HC Research estimates gasoline and diesel prices in Egypt to increase by 15-30% from June to July, compared to the average price increase of 35-51% in fiscal year (FY) 2017/18, hence HC expects inflation to average at 14.2% in FY 2018/19, 12.4% in FY 2019/20, 10.3% in FY 2020/21, and 8.4% in FY 2021/22.
HC also expects the Central Bank of Egypt (CBE) to resume interest rate cuts in the fourth quarter (Q4) of 2019, with a total of at least 500 basis points (bps) over two years, including 200 bps in 2019 and 300 bps in 2020, to near the interest rates in the period before the 2011 Revolution.
Sara Saada, macroeconomic analyst at HC, said that interest rate cuts would result in sustained growth. “Public spending was the main driver of growth in the GDP, growing 5.3% in FY 2017/18 from 4.2% in FY 2016/17, with a growth of public investment to 62% and a decline of private investment to 15% in real terms,” she added.
“We believe that the resumption of the monetary easing policy will be a catalyst for the growth of private investment, which in turn will promote sustainable growth in GDP.”
Saada added: “We believe that foreign direct investment (FDI) will reverse its course in FY 2019/20 and increase on the basis of growing confidence in the Egyptian economy, supported by improving the fundamentals of our strong external position, raising credit rating, and local stability.”
The HC analyst expects the GDP growth to reach 5.5% in FY 2018/19, 5.9% in 2019/20, and 6.3% in FY 2020/21.
“In addition to the recovery of private investments, we believe that the approval of the proposed amendments to reduce trading costs, improve tax incentives for listed companies, and resume the government IPO programme are all important catalysts for the capital market,” Saada said.
She noted that the inflation is expected to ease in the wake of the measures to control the financial situation, pointing out that in terms of fiscal policy, the government’s wise commitment to fiscal control would lead to a budget deficit downturn and achieve a stable basic surplus.
Saada predicts that the budget deficit will fall to 8% of the GDP in FY 2018/19, 7.2% in FY 2019/20, and 6.5% in FY 2020/21, compared to 9.7% of the GDP in 2017/18.
“We expect tax revenues to range between 14-14.2% of the GDP during our forecast period and lower expenditures from 28% of the GDP in FY 2017/18 to 24% by FY 2020/21,” she added.
“The government aims to recover the full cost of petroleum products, except for butane, and thus will remove most of the energy subsidies.”
Commenting on the strength of the external situation and its support for the foreign currency rate, Saada said: “Egypt’s external position have been strengthened since Q2 of 2016. However, we see that the movement of the Egyptian pound remains largely dependent on inflows in foreign portfolios, which amounted to $17.4bn in April 2019.”
For the current account, the Egyptian Ministry of Petroleum aims to reduce the deficit of petroleum products as it expands its refining capacity and replaces imports of petroleum products with crude oil.
Accordingly, she expects a marginal surplus in the oil trade balance to begin in FY 2019/20.
“We also see that tourism revenues continue to improve under stable security conditions, moving beyond pre-revolution levels from FY 2018/19. We, therefore, expect a current account deficit of $7bn in the FY 2018/19, $5.7bn in FY 2019/20, and $5.4bn in FY 2020/21,” Saada said.
“We also see FDIs increasing over the next two years to cover the current account deficit from FY 2019/20 to $7.8bn in FY 2019/20 and $8.6bn in 2020/21.”
With regard to the financial account, Saada expects that the Egyptian government would continue to resort to dollar bond issuance, especially after the end of the IMF programme in FY 2018/19. “Foreign portfolios’ contributions to the Egyptian debt market are likely to remain volatile and largely linked to emerging markets’ (EMs)moves, though we expect Egypt to remain an attractive market among other EMs,” she said.
Therefore, HC believes that the recent appreciation of the Egyptian pound is due to the Carry Trade flows (the flows benefiting from difference between currency prices).
Saada expects the Egyptian pound to stabilise for some time, according to HC’s forecast, before reversing the trend by the end of the year, which will trigger a profit-taking movement by foreign investors.
Accordingly, she predicts the US dollar exchange rate against the local currency to reach EGP 17.43 in FY 2019/20 and EGP 18.25 in FY 2020/21.