Egyptian Companies’ Profits Surge as They Reap Benefits of Currency Float
Egyptian Companies’ Profits Surge as They Reap Benefits of Currency Float
(Bloomberg) -- For any central bank balking at freeing up its currency for the fear of inflicting pain on the economy, the turnaround being enjoyed by companies in Egypt may provide comfort.
Three years after the north African nation let markets set the pound’s value, its companies are witnessing a rebound in profits. While earnings have surged to a record in dollar terms, estimates have returned to levels last seen before the float.
It’s a transformation for a country that 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.
“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.”
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 too. 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Africa, Kenya has struggled to boost credit growth, in large part because of a cap on interest rates that was only just rescinded.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.
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.
To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Paul Wallace
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