Tale of Two Currencies: Egypt Sets Itself Apart from Nigeria

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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 (IMF) 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.

Pound Rebounds

Egypt’s pound lost more than half its value against the dollar after officials let it float on November 3. But it has started to rebound, gaining 16 per cent this month, which is the best performance among 154 currencies tracked by Bloomberg.
While Nigeria’s naira has fallen almost 40 per cent 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 investors’ 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 per cent 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 per cent in dollar terms, the best performance in Africa. Nigeria’s benchmark stock index is down 6.2 per cent since the end of 2016.

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 Febuary 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.
•Culled from Bloomberg

  • Villager

    When a country is led by unscientific folks, what do you expect?

  • Jon West

    The difference is that Egypt is a nation, while Nigeria is a country. The difference is telling!!!

  • jones ejembi

    Those of you complaining here will be the first to scream when the effects of devaluation hits you.

  • Daniel Obior

    There is no alternative to allowing market forces prevail on the value of the Naira.
    The end result of our stupid policy will be more suffering.

  • DanielOsazuwa

    We devalued our currency and it failed to lift the capital market. The NSE index actually climbed from a high of 31,017.25 in June 2016 to yesterday closing low of 25,130.36. When you devalued a currency, the first sign of it effectiveness is the reaction of the market. Bullish movement always go with devaluation. I knew it was going to play out this way ( see my disq comment a day after Emefiele “flotation”)

    A situation where Nigeria most capitalized Bank share is about $0.22 and a PE ratio of 3. 35 is an aberration. This tells of a rudderless fiscal policy. Emefiele FX undigested policy has wiped out more than 65% of our capital market valuation.

    I am afraid, Emefiele combination with Ostrich Buhari will take our economy on a TGV ride to depression.

    GUARANTEED ! https://uploads.disquscdn.com/images/0393bc71ac65e3385b7346aa7baadbaaf603b562d6e1073cdadae0784fafa770.jpg