Dubai: Egypt is on its way to a sustainable economic recovery, thanks to fiscal and structural adjustment programmes in recent years and funding from the International Monetary Fund (IMF) and its GCC allies, analysts and economists have said.
Amid the recent Emerging Market (EM) sell-off that triggered sharp currency devaluations and a spike in inflation, Egypt remains stable even as it faces fiscal and current account deficits, high inflation and foreign capital outflows from its domestic debt market.
“Unlike its emerging markets peers, Egyptian foreign exchange and interest rates have remained stable, and there have been no downgrades to its near-term macro prospects,” said Ehsan Khomn, head of Mena Research and Strategy at MUFG. “Indeed, our forecasts have economic growth continuing to accelerate over the medium-term and imbalances narrowing.”
According to the Institute of International Finance (IIF), real GDP growth accelerated from 4.2 per cent in the 2016-17 period to 5.3 per cent in 2017-18 — driven by natural gas, construction and tourism on the production side, and net exports.
“We expect growth to remain around 5 per cent in the current fiscal year as the rebound in tourism and higher natural gas production continues,” said Garbis Iradian, IIF Mena chief economist. “The discovery of the giant Zohr field in 2015, which came on stream this year and holds an estimated 30 trillion cubic feet of gas, may shift Egypt from a net importer to a net exporter of natural gas by end 2019.”
Egypt’s resilience to the recent EM turmoil and its improving key economic indicators are largely attributed to a slew of reform measures.
“To a large extent, Egypt’s outperformance is predominantly due to the delivery on the adjustment measures central to the IMF’s three-year $12 billion [Dh44 billion] reform programme — progress on subsidy cuts, tax hikes, adjustments to monetary policy and the assurances of ongoing structural reforms permitting policy institutions to build credibility for the first time since the 2011 revolution,” said Khomn.
According to the IIF, the Central Bank of Egypt (CBE) has succeeded in reducing inflationary pressures and containing the second-round effects of 2017’s sharp depreciation of the Egyptian pound, followed by the substantial increase in fuel prices in June 2018.
The 12-month core inflation rate — which excludes volatile food items and regulated prices — declined from a peak of 31.6 per cent in September 2017 to 8.6 per cent in September 2018 as the impact of the exchange rate pass-through faded, supported by a relatively tight monetary policy.
While unemployment continues to decline, it remained high at 9.9 per cent in the second quarter of 2018, with youth unemployment exceeding 26 per cent.
“The current phase of structural reforms is focusing on jobs. After the successful execution of the painful adjustment that led to the sharp devaluation of the EGP [Egyptian pound], as well as the adoption of a series of austerity measures, the authorities now face a more benign policy outlook. The next stage of structural reforms will therefore focus on creating jobs by boosting domestic industrial production and attracting FDI [foreign direct investment],” said Jonah Rosenthal, senior analyst at IIF Mena.
Despite the wild swings in the exchange rates of most emerging markets, thanks to some intervention by the CBE, the currency seems to offset downward pressure on the Egyptian Pound (EGP). The currency is expected to strengthen this year although it may not be allowed to appreciate, to protect the competitiveness of the economy.
Strengthening the fiscal position is necessary to reduce Egypt’s high public debt, which hovers around 100 per cent of GDP.
The fiscal deficit in the 2017/18 fiscal period may have narrowed to 9.4 per cent of GDP.
Analysts say the medium-term outlook could be more uncertain due to structural bottlenecks and a less favourable global environment, including tighter financial conditions and uncertainty over the global trade system.
Absent deeper structural reforms, growth could decelerate to 4 per cent by 2022, insufficient to reduce unemployment. In this context, to sustain the relatively rapid growth of the past two years, Egypt needs to make the economy more responsive to market forces and empower the private sector by reducing the role of the state and the military establishment in the economy.
According to MUFG, the Egyptian rebalancing story continues its positive momentum. However, the more challenging external environment is weighing on the country’s prospects. In particular, heightened geopolitical tensions particularly pose a threat to the rebound in tourism receipts while lower risk appetite will inevitably make overseas funding more difficult and costly to access.