Three years after the start of Egypt’s economic reform programme, many easy gains have been made. The country has shifted, via painstaking measures, to a more sustainable macroeconomic position. A key measure of this success is lower inflation. Inflation has fallen from 33% to a decade-low of 3.1% as of October 2019. Foreign reserves have more than doubled from $17.5bn in 2016 to around $45.4bn in December 2019, representing 8.2 months of import cover. Moreover, the currency has appreciated by almost 12% from EGP 18.0 to EGP 15.95 per US dollar in 2019 alone, while interest rates have been gradually cut throughout the year from 18.75% to 13.25% and are nearing the pre-floatation level.
Inflation is likely to stay in single digits in 2020, so there is still scope for rates to fall further, possibly to 11.5% by 2020-end and 11% in early 2021.
Another positive is that the process to remove the petrol subsidy is pretty much complete, and the debt to GDP ratio is on a downwards path.
We remain strong advocates of the Egyptian story – it is a growth market supported by favourable demographics and an ongoing broad-based reform programme that is starting to bear fruit.
With inflation remaining below the 10% level and private investments showing signs of recovery, having climbed to 4.5% of GDP in fiscal year 2019 (excluding oil & gas, power and real estate) from 3.6% in the previous year, we believe 2020 should see much-improved consumer demand growth on stronger job creation and expanding real incomes. In our view, the Central Bank of Egypt’s (CBE) recent move to increase the retail debt burden to 50% from 35% should further support private spending, especially when it comes to discretionary goods.
The Egyptian government is also fully aware of the country’s industrialisation potential, with what seems like a growing emphasis on supporting the private sector and empowering small and medium enterprises (SMEs). Bank management teams are generally upbeat, with budgeting for loans for capital expenditure kicking in as early as the first quarter of 2020. We are also excited about the CBE’s recent initiatives, including the EGP100bn subsidised funding programme, which could unlock investments worth 4% of the GDP.
With a population of over 100 million, and an improving economic outlook, we find that consumer-oriented industries, such as food, healthcare, and retail, as well as infrastructure-related businesses and financials are where investors should seek opportunities.
Exports are also looking good given the renewed cost-competitiveness of Egypt and the presence of businesses that are well positioned to benefit from the continued infrastructure spending, investment, and the new export support programme.
Growth in the short term is likely to continue to be investment driven, with the CBE’s monetary easing throughout 2019 helping to spur private sector spending.
It is hoped that this will trigger the transition from offshore gas-driven growth to a stronger consumer and bank lending story and help trigger a virtuous cycle of domestic and foreign investment in the wider economy.
Egypt is already attracting foreign direct investments, and in 2018 it received $7.9bn. Although this may be below the targets the government set out to achieve, it remains more than any other country in Africa.
Already, there is some acceleration in private sector investment growth, alongside a steady pick-up in system-wide household lending data, which is assuring.
With these factors in place, the economy is well positioned to grow 5-6% or more in 2021 and 2022, in our view.
We will watch the investment story closely to assess how enthusiastic we should be on Egypt on a multi-year basis.
On valuations, Egypt is trading on a 12-month forward P/E of 9.2x, a sizeable discount to the 12.9x multiple for global emerging markets and 5% below its long-term average of 9.7x; the market offers a 12-month forward dividend yield of 3.2%. In terms of performance, MSCI Egypt is up 36.4% year to date (in dollar terms), outperforming EM, which is up 14.6%.
Egypt is well owned by frontier funds (average allocation 10% Egypt), but only 26% of actively managed global emerging market funds we monitor have any exposure. Aside from an improving consumption and investment story, we believe that unlocking global emerging market money will be key for the market to exit the current trading range.
By Daniel Salter, Ahmed Hafez, and Charles Robertson
Renaissance Capital Research