Egypt: Institutional and external risks persist despite pos- itive growth outlook

CAIRO (Capital Markets in Africa) – Deutsche Bank considered that Egypt’s reform program with the International Monetary Fund has been successful in reducing macroeconomic imbalances and improving the country’s growth prospects. It projected real GDP growth to accelerate from 5.5% in the fiscal year that ends in June 2019 to 5.9% in FY2019/20, supported by higher oil, gas and renewable energy production, sustained spending on state-sponsored mega-projects, as well as by a recovery in private consumption. It expected private consumption to increase in the first quarter of 2020 as inflationary pressures moderate from the fourth quarter of 2019 and bank lending to households increases. However, it anticipated growth prospects to be constrained by tight external financing conditions, subdued non-oil private sector activity, a lack of further structural reforms and institutional weaknesses.

Also, it forecast the average inflation rate to decline from 13.3% in FY2018/19 to 10.2% in FY2019/20, in case the Egyptian pound appreciates, global oil prices decline, and the government’s subsidy cuts are less aggressive compared to previous years. However, it pointed out that upside risks to the inflation rate include further subsidy cuts, the introduction of fuel price indexation mechanisms that would automatically link local prices to global ones, as well as the hike in electricity tariffs by an average of 15% in July 2019, a third hike to water prices, and adjustments to some public transportation costs and rents. It expected the Central Bank of Egypt to ease monetary policy starting in November 2019 in order to achieve the authorities’ inflation target.

Further, Deutsche Bank anticipated the current account deficit to narrow from 1.7% of GDP in FY2018/19 to 1.1% of GDP in FY2019/20, supported by remittance inflows following the unification of the exchange rate system, and foreign currency receipts  from  the  Suez  Canal,  which  should  support  the appreciation of the pound. It expected the latter, combined with high interest rates, to increase foreign currency inflows in local debt instruments. It also projected the fiscal deficit to narrow from 8.6% of GDP in FY2018/19 to 7.8% of GDP in FY2019/20.