By Charles Robertson
5 JULY 2016– Russia outlook, Egypt devaluation and why financial markets help Nigeria/Egypt
A couple of themes interested me at RenCap’s 20th annual Russian conference and the 20th annual conference in St Petersburg. First, there’s still a lot of scepticism in Russia that inflation will come down to the 5% we target for end-2017, let alone the official 4% target. One plausible consequence of Russia beating expectations on inflation is that mortgages (5% of GDP) will grow faster than expected, similar to what Emerging Europe saw when inflation dropped from 10% in 2000 to low single digits a few years later (see fig 3). Against this positive is the view that credit growth may rise overall by just 10% annually – so it will be banks exposed to that retail story that should benefit. The average Russian has 23 square metres to live in, against 34-45m in western Europe.
Second, the Russian economy ministry has drawn up plans to double growth from 1.5-2.0% to 4% in the medium-term. We’re sceptical this can be achieved. But even if IMF forecasts are right and Russia does only grow by 2% on average over 2016-21, once you strip out demographic effects, this is better per capita growth than Mexico, SA or Brazil. See fig 6 (more on that in the Fixit report we released in June).
Meanwhile, Russian tourists are getting the green light to visit Turkey again, but are unlikely to visit Egypt in the short-term. That is one reason why Egypt’s current account is deteriorating – to a rolling annual $15bn now, based on data released over the weekend. This is in line with the forecast deterioration we included in our April Egypt piece. Note recent trade data (March and April) show imports dropping 20-25% while exports are basically flat, so our $16bn deficit for 2015/6 still seems plausible.
This may explain why the CBE governor is admitting over the weekend that the exchange rate policy is not working – and we hope to see a devaluation perhaps after Eid – ideally to the fair value REER rate of around 11/$.
Current account data Egypt – note we have used 9-mo data to estimate the Jan—Mar 2016 data: but revisions might have changed previous quarters.
If Egypt accepts this devaluation, it will be relief to EEMEA and Africa investors. Just a month ago – both Nigeria and to some extent Egypt – the two largest equity markets in Africa, were tough or impossible for equity investors to put money into. Now Nigeria has followed on from electricity price hikes (Feb-16) and the fuel subsidy removal (May-16), to a float of the currency (Jun-16). In Nigeria, it is a de jure rather than a de facto float right now.
Yes, the currency is not officially restricted to a certain level, but in practice, banks are not yet free to quote the Naira exactly where supply and demand would put it. But still at around NGN280/$, the currency is far more sensibly priced than it was when it was pegged at NGN197-199/$. We hope greater freedom will come in coming weeks/months. There is at least a 25% spread between the official and parallel rate in Nigeria, as in Egypt. We wonder if it is exposure to financial markets that are leading Nigeria and Egypt to adopt policies that make the most economic sense. Both contrast with (eg) Angola, which is reportedly aiming to stop talks with the IMF, and where the official/unofficial currency spread is 71%. There is no stock market in that country, nor an independent private sector able to pressure the government to alter policy.
CONCLUSION: We think markets are having a positive long-term impact on Nigerian and Egyptian policy making. In Russia, we are interested by the likelihood that inflation will beat expectations and produce mortgage growth.
(Thoughts from a Renaissance man)- Robertson, Charles Global Chief Economist Renaissance Capital Twitter @Rencapman
