Goldman Sachs calls EGP undervalued by 30%, sees it at 50 per USD

Goldman Sachs thinks the EGP is trading more than 30% below fair value after October’s currency slide, according to a research note picked up by Asharq Bloomberg, making it one of the most undervalued emerging market currencies.

The bank now sees the USD at EGP 53 in three months, 52 in six, and 50 in 12, up from the 49, 48, and 46 it forecast in June, when it put fair value at EGP 43 and called the EGP 13-15% undervalued. Last month’s slide, which took the greenback past a record EGP 56 on 26 October, widened the gap while fair value held relatively steady, Goldman says. The EGP has since recovered to about 53.9, per the central bank’s average market rate on Thursday, 5 November.

That slide came as foreigners sold local debt. Offshore holdings of Egyptian local-currency debt fell to around USD 20 bn from some USD 30 bn at end-September, Goldman estimates, with rolling monthly net sales heavy enough to add to the pressure on the EGP. That’s far more than the EGP 116.2 bn (c. USD 2.07 bn) foreigners net sold on the EGX across 4-22 October, since Goldman’s estimate likely also captures T-bills held off the exchange and maturities that weren’t rolled over. Foreign positioning is still large, so more money could leave, Goldman warns. It also sees a silver lining: with lighter holdings, current positioning reflects the EGP’s structural value more clearly.

SOUND SMART- Goldman measures fair value with the real effective exchange rate, which compares the EGP against a basket of trading partners’ currencies after adjusting for differences in inflation. A currency trading below that level is undervalued: it’s cheaper in the market than the underlying economy suggests it should be.

Goldman is sticking with its buy call on the EGP, citing both expected appreciation and the yield from holding local assets. If regional tensions ease, the EGP could rally strongly, the bank says. If tensions persist without a major escalation, investors still collect the high interest rates. Those rates rose after the CBE’s surprise 100 bps hike on 29 October, which left the overnight deposit rate at 20%, some 6.1 percentage points above September’s 13.9% urban inflation.

Our take

Egypt has made this round trip before. Some USD 15 bn in hot money left during the 2018 emerging-market crisis and close to USD 20 bn exited at the outbreak of Covid in 2020, then-Finance Minister Mohamed Maait told the American Chamber of Commerce in June 2022. Another estimated USD 20 bn left after Russia’s invasion of Ukraine that year. And earlier this year, USD 6.7 bn exited within three weeks of the war on Iran breaking out, before money started flowing back in mid-March.

Each time, foreign investors came back once yields and the exchange rate made the trade attractive again. The math is simple: after a shock, investors can buy local debt with a cheaper EGP at higher interest rates, pocketing the yield plus a currency gain as the EGP strengthens before they convert back. “The lesson we have learned [is that] you cannot depend on this type of investment. It is coming just to get high yields, and once there is a shock it leaves the country,” Maait warned at the time.