Monthly Macro Misalignment Monitor for Egypt Sep 28, 2012

Transcription

1 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Monthly currency misalignments are displayed in the compass graph using the gaps in selected monthly variables, their nowcasts, or interpolations. A gap is a deviation of the actual value of a variable from its long term trend. s implying depreciation pressures are shown as red arrows; gaps implying appreciation pressures are green. The gaps are normalized by their respective critical level (the dotted circle), chosen as two standard deviations of the distribution of the gaps in normal times (i.e. excluding currency crises). Please refer to the glossary at the end of this document for the definitions of the selected variables. Risk balance in September, 1 Actual s Foreign Exchange Reserves Real GDP Net CBs Claims on Government Net Exports Real Asset Price Index Real Interest Rate Terms of Trade Real Eff. Exchange Rate Depreciation Pressure Appreciation Pressure Critical Level September 1 Real Comp. Exchange Rate Name Value Standard Error a (pp) 1/ Critical value b (pp) Real GDP (percent) Real Interest Rate (percentage points) Real Eff. Exchange Rate (percent) Real Comp. Exchange Rate (percent) Terms of Trade (percent) Net Exports (percentage points) Net CBs Claims on Government (percentage points) Foreign Exchange Reserves (month) Real Asset Price Index (percent) a Standard error of the gap estimate b Calculated as standard error of gap variability in normal times 1

2 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Quarterly currency misalignments are displayed in the compass graph using the gaps in selected quarterly moving averages of the variables. The gaps are normalized by their respective critical level (the dotted circle), chosen as two standard deviations of the distributions of the gaps in normal times (i.e. excluding currency crises). Risk Balance in September, 1 (July September, 1) Foreign Exchange Reserves Net CBs Claims on Government Net Exports Terms of Trade Real Comp. Exchange Rate Real GDP Real Asset Price Index Real Interest Rate Real Eff. Exchange Rate Depreciation Pressure Appreciation Pressure Critical Level Actual s July September, 1 Name Value Standard Error a (pp) 1/ Critical value b (pp) Real GDP (percent) Real Interest Rate (percentage points) Real Eff. Exchange Rate (percent) Real Comp. Exchange Rate (percent) Terms of Trade (percent) Net Exports (percentage points) Net CBs Claims on Government (percentage points) Foreign Exchange Reserves (month) Real Asset Price Index (percent) a Standard error of the gap estimate b Calculated as standard error of gap variability in normal times

3 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Level and Filtered Trend Real GDP (1*log) 86 9M9 1M9 11M Real Comp. Exchange Rate (1*log) 9M9 1M9 11M9 Net CBs Claims on Government (percent of GDP) 6 4 9M9 1M9 11M9 Real Interest Rate (percent, p.a.) 1 9M9 1M9 11M9 Terms of Trade (1*log) M9 1M9 11M9 Foreign Exchange Reserves (months) 4 3 9M9 1M9 11M9 Real Eff. Exchange Rate (1*log) M9 1M9 11M9 Net Exports (percent of GDP) M9 1M9 11M9 Real Asset Price Index (1*log) M9 1M9 11M9 The blue line shows the observed levels of the variables, or their now-casts, or their monthly interpolations. The green dotted line is an estimated long term trend. Currency crises are discarded in the trend estimations. 3

4 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 s Over Time Real GDP (percent) 4 9M9 1M9 11M9 1M9 Real Comp. Exchange Rate (percent) 1 9M9 1M9 11M9 1M9 1 Real Interest Rate (percentage points) 1 9M9 1M9 11M9 1M9 Terms of Trade (percent) 9M9 1M9 11M9 1M9 1 1 Real Eff. Exchange Rate (percent) 9M9 1M9 11M9 1M9 Net Exports (percentage points) 9M9 1M9 11M9 1M9 Net CBs Claims on Government (percentage points) Foreign Exchange Reserves (month) Real Asset Price Index (percent) 9M9 1M9 11M9 1M9 9M9 1M9 11M9 1M9 9M9 1M9 11M9 1M9 The blue line represents the estimated gap with the grey bands being one standard error of the estimates. The bands may broaden in the end, as the uncertainty of the estimate increases, because of delayed observations. 4

5 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Absolute and Relative Probabilities of Depreciation and Appreciation Periods ahead Probability (%) of 1 month 3 months 6 months Absolute probabilities Depreciation by more than 1 % Depreciation by more than % Appreciation by more than % Appreciation by more than 1 % Relative probabilities Depreciation by more than standard error Depreciation by more than 1 standard error Appreciation by more than 1 standard error Appreciation by more than standard error Standard error of historical variability (pp) Current Exchange Rate (as an average of Sep, 1) is 6.9 of local currency units per USD Please note that the Macro Misalignment Monitor is not intended as a tool to trade on. The MMM is an automated monitoring tool. The probabilities in the table assume preservation of the historical dependency of the exchange rate on the gaps of a limited set of variables. These signals may serve as a trigger for more research and/or to create a currency blacklist.

6 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Decomposition of appreciation/depreciation to the gaps and their lags Three columns show a decomposition of exchange rate depreciation/appreciation pressures, with a horizon of one, three and six months ahead, respectively. These columns are based on historical dynamics of gaps, the average historical depreciation trend and economically consistent assumptions about the effects of the gaps on the exchange rate. Each variable is depicted in its own color. Lighter shades correspond to monthly gaps with more lags, darker shades to more recent months. Colums that are on balance positive (bigger part above than below zero) indicate depreciation; on balance negative columns indicate appreciation. Appreciation / Depreciation (annualized %) Depreciation Depreciation Depreciation Real GDP Real Interest Rate Real Eff. Ex. Rate Real Comp. Ex. Rate Terms of Trade Net Exports Net CBs Claims on Gov. Forgn. Exch. Reserves Real Asset Price Index Trend Depreciation ( + ) Current Exchange Rate (as an average of Sep, 1) is 6.9 of local currency units per USD Disclaimer: The information provided here is based on information that TCX or OGResearch consider reliable, but which it did not verify. No representation or warranty is made as to, nor should reliance be placed on, any information contained herein being accurate or complete. Neither TCX, nor OGResearch, nor any of their parent or subsidiary undertakings, or any such persons officers or employees, accepts any liability for any losses or damages that may result from the lack of accuracy or incompleteness of this information. 6

7 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Glossary The Macroeconomic Misalignment Monitor is designed to provide an indication of exchange rate vulnerability. Therefore, the choice and construction of indicators is based on robust economic arguments linking currency vulnerability to dislocations in relative prices and balance of payments imbalances. In designing a generic set of indicators, we had to focus on indicators for which up-to-date data of quarterly or higher frequency are available in most of the countries. Indicators relying on annual data or data issued with significant lags are not acceptable, as the MMM is intended to offer up-to-date indications of potential extraordinary pressures on local currencies. Data subject to seasonal effects are seasonally adjusted. The indicators included in the MMM are the following a : Real gross domestic product (rgdp) is an indicator of excess supply or demand in the economy (albeit with some delay). If there is excess supply, it is likely that monetary policy will react by easing the monetary conditions and, in turn, that the nominal exchange rate will depreciate. A positive gap indicates appreciation potential. Real interest rate (RIR) is the difference between a chosen relevant nominal interest rate and the actual inflation (usually CPI inflation). The real interest rate indicates whether the monetary conditions are in line with prices. If inflation shoots up and interest rates do not adjust, disequilibrium is created in the parity condition, leading to depreciation pressures. This situation might be caused, for example, by monetary policy artificially holding interest rates low to help finance fiscal borrowing. A positive gap is interpreted as a tight monetary stance and signals potential appreciation. Real effective exchange rate (REER) expresses the relative price of the domestic and trade-weighted index of foreign price levels. As price levels are suitable proxies for prices of production factors (wages, services, goods), as well as proxies for producers final tradable prices, the real effective exchange rate captures the ability of an economy to offset pressures in the balance of payments by means of trade. If the real exchange rate appreciates, the economy becomes less competitive, increasing the probability of adjustment through the nominal exchange rate, as other prices are less flexible. A positive REER gap indicates a depreciated REER and signals potential appreciation pressures. Real exchange rate with respect to main competitors (CREER). A positive CREER gap means that a country has a temporary competitive advantage over its competitors on the export markets, and signals potential appreciation pressures. a Note that the list of indicators for a particular country depends on availability of data; therefore a subset of the presented generic list of indicators might be used in some cases. 7

8 Monthly Macro Misalignment Monitor for Egypt Sep 8, 1 Glossary (continued) Terms of trade (ToT) is defined as the relative price between a country s exports and imports. It is an important indicator of the ability to cover balance of payments pressures through trade in countries where the domestic consumer price index is not a good proxy for the export deflator. Commodity exporters are a typical example of such countries. In this case, the terms of trade will be constructed with a large weight for the exported commodity s price, and this price, in turn, will become an important factor in estimating depreciation pressures. A positive ToT gap indicates appreciation potential. Net exports to GDP (NX) is a ratio of net exports to a country s nominal GDP. NX is another indicator of potential pressures on the current account because it is, for most countries, an important part of the trade balance and, in turn, of the current account. It provides an indication of how the country is able to compete in international markets and secure the largest part of its foreign currency inflow. If the trade balance turns suddenly into a deep deficit, it means that some shock has hit the economy (a drop in foreign demand, lower domestic supply, larger domestic demand, etc.), which will need to be adjusted by the exchange rate, offsetting the shock. A positive gap signals potential appreciation pressures. Foreign reserves of central bank in months of imports (FRes) is an indicator of overall external balance pressures and in this sense complements the abovementioned indicators of current account imbalances. Foreign reserves express the central bank s ability to defend the nominal exchange rate in the presence of depreciation pressures. In turn, if foreign reserves are depleted, or have recently dropped, this indicates that either the central bank has been defending the exchange rate, or there are non-realized underlying depreciation pressures in the balance of payments. Both cases indicate a higher probability of actual exchange rate depreciation. A positive gap signals accumulation of reserves and indicates potential appreciation pressures. Net central bank s claims on government b to nominal GDP (CBClaim) is included in the list of indicators as changes in the net claims may affect money supply and cause pressures on the currency if these changes are not sterilized by other instruments of the CB. In an extreme case, CBClaim might indicate monetization of the government s deficit. A positive gap of this indicator signals potential depreciation pressures. Real asset price index (RAPI) is a ratio of asset price index to CPI. An increase in real asset prices represents a positive wealth change, which is attended by depreciation and inflation pressures. A positive RAPI gap therefore constitutes a risk of depreciation of the local currency. b The indicator measures either claims of the general government or of the central government only. The choice depends on data availability. 8