terms of economic growth. Its output will expand 5.5% in 2019, more than twice as much as Nigeria’s and the most among Middle Eastern nations, according to Bloomberg surveys of analysts.
Portfolio flows into Egypt soared following the devaluation and the start of IMF-supported reforms, which included cutting subsidies that soaked up much of the budget. And it got more foreign direct investment last year than anywhere else in Africa, according to the United Nations.
Nigeria has attracted plenty of hot money by keeping bond yields high and pledging not to let the naira weaken, but FDI has plunged.
The IMF says the Nigerian currency regime deters investors and hurts the economy, which is growing more slowly than the population. President Muhammadu Buhari argues it’s needed to boost local manufacturers and stop inflation accelerating.
Dollar earnings of Egyptian companies rise to a record
It’s a turnaround for a country which, in November 2016, was forced to liberalize an overvalued currency and cut subsidies to get a $12 billion bailout from the International Monetary Fund. The measures, aimed at easing a dollar squeeze, initially caused inflation to accelerate to 33% and sent earnings plunging.
Today, it’s inflation that’s near a record low. Foreign currency reserves are booming and the stock market is 62% bigger than its post-float low. Projections for economic growth of 5.6% this year and the pound’s best annual performance since at least 1999 are firing up earnings.
Earnings estimates are back at pre-float levels
Higher earnings estimates reflect the adjustment the economy has gone through and investors’ improved perception of the nation of 100 million people, Schultz said. Moderating inflation has contributed to investor returns, he added.
Rising profit expectations are making Egyptian stocks cheaper to own. The EGX 30 Index trades at 8.3 times projected 12-month earnings, one of the lowest valuations in emerging markets.
In east Africa, Kenya has struggled to boost credit growth, in large part because of a cap on interest rates that was only just rescinded. While the country doesn’t peg the shilling, the IMF last year reclassified the currency regime from “floating” to “other managed arrangement” to reflect its limited volatility and periodic central-bank intervention. The IMF has also said the shilling is overvalued, an assessment rejected by the central bank.
“Egypt is a very good example of what happens when a country ends currency management and lets it float in the market,” said Andrew Schultz, the head of Africa strategy and sales at Investec Bank Ltd. in Johannesburg.
“It’s a success story that a number of countries in the region could learn from — especially Nigeria and Kenya.”
Nigeria is fighting slow economic growth even as inflation has risen to a 17-month high of 11.6%. Moves to boost the economy with lower rates would put upward pressure on prices and also test the naira’s strength. The country has made a messy advance toward a freer currency in recent years, promising a float but later reasserting controls. It now implements a dual system that allows foreign investors to repatriate funds more easily but which they say has led to an artificially strong currency.
History Currency Float in Nigeria
Emefiele imposed currency restrictions in 2015, defying advice from bankers to float the naira and raise interest rates as some other oil exporters had done. His decisions were in line with the stance taken by Buhari, an opponent of letting the naira float freely.
“On the issue of free float, the monetary policy committee has said it is wrong – it will certainly lead to capital flight,” Emefiele said at a press conference after announcing the rate decision.
“It will lead to massive, massive depreciation of the valuation of our currency, and ultimately to currency crisis in Nigeria,” he added.
Answering a question about an unnamed presidential candidate criticising the central bank’s policies, Emefiele said: “I have always said that we are apolitical. We will remain apolitical.”
Currency controls imposed by Emefiele saw investors cutting their exposure to Nigerian assets as the once-promising emerging market was ejected from key bond indexes.