Egypt’s steady adoption of supportive macro policies as part of the recently announced International Monetary Fund (IMF) programme would provide an upside risk, according to a Bank of America Merrill Lynch report on 11 August.
An upside risk would mean an uncertain possibility of gain.
Merrill Lynch sees that the IMF deal with Egypt’s government would support Egypt’s global financial position, but the deal’s conditions will lead to a further increase in prices.
Merrill Lynch added that the downside risks could affect the country’s politics and security situation, a devaluation of the Egyptian pound, a socioeconomic impact of fiscal reforms, and a failure to mobilise sufficient external financing or Gulf financial aid.
Regarding Merrill Lynch’s forecast for the foreign exchange rate between the US dollar and the Egyptian pound, it estimates that the exchange rate in the third quarter (Q3) of 2016 will reach EGP 10.50, while the spot rate in the market’s current price stands at EGP 8.88. The report forecasts that the forward exchange rate for Q3 2016 will reach EGP 10.48.
A forward rate is a rate applicable to a financial transaction that will take place in the future, and is based on the spot rate, and refers to the rate that will be used to deliver a currency, bond or commodity in the future.
For Q4 2016 expectations, Merrill Lynch expects that the forecast rate might reach EGP 10.50, even while the forward rate is expected to register EGP 11.20.
Further, the report expected that forecast rate would reach EGP 11.50 in Q1 2017, at the same time the forward rate is expected to record EGP 11.72.
The report estimated that the forecast rate will remain stable at EGP 11.50 in Q2 2017. Further, it expected the forward rate for the same period to increase to EGP 12.27.
Merrill Lynch said that the real GDP growth rate in Egypt is predicted to reach 3.5% year-on-year in fiscal year (FY) 2016/2017, the same as in FY 2015/2016.
“The Consumer Price Index (CPI) inflation is expected to reach 12.5% in FY 2016/2017, compared to 10% in FY2015/2016. The current account is expected to decrease to 4.3% of GDP in FY 2016/2017, compared to 4.4% of GDP in FY 2015/2016,” the report read. “Further, the fiscal balance is expected to be decreased to 10.5% of GDP in FY 2016/2017, compared to 11% of GDP,” read the report.