May 16. 2023/Cordros Report
We initiate coverage of the Egyptian economy and discuss our views on growth, inflation, balance of payment, currency, monetary policy and fiscal policy.
Cost Pressures Remain Entrenched in the Local Economy
The latest annual data from the country’s statistical office shows that the Egyptian economy grew by 6.17% y/y in the 2021/2022 fiscal year (2020/2021: 1.97% y/y), primarily due to the (1) favourable base effects from the 2021 fiscal year, (2) strong domestic demand, (3) favourable weather conditions, and (4) strength in the transport and communication sectors. Meanwhile, domestic cost pressures remain intact, settling at 32.70% y/y in March 2023 – the highest print since July 2017 (32.98% y/y). At the same time, currency pressures continue to build up in the official and parallel markets as the Central Bank of Egypt (CBE) has consistently failed to allow flexibility in the management of the exchange rate which has caused misalignment with economic fundamentals. On monetary policy, so far in 2023, the MPC increased its key policy rate by 200bps over two policy meetings in the year – unchanged at 16.25% in February but increased by 200bps to 18.25% in March. Finally, after accounting for the net acquisition of financial assets, we note that the overall fiscal deficit settled higher at EGP484.80 billion (or 6.1% of GDP) in the 2021/2022 fiscal year, relative to EGP472.35 billion (or 6.8% of GDP) in the 2020/2021 fiscal year.
Debt Concerns to Linger Amid FX and Price Pressures
We expect the domestic economy to grow slowly in 2022/2023FY relative to the prior year due to the trifecta effects of (1) elevated consumer prices, (2) high borrowing costs, and (3) increased FX volatility. Consequently, we forecast Egypt’s economic growth to decelerate in 2022/2023FY to 3.84% y/y (vs. 2021/2022: 6.17% y/y) and settle at 4.50% y/y by 2024FY. On consumer prices, our in-house model suggests that the country’s headline inflation is likely to maintain its uptrend and average 32.27% y/y in 2023E (vs. 2022FY: 13.82% y/y) on account of (1) lingering FX depreciation, (2) trade restrictions, and (3) increased transport costs. That said, we see significant risks regarding the economy’s vulnerability to external shocks and do not rule out further local currency devaluation if the CBE fails to honour its pledge of liberalising the exchange rate. Elsewhere, we believe the MPC will remain hawkish not only to contain the demand side factors impacting domestic prices but to also avoid the secondary effects that may result from supply shocks. Accordingly, we expect an additional 200bps increase in the overnight deposit rate over the year. On fiscal policy, we believe that if the government can successfully implement its privatisation strategy, reducing the state’s footprint in the economy, the sentiments are likely to improve significantly, attracting foreign investments and boosting FX reserves. However, if the strategy falls short, it could increase the likelihood of further currency weakness, the reintroduction of FX restrictions, and possibly, sparking debt restructuring negotiations over the medium term.
