The decline in the net international reserves (NIR) balance and the Balance Of Payments (BOP) requires unmatched measures to tackle the limited availability of foreign currency, according to a HC Brokerage report issued Thursday.
The report said this can be done through reforms aimed at improving the investment environment that affects short‐term results and attract direct and portfolio investments.
A consistent exchange‐rate policy of the EGP devaluation to the market‐clearing rate is inevitable to absorb economic shocks.
HC projects a further decline in the current account balance to 4.7% of GDP in fiscal year (FY) 2015/2016 and 4.4% in FY 2016/2017. The report attributed the decline to projections of a negative gap in the petroleum balance, tourism receipts not reverting to pre‐revolution levels, and the modest growth in non‐oil imports.
“According to HC estimates, the EGP against dollar official rate has been falling below the 95% confidence interval of its fair value since July, and it will continue deviating away from the fair value as devaluations are late,” the report read. “The current exchange‐rate policy of protecting the currency from devaluation affects Egypt’s competitiveness and contributes mostly to the reduction of NIR”.
The deterioration in the current account balance is mainly a result of the negative gap in the petroleum balance and tourism receipts not reverting to pre‐revolution levels. Egypt’s petroleum‐balance deficit declined as Egypt became a net importer of natural gas in the second quarter (Q2) of 2015 and as new explorations slowed down.
According to Morgan Stanley Capital International (MSCI), the Emerging Markets Index gained 7% in October. Therefore, an abundant investment opportunity has been created across Egyptian financial markets.
However, as some emerging‐market currencies fall to their historical lows in real terms, HC believes that the EGP needs to be depreciated to gain competitiveness in real terms among other currencies, according to the report.
The report expected that real GDP growth will increase to 4.5% in the current FY 2015/2016 compared to 4.2% in the previous FY 2014/2015, while it expected that the GDP for the FY 2016/2017 will increase to 4.9%.
In addition, the report expected that consumer price inflation will decline in the current FY by 10.5%, compared to 11.4% in the previous FY, and is expected to stabilise at 10.5% in FY 2016/2017.
The report further expected that the average exchange rate will be EGP 9.5 to the dollar by FY 2016/2017.
The report predicted that the net foreign reserves will decline in the current FY 2015/2016 to reach $16.920bn compared to $20.080m in the previous FY 2014/2015, and areexpected to continue declining in the next FY to reach $15.864bn
Trade balance reached $38.785m in the previous FY and is expected to reach $41.925m in the current FY and expected to reach $43.960m in the next FY 2016/2017, according to the report.
The export proceeds in the previous FY amounted $22.058m and an increase of $23.396m is expected in the current FY to keep increasing to reach $25.360m next FY.
HC Brokerage is affiliated to HC Securities and Investment. HC Securities is a full‐fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services.