09-Jul-2017
Winners and losers from a stronger EGP
EGP strength if CBE changes repatriation mechanism
Our forecast of USD-EGP ending 2017 between EGP16-17 is contingent upon significant net portfolio inflows filtering through to the financial system. This is itself dependent on the CBE changing incentives for the repatriation mechanism for foreign portfolio investment (FPI), which has absorbed most of the significant YTD inflows and so neutralising their exchange rate impact. One scenario would be to increase the cost of the mechanism, leading some investors to bring their funds directly into the interbank market. Continuing interest rate strength –CBE lifted rates by a further 200bps on Thursday in what looks like the end of the tightening cycle– should mean further portfolio flows. No change in the mechanism would represent a downside risk to our 2017 forecasts, as it would leave any EGP appreciation dependent on the slower turnaround in other BoP drivers such as FDI, tourism and net exports, rather than on the faster impact of FPI flows on FX liquidity in the banking system.
Appreciation largely positive for consumers, banks…
A stronger EGP means a lower cost of imported capex (ETEL, SVCE, ARCC) and USD-dominated payments (ETEL, ARCC) and would translate into lower burden of foreign currency debt in EGP terms (OTMT, TMGH). Many consumer companies would be able to take advantage of lower costs to introduce price promotions to boost volumes, though we think that actual price cuts are unlikely. For banks, EGP appreciation would likely be positive for corporate sentiment, which could drive a quicker-than-expected recovery in loan growth. A stronger EGP would also improve the credit quality outlook, as well as capital adequacy ratios for banks with EGP-denominated capital and FX-denominated assets.
…but negative for industrials, materials, telecom
However, a strengthening pound would shrink USD-dominated earnings (OTMT, SKPC, GTHE) and be negative for names that set prices in USD (ALCN, ETEL), or if pricing is correlated with FX movements (SWDY). It would also mean less revenue in EGP for companies whose production is mainly export-oriented or priced at international benchmarks (KIMA, MFPC). EGP earnings for steel producers would also be hit as prices are set to a USD-linked import parity level.
EFG Hermes Research Team
Our forecast of USD-EGP ending 2017 between EGP16-17 is contingent upon significant net portfolio inflows filtering through to the financial system. This is itself dependent on the CBE changing incentives for the repatriation mechanism for foreign portfolio investment (FPI), which has absorbed most of the significant YTD inflows and so neutralising their exchange rate impact. One scenario would be to increase the cost of the mechanism, leading some investors to bring their funds directly into the interbank market. Continuing interest rate strength –CBE lifted rates by a further 200bps on Thursday in what looks like the end of the tightening cycle– should mean further portfolio flows. No change in the mechanism would represent a downside risk to our 2017 forecasts, as it would leave any EGP appreciation dependent on the slower turnaround in other BoP drivers such as FDI, tourism and net exports, rather than on the faster impact of FPI flows on FX liquidity in the banking system.
Appreciation largely positive for consumers, banks…
A stronger EGP means a lower cost of imported capex (ETEL, SVCE, ARCC) and USD-dominated payments (ETEL, ARCC) and would translate into lower burden of foreign currency debt in EGP terms (OTMT, TMGH). Many consumer companies would be able to take advantage of lower costs to introduce price promotions to boost volumes, though we think that actual price cuts are unlikely. For banks, EGP appreciation would likely be positive for corporate sentiment, which could drive a quicker-than-expected recovery in loan growth. A stronger EGP would also improve the credit quality outlook, as well as capital adequacy ratios for banks with EGP-denominated capital and FX-denominated assets.
…but negative for industrials, materials, telecom
However, a strengthening pound would shrink USD-dominated earnings (OTMT, SKPC, GTHE) and be negative for names that set prices in USD (ALCN, ETEL), or if pricing is correlated with FX movements (SWDY). It would also mean less revenue in EGP for companies whose production is mainly export-oriented or priced at international benchmarks (KIMA, MFPC). EGP earnings for steel producers would also be hit as prices are set to a USD-linked import parity level.
EFG Hermes Research Team