Derived by stable performance of its economy, Egypt has recently announced it will not ask for further funding from the IMF, when its $12bn loan programme expires in June 2019, after undertaking tough economic reforms which included slashing energy subsidies, imposing new taxes, and floating its pound currency.
BofA Merrill Lynch Global Research expects in its outlook for the global markets and economy in 2019, that Egypt, the most populous country in the Arab world, to go through a Post-Programme Monitoring framework in order to guarantee a smooth exit from the three-year IMF deal.
MENA Economist, Jean-Michel Saliba, sees macro stabilisation in the country continuing and the government’s reform momentum is intact, and should be maintained into the second half of 2019. Egypt’s current account deficit narrowed sequentially by $1.3bn to $0.6bn and stood at $5.9bn, a which equals 2.4% of Egypt’s GDP on a trailing basis in the second quarter of 2018, from a peak of $20.1bn in 2016.
In September, foreigners held $13.1bn of treasury bills (T-bills), due to $8.4bn in outflows. Foreign holdings represent a large 18% of the outstanding T-bills stock and 25% of Net international reserves (NIRs) including CBE deposits not included in foreign-exchange (FX) reserves.
The 2011 uprising which toppled long-time ruler Hosni Mubarak hit the Egyptian economy hard, driving tourists and foreign investors away, drying up foreign reserves. NIRs drowned to $17.5bn in June 2016, but have slowly increased to reach $44.5bn in October, which covers 7.8 months of country’s imports. The Central Bank of Egypt (CBE) holds $7.8bn in deposits not reported in reserves.
The CBE commented that it could intervene if the pound weakened beyond its comfort zone. The country floated its currency in November 2016. Saliba forecasts the outlook for the USD-EGP relationship to be relatively stable as T-bills are likely to remain high enough and FX reserves are still high. He also warned of reforms and rollovers of crowded T-bill positions.
Inflation has increased after energy-subsidy reforms, but base effects are likely to bring it to within the CBE’s target of 13+/-3% by end-2018. The CBE’s gradual data-dependent easing stance and a focus on month-over-month seasonally-adjusted inflation figures suggest the CBE could remain on pause for the next several months.
According to Saliba, the budget for fiscal year (FY) 2019 is key to anchor debt dynamics. A primary surplus of 0.2% of the GDP this year has been achieved due to energy subsidy reform and the value-added tax (VAT) hike, excluding the CBE recap costs. All fuel subsidies—except liquid petroleum gas—are likely to be eliminated by the end of next year.
“An automatic fuel price indexation mechanism is likely to be introduced by December. The target is to bring the primary surplus to 2% of the GDP in FY 2019 and keep it there. The FY 2019 reforms include fuel subsidy reforms, wage bill control, and improved tax mobilisation,” Saliba concluded