CAD narrows to three-year low

 Egypt’s external balances’ adjustment continued to gain ground in 3Q17, with current account deficit (CAD) narrowing to a three-year low of USD1.6bn (fell 32% Q-o-Q and 66% Y-o-Y). On a 12-month rolling basis, CAD narrowed 41% Y-o-Y to USD12.2bn. Improvement was recorded across the current account’s components. Trade deficit narrowed 5% Y-o-Y (though was up 7% Q-o-Q), thanks to a mix of decelerating growth of hydrocarbon imports as increased gas production starts to support external balances and nearly flat non-oil imports. The services balance was boosted by 2.5x growth in tourism revenues, as the sector continued to recover from a depressed base, and slight recovery in Suez Canal revenues. Remittances also recorded a sharp jump of 37% Y-o-Y to USD6.0bn. CAD outturn came in much narrower than our expected USD3bn, primarily due to the sharp rise in remittances as well as higher-than-expected tourism revenues. Accounting for these changes, we update our forecasts and now expect a CAD of USD11bn (4.3% of GDP) in FY17/18 from an earlier USD14bn.
 
Remittances up to a record high

 The sharp jump in remittances was clearly the highlight of the released data as it came after signs of stabilisation. Egyptians remitted USD6.0bn during the quarter; the highest number on record. It is unclear whether there has been a particular driver for such a big jump, or whether it might have been a seasonal phenomenon, but more expats have been seeing opportunities in sending money back home – whether to support their families or increasingly so for personal investments (in both bank deposits and real estate). Such growth and resilience of remittances are particularly interesting as it contrasts to similar transfers from the GCC to other countries (especially Southeast Asia) due to a combination of job losses – as these countries push for localisation of jobs – and increased indirect taxation on expats. We expect remittances to moderate from these levels, remaining largely stable.
 
Healthier funding mix

Narrower CAD also coincided with continued improvement in the funding mix. FDI covered close to 80% of the deficit, while net portfolio inflows stood at USD7.5bn, thanks primarily to rising investments in the local debt market. Moreover, the economy has been unwinding the various liabilities it has built during the time of FX shortages; banks are slowly re-building their FX positions (rose to USD4.5bn by Sep ‘17, compared to a net liability position of USD6.2bn a year ago). CBE’s NFA position saw a similar pattern, repaying USD0.5bn during the quarter. Suppliers’ credit also saw net outflows for the second consecutive quarter as more importers were funded locally.