EMs: Egypt continues to move ahead with structural economic reforms - BBH
Analysts at Brown Brothers Harriman explained that Egypt continues to move ahead with structural economic reforms.
Key Quotes:
"While painful, these measures should help put Egypt on a path of improving fundamentals. Foreign investors have taken notice, with inflows picking up sharply."
"The pound has steadied since the freefall when it was floated in November. In 2016, EGP fell -57% vs. USD and was by far the worst EM performer. Next closest were ARS (-18%), TRY (-17%), and MXN (-16%). So far in 2017, EGP is flat YTD and is ahead of only COP (-1.5%), PHP (-1.6%), BRL (-1.7%), and ARS (-3.6%). Our EM FX model shows the pound to have VERY WEAK fundamentals, so this year’s underperformance is likely to continue.
Egyptian equities are underperforming EM after a terrific 2016. In 2016, MSCI Egypt 110.5% vs. 7% for MSCI EM. So far this year, MSCI Egypt is up 4.5% YTD and compares to 17.6% YTD for MSCI EM. This underperformance should ebb, as our EM Equity model has Egypt at a NEUTRAL position.
Currency controls have been eased, suggesting policymakers no long see a dollar shortage. Good two-way flows have been seen in EGP, which has also helped encourage foreign investment. Finance Ministry reports that foreign holdings of local currency debt jumped from EGP10.1 bln at the end of 2016 to EGP136 bln as of May 30.
Yet Egyptian bonds have underperformed. The yield on 10-year local currency government bonds is up 109 bp YTD. This is the worst in EM and compares to the next worst Czech Republic (+62 bp), China (+54 bp), and Korea (+12 bp). With inflation likely to turn higher again and the central bank forced to tighten further, we think Egyptian bonds will continue underperforming.
Our own sovereign ratings model has Egypt’s implied rating at B/B2/B. Actual ratings are B-/B3/B, which suggests upgrade potential for S&P and Moody’s. If Egypt can stick with the reform plan, the agencies may reward it with upgrades towards year-end."