A recent report issued by Arqaam Capital expects Egypt’s economy to keep its growth trajectory alive, with the government continually carrying out its reform plans.
According to the report, growth in Egypt is set to accelerate to 5-6%, contingent on quick implementation of fiscal and investment reforms and a more significant drop in inflation to generate higher investments and industry-led growth.
The exchange rate has remained broadly stable since March 2017. The Central Bank of Egypt (CBE) has not intervened in the foreign exchange market directly.
Notwithstanding short-term appreciation pressures, the external position in fiscal year (FY) 2017, adjusted for the policy shift mid-year, was moderately weaker than the level consistent with fundamentals and desirable policies.
Inflation has turned the corner and is expected to decline to around 12% by June and to single digits by 2020.
The International Monetary Fund (IMF) and the government agreed that policy interest rates should not react to the favourable base effects, which are projected to reduce year-over-year inflation significantly in the coming months.
The external balance also continues to improve. The current account deficit remained unchanged at about 6% of GDP in FY 2017, compared to the first IMF review projection.
There is also improved external competitiveness, reforms of the business environment, and a further recovery in tourism.
Regarding the fiscal balance, with a primary surplus of 0.2%, total deficit is likely to exceed the IMF’s projections. The primary deficit was 1.8% of GDP in FY 2017, as expected at the time of the first review, but public sector debt was 4% higher of GDP than projected (which was 108% of GDP).
A primary fiscal surplus of 0.2% of GDP is projected in FY 2018, mainly driven by the full-year impact of the value added tax increase, lower wages, and fuel subsidies.
Consequently, the programme’s improvement of the primary balance by a cumulative 5.5% of GDP is attainable, and general government debt is projected to decline by about 17% of GDP by the end of the programme.
The report also noted that Egypt needs to create fiscal space for its significant spending needs on upgrading infrastructure, investing in health and education, and building a sustainable social safety net.
The financing gap for FY 2018 was identified during the first review in 2017 and covered with $1bn from the World Bank, $0.5bn from the African Development Bank, and $0.425bn from the G7.
The projected gap for the July-December 2018 period is expected to be $1.1bn, to be covered from international banks, and the gap for the remaining period of the programme (January-June 2019) is projected at $1.5bn, to be financed from new eurobonds, additional bilateral support, or international reserves.
“Our growth forecasts are 4.5%, 5.5%, and 6.2% in FY 2018, 2019, and 2020 respectively, and we are in the process of revising these estimates slightly upwards to account for the expected improvement in tourism performance,” the report added.
The IMF expects 4.8% (up from 4.5%) in FY 2018, 5.5% (from 5.3%) in FY 2019, and 5.8% in FY 2020, based on a scenario that expects a more tangible rebound occurring in FY 2019, rather than the preceding year, as evident from indicators including private consumption and investment growth figures, credit growth, and foreign direct investment.
The IMF appears to be expecting the rebound to occur when leading indicators improve significantly, ie when inflation is down to near single-digit levels, the budget deficit breaks the 10% level, and the investment rate rises above the 15% level it had plateaued at since FY 2016.
