Tale of two currencies: Egypt sets itself apart from Nigeria
Lagos — 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 $12bn IMF loan for Africa’s third-biggest economy. This week, MD 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, is not letting the naira trade at its market value, insisting that is 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 has left the currency overvalued and say they will avoid Nigerian local markets until it weakens. While the government managed to issue a $1bn 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.
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 14% in February, which is the best performance among 154 currencies tracked by Bloomberg. While Nigeria’s naira has fallen almost 40% against 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 is 38% weaker than the official rate of 315 to the dollar.
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% in dollar terms, the best performance in Africa. Nigeria’s benchmark stock index is down 6.2% 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:earnings ratio based on estimates for the next 12 months falling to 7.6, 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 on time. In Egypt, the ratio has risen to 11.1 from 7.8 in June.
Not all good for Egypt
Prices have rocketed in Egypt, with inflation reaching 28.1% in January. The pace is now faster than Nigeria’s rate of 18.7%. Still, the IMF said on February 15 that Egyptian inflation would start to dip as the effect of the devaluation wore 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.