The economy is about to enter its first year in four without any form of macro tightening, opening room for a more favorable environment for economic growth, EFG Hermes said in its latest yearbook. They, therefore, see room for the private sector activities to recover gradually in 2020, with interest rates nearly back to their pre-devaluation levels, and fiscal consolidation is coming to an end.
They expect this recovery to be gradual as the economy slowly pushes away the dust of austerity. Egypt is a domestic-demand based economy, so it will take time for investment to recover until consumer demand also picks up, according to EFG Hermes analysts. The latter has been unsurprisingly going through one of its weakest periods in recent decades as private consumption grew by less than 1% in the first nine months (9M) of fiscal year (FY) 2018/19, below the population growth of 2.5%.
They said that Egypt’s inflation has fully normalised in 2019, opening room for the Central Bank of Egypt (CBE) to press full gear on monetary easing, and bringing policy rates back to their pre-devaluation levels. They expect 150-200 bps of policy rate cut in 2020, with inflation set to stabilise at 6-7%, providing room for the CBE to cut rates further, while still offering foreign portfolio investors a lucrative real yield, as current non-of-tax yields are below 12%.
On the fiscal side, consolidation has been achieved with the liberalisation of fuel subsidies in July 2019, they said. The government turned into gradual fiscal easing by utilising the saving from fuel liberalisation to boost domestic demand, doubling both the minimum wage and pensions, while also increasing public wages by 12% and also maintaining a primary surplus of 2% of GDP. Going for FY 2020/21, they think the government will tactically move to boost domestic demand, while not jeopardising its fiscal discipline.
EFG Hermes analysts expect the overall fiscal deficit to narrow over the coming two years, thanks to lower interest rates which will reduce the borrowing cost, and extend the debt maturity profile of the government.
On the external front, they expect a largely stable USD-EGP, with a bias towards a small margin of weakness. Fundamentally, they see Egypt continuing to run relatively affordable current account deficits of 2.9% of GDP in FY 2019/20 and 3.6% in FY 2020/21, thanks to the continued recovery in tourism sector, further improvement in the energy balance, and the muted domestic demand growth which is likely to keep the import bill in check. On the other hand, the capital account will likely remain supportive, with high real yields and a positive macro outlook maintaining the attractive carry trade.
The future health of current account deficit will largely depend on the extent of the recovery in non-oil exports and foreign direct investment, these two drivers lagged behind in the past three years, as non-oil exports’ performance, since the devaluation, was rather underwhelming, growing on average by 14% in the two years since the devaluation before showing a surprising drop in the past fiscal year. This drop was one of the key factors resulting in the widening of current account deficit, which came despite record tourism revenues and energy balance turning into a surplus, they added.