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Egypt’s outlook stable supported by fiscal policy, despite lower PMI: FocusEconomics - Daily News Egypt

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Egypt’s outlook stable supported by fiscal policy, despite lower PMI: FocusEconomics

GDP to expand 5.3%, fiscal deficit narrowing to 8.4% in FY 2019, EGP 18.2 per USD in CY 2019

The Egyptian economy’s outlook remains stable, despite the shaky start to the third quarter (Q3) of fiscal year (FY) 2019, which ran from January to March, according to the April 2019 edition of the “FocusEconomics Consensus Forecast – Middle East & North Africa”, which was released on Tuesday.

The report indicates that after falling in January, the private- sector PMI fell again in February to plunge to the lowest level since September 2017, leaving it in contractionary territory for the sixth month running.

It resulted from markedly lower output and a substantial drop in new business orders. This comes after economic growth accelerated in Q2 of FY 2019. On the fiscal front, the government approved the FY 2020 budget on 27 March.

Commenting on the outlook of firms, Daniel Richards, MENA economist at Emirates NBD, said: “Although conditions are currently difficult, over 44% of respondents expect output to be higher in 12 months’ time, sharing our expectation that economic conditions will become steadily more favourable over 2019. The interest rate cut enacted by the Central Bank of Egypt on 14 February – the first since March last year – should help stimulate some private sector demand, which has lagged public investment in driving Egypt’s growth recovery over the past two years.”

However, FocusEconomics believes that the finance package is in line with the government’s IMF-backed reform programme, targeting a lower fiscal deficit on the back of a restrained rise in spending and strong economic growth boosting revenues, adding that “FocusEconomics Consensus Forecast panellists see the fiscal deficit narrowing to 8.4% in FY 2019 and 7.4% in FY 2020.”

Meanwhile, MPs are expected to vote in favour of constitutional changes on 14 April which would extend the president’s term, subject to a confirmatory public referendum.

In regards to economic growth, the report indicates that higher government investment spending, rising natural gas production and an improving regulatory environment, are to boost growth. However, despite moderating in recent years, fiscal imbalances continue to restrain economic potential.

FocusEconomics’ panellists expect the GDP to expand to 5.3% in FY 2019, which is unchanged from last month’s forecast, and 5.4% in FY 2020.

On the monetary front, the report says that inflation accelerated to 14.4% in February from 12.7% in January and therefore climbed further above the CBE’s Q4 calendar year (CY) 2020 target range of 9.0% plus or minus three percentage points.

“February’s increase was due to surging transport prices. Our panellists expect inflation to average 12.0% in CY 2019, which is down 0.1 percentage points from last month’s forecast, and 10.2% in CY 2020,” the report adds.

At its 28 March monetary policy meeting, the CBE left all interest rates unchanged, leaving the overnight deposit rate at 15.75%, the overnight lending rate at 16.75%, and the main operation rate at 16.25%.

FocusEconomics believes that the CBE’s March policy decision came on the back of an uptick in inflation in February and possible sustained price pressures in the run-up to Ramadan in May.

The report forecast that, overnight deposit rate to end CY 2019 at 14.93%, and CY 2020 at 13.46% during the next meeting set for 23 May.

While the CBE has allowed the value of the pound to be determined by market forces since November 2016, authorities continue to ensure stability in the exchange rate against the USD.

On 29 March, the pound traded at EGP 17.33 per USD, a 1.0% appreciation from the same day a month earlier.

“Our panel expects the pound to weaken going forward on the back of expected monetary policy loosening, ending CY 2019 at EGP 18.2 per USD and CY 2020 at EGP 18.59 per USD,” the report adds.

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