Pharaohs in the spotlight

A fortnight ago, both Egypt and Nigeria successfully tapped the Eurobond market. The former raised US$4.0bn from the sale of five, ten and 30-year debt instruments, the latter US$2.5bn from the sale of 12 and 20-year bonds. (The FGN might have wanted to raise more, had it not been for the need to secure the go-ahead from the National Assembly first.) The coincidence prompts us to revisit the different paths taken by the two governments on how to extricate themselves from acute fx scarcity and an economic slowdown.

To recap briefly, in November 2016 the Central Bank of Egypt (CBE) devalued the pound by more than 30 per cent and announced a move to a floating rate regime. The rate was adjusted from EGP8.9 per USD to EGP13.0, and the pound has since weakened to EGP17.7, having briefly traded south of EGP20.0.The CBE also hiked its policy rate by 300 bps to 14.75% in a coordinated step with the devaluation. The executive board of the IMF promptly approved a three-year extended fund facility of about US$12bn.

Thisfacility, like all others,comes with conditionality attached although the Fund insists that the economic programme is “homegrown”. As is universally known, this is the sticking point with the FGN. In Egypt’s case, the government levied VAT, cut electricity subsidies and began to channel some of the fiscal savings into the creation of social safety nets. The agreement with the Fund hastened the release of support from other multilateral agencies.

In terms of results, Egypt can point to some successes. Inflation spiked in response to the float (a description which many fixed-income investors would dispute) and the reduction in subsidies. It peaked at 33.0 per cent y/y in July and has started to fall rapidly, to 17.1 per cent in January, now that the one-off effects have been washed out of the index. The balance-of-payments for the nine months to March 2017 show a net inflow of portfolio investment of USD7.8bn, compared with an outflow of USD1.5bn in the year-earlier period.

There has therefore been a traditional positive response to the fx and other reforms, along with the endorsement of the IMF. This is also evident, if less markedly, from non-energy exports and FDI. Gas production from the hugeZohr field, developed by ENI of Italy, started in December 2016 although, given the extended lead times in the industry, we should be wary of claiming a success for the reform programme. The CBE noted earlier this month that net external demand had driven a recovery in Egyptian GDP growth, to 5.3 per cent y/y in Q4 2017 and 5.0 per cent for the calendar year. Public domestic demand, its commentary added, was a secondary driver, compensating for a fall in private domestic demand.

It is still too early to be definitive about the impact of the medicine taken by the Egyptians, and to adopt the anti-globalisation stance that the programme has brought further austerity for the population. The commentary also noted that the unemployment rate of 11.3 per cent in December 2017 was the lowest for seven years.

Extending the parallel, Nigeria has its own “homegrown” programme without an IMF agreement in place. For most buyers of fx, there has been a devaluation, the main exception being the government’s priority transactions. Foreign portfolio investors have responded positively, as they have in Egypt.

Growth in Nigeria has disappointed despite the fiscal stimulus from the FGN: 0.83 percent for full year 2017, on the back of a further rebound in oil production/prices. In common with Egypt, household budgets remain under pressure. The external balance sheet is stronger in both countries, which is discernible in the balance-of-payments and official reserves.

When we look beyond the immediate macro response to the reforms, we will single out three broader realities in the political economies of both countries. The first is the run-up to presidential elections, next month in Egypt and February 2019 in Nigeria. There seems little doubt that President Abdel Fattah al-Sisi will be re-elected. The political risk is negligible. This is not the case in Nigeria, where we can expect the infrastructure spend to accelerate in the months ahead. However, we have argued elsewhere that in Nigeria, unlike in Ghana or Kenya for example, elections are not generally synonymous with large-scale fiscal slippage, judicial challenges and widespread disorder.

The second reality is Egypt’s ability to tap into the goodwill of cash-rich Gulf states. This has been seen most recently in the flow of dollars into the country since the removal of the Islamist government in Cairo in 2013. Nigeria clearly has no comparable source of support.

The third is that the fiscal and debt dynamics are far more challenging in Egypt, which we identify in a budget deficit (including grants) regularly close to 10 per cent of GDP, although now on a downward trend, and gross public domestic debt close to 90 per cent. In Nigeria the deficit (federal only) is capped at 3 per cent, and the comparable debt burden is no more than 30 per cent under a worst case scenario. This should make Nigeria better placed on paper than Egypt to push through the structural reforms to create a leaner, more dynamic and more diversified economy. We then hit other realities in the political economy, notably the federal system and the Dutch disease.

From a narrow credit perspective, the agencies favour Nigeria with their foreign-currency, long-term ratings. S&P has Egypt at B- and Fitch on B: they both have Nigeria one notch higher, at B and B+ (with a negative outlook) respectively.

Gregory Kronsten

Head, Macroeconomic & Fixed Income Research

FBNQuest