JP Morgan said the Egyptian pound’s competitiveness improved Egypt’s balance of payments’ performance.
The bank forecast in its report, that the current account will achieve a surplus of 1.4% of GDP in the fiscal year (FY) 2019/20.
It pointed out that against the improvement background in the security situation, as well as the high competitiveness of the Egyptian pound after the sharp decline in 2016, external deficits continued to decline with the current account deficit falling to $6bn (2.4% of GDP) in FY 2017/18 from $14bn (more than 6% of GDP) a year ago.
It added that the trade deficit almost remained stable from the previous year, in terms of absolute value, while exports rose by 19%. Imports also modestly increased by 7% despite strong GDP growth of 5.3%, based on the enriched competitiveness of the Egyptian pound and the rise in hydrocarbon gas from the Zohr gas field.
Simultaneously, the boost in the number of tourists, and the surplus in the Suez Canal revenues led, to the surplus doubling of the services sector to about $11bn from $5.6bn the previous year, due to improved security conditions, and the competitiveness of the pound (Figure 3).
Remittances grew by 21%, supported by remittances of Egyptians working in the Gulf. We expect the external balance to continue to improve, provided that the security situation remains stable.
Concurrently, net foreign direct investment flows remain strong at $7.7bn (3.1% of GDP), driven by investments in the oil sector; however investments in securities portfolios have declined, as a result of the increased worldwide concern regarding risk aversion.
Emerging market volatility since the first quarter has also dampened some of the hot money inflows which have been absorbed since the reforms began. We believe that there is still more room to attract foreign direct investment inflows, however we expect continued pressure on investment flows in the securities portfolios, against the backdrop of rising global interest rates.
According to JP Morgan, foreign holdings of treasury bills dropped from $22bn in March to about $14bn in August.
In light of the difficult international challenges, we believe that the International Monetary Fund (IMF) programme is still on track; therefore we see no obstacle to the disbursement of the new IMF loan tranche in December. The IMF mission is expected to visit Cairo in mid-October to review the programme.