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HC: Egypt macro, FX shortage weighs on economic growth

Egypt macro

FX shortage weighs on economic growth

  • Low FX liquidity is fueling soaring inflation and affecting GDP growth, in our view. We expect an FX adjustment when Egypt improves its FX supply

  • We see the current account deficit turning into a surplus with a moderate expansion in external debt over FY23/24e, impacted by recent rating downgrades by Moody’s, S&P, and Fitch

  • We expect the budget deficit to widen to 7.1% of GDP in FY23/24e on higher interest expense and social benefits 

HC shared their outlook recently about Egypt’s macro economy in 2024 addressing the main GDP growth drivers and expectations on the EGP, Inflation rates and the state general budget.

Economist and financial analyst at HC, Heba Monir commented: “ FX shortage and monetary tightening constraining GDP growth, in our view: Egypt’s real GDP growth decelerated to 3.8% in FY22/23, and we expect it to increase to 4.0% in FY23/24e, slightly lower than the government’s target of 4.1%, yet higher than the IMF’s October 2023 estimate of 3.7%. However, lower-than-expected tourism revenue by c15% y-o-y due to the Israeli-Hamas war could lower our GDP growth estimate for FY23/24e to 3.3% and narrow the overall balance of payments (BoP) surplus by c50%. Our estimates reflect an EGP devaluation of c37% y-o-y in FY22/23 and of c19% y-o-y in FY23/24e, based on our real effective exchange rate (REER) model, compared to a c6% y-o-y EGP devaluation in FY21/22. The EGP devaluation, mainly triggered by foreign portfolio outflows following the outbreak of the Russian-Ukrainian war, fueled inflationary pressures and negatively affected corporate borrowing and private consumption. We expect GDP growth in FY22/23e to be driven by higher private consumption (+5.9% y-o-y), higher FDIs (+28.4% y-o-y), and a narrowing trade deficit, while in FY23/24e, besides the improved trade deficit, we expect a rebound in public investments (+47.8% y-o-y) to drive GDP growth, despite lower government consumption (-2.90% y-o-y).

Monir continued: “ We expect inflationary pressure to persist in FY23/24e, reflecting the EGP devaluation: We expect inflation to accelerate to an average 33.2% y-o-y in FY23/24e, from 24.1% in FY22/23 and 8.48% y-o-y in FY21/22 as we expect inflationary pressures to persist following Russia’s withdrawal from the Black Sea Grain Initiative, supply shortages, weakening EGP, higher oil prices, and the impact of El Niño on commodities’ prices. We expect inflation to decline gradually on base effect to 26.1% by June 2024. To control inflation and anchor inflation expectations, the Central Bank of Egypt (CBE) increased policy rates by 1,100 bps since FY21/22, and we expect it to leave rates unchanged at its 21 December meeting since inflation is supply-driven. In 2024e, we expect an improvement in the government’s partial asset sale program, tourism, Suez Canal, and Egypt’s worker remittances to possibly trigger the start of monetary easing, which would lead to a higher GDP growth in FY24/25e, on our numbers. The Egyptian government recently secured USD2.63bn from selling public stakes in companies in July and September and is on track to sell public stakes and assets worth more than USD2bn by the end of June 2024.

The BOP reversed into a surplus of USD882m in FY22/23, which we project to narrow to USD529m in FY23/24e on lower borrowing by banks: Egypt’s balance of payments (BOP) recorded an overall surplus of USD882m in FY22/23, reversing a deficit of USD10.5bn a year earlier, mainly due to a significant narrowing in the current account deficit on lower imports and improved tourism and Suez Canal revenues. For the same reasons, we expect the BOP to record an overall surplus of USD529m in FY23/24e. We anticipate the current account deficit to turn into a surplus of USD1.31bn in FY23/24e (c0.4% of GDP), from a deficit of USD4.71bn in FY22/23, versus the IMF’s deficit estimate of USD8.63bn (2.41% of GDP), on a lower trade deficit, in our view. Regarding Egypt’s external debt, which reached USD165bn by the end of June 2023, we estimate that the government repaid around USD33.9bn in FY22/23 and rolled over some USD24.0bn (mostly GCC deposits), representing c41% of its total dues for FY22/23 with a scheduled repayment of USD24.7bn in FY23/24e. We forecast a moderate increase in FY23/24e’s external debt, constrained by debt capacity and the recent rating downgrades by Moody’s, S&P, and Fitch, leading Egypt to resort to Asian markets to issue Panda and Samurai bonds with a value of around USD979m and considering tapping the Indian market. We forecast the financial account surplus to narrow by c13% y-o-y to USD7.82bn in FY23/24e with a net inflow in Egypt’s portfolio investment of USD0.18bn versus an outflow of USD3.77bn in FY22/23. The banking sector’s net foreign liabilities (NFL), including the CBE, widened c36% y-o-y to USD27.1bn as of June 2023. We estimate it to narrow by c6% y-o-y to USD25.5bn by June 2024, on an improvement in foreign currency inflows, including proceeds from the government’s partial asset sale program and improving FDIs in the services sector, especially in real estate, finance, and information technology. Following the delay in the IMF program review of March and September, related to the USD3.0bn Extended Fund Facility (EFF) Egypt secured in December 2022, Egypt’s 1-year CDS fluctuated over the 11M23, reaching 1,122 bps currently from 499 bps in January, after it resumed its partial asset sale program. In our view, Egypt’s commitment to the IMF’s reforms, most importantly leveling the playing field with the private sector, is essential to attract FDIs again and restore FX liquidity.” Monir added.

Heba Monir concluded: “ We estimate the budget deficit to widen to 7.1% of GDP in FY23/24e mainly on higher interest expense: Egypt’s budget deficit reached 6.1% of GDP in FY22/23, similar to FY21/22’s level, while we estimate it to widen to 7.1% of GDP in FY23/24e, reflecting a cash deficit of EGP810bn, c5% lower than the government estimate of EGP849bn. Our FY23/24e budget estimates assume c54% y-o-y higher total revenues of EGP2.13trn, in line with the government’s estimate (-1%), on a c25% y-o-y higher tax revenue and a 2.87x y-o-y hike in non-tax revenue. We expect expenditures to increase c44% y-o-y to EGP2.94trn, c2% lower than the government’s estimate. We forecast interest expense to increase by c29% y-o-y to EGP757bn in FY22/23e and by c55% y-o-y to EGP1.17trn in FY23/24e, representing c37% and c40% of total expenditures in FY22/23e and FY23/24e, respectively, higher than its 5-year historical average of c36%, mainly due to the 1,100 bps increase in key policy rates since the start of 2022.