Egypt’s economic growth will remain strong in the medium term due to relative political stability, strong investment, and recovering consumer environment, Fitch Solutions said in its latest report. That said, more needs to be done in terms of structural reform to maintain high growth rate over the long term.
Fitch analysts expect growth to remain strong in the next five years. The economy will continue to be dominated by private consumption, while fixed investment will see the fastest growth rates in the short to medium term. Egypt’s positive short-term story is effectively one of pent-up demand that has been unleashed by increased macroeconomic and political stability.
Sustained strong growth rates over the long term will require more structural reform. They currently forecast a gradual drop in headline growth rates past the medium term. This is to account for the pessimism that reforms will be sufficient to draw in large amounts of foreign direct investment, and other competitiveness will improve enough to boost the private sector. The next few years will prove formative in this regard, however, with IMF led reforms having helped restore macroeconomic stability, the government can now move onto making more structural changes to the economy.
Fitch expects GDP growth rate to remain strong in the short term. They forecast real GDP to grow at 5.9% in fiscal year 2019/20 (FY19/20) from 5.6% in FY18/19.
In context, investment will remain a key driver of growth. Fixed investments grew by 12.3% year over year YoY in the first three quarters of FY 18/19, according to the government’s most recent national accounts release, outpacing the growth rates in all other components of GDP. Much of the investments stems from public sources, a trend that will likely to continue to play out over the next year.
The FY19/20 budget plans for EGP140bn of treasury funded investment, recording 40% higher than the previous year, which, given that inflation is falling at a rapid pace, should translate into substantial investment flows in real terms. Meanwhile, the private sector appears to remain under pressure to some extent with purchasing managers’ index readings having climbed above 50.
On the other hand, Fitch analysts expect interest rates to be cut by 200 basis points (bp) by the end of the year, and will continue to drive down borrowing costs for local firms, a shift that has already began to filter through into stronger business lending growth, which should help boost momentum in private investment in the near term as well.