• CA deficit hits record low in 1Q16; we adjust our estimates Egypt’s current account deficit (CAD) widened to USD5.5bn (1.6% of GDP) in 1Q16 from USD5.0bn in 4Q15, setting another record high and coming above our forecast of USD5.0bn largely due to higher non-hydrocarbon imports. While the trade deficit widened by a mere 3% Q-o-Q to USD9.9bn, the pressure on the current account came from a collapse in tourism revenue and a continued slide in remittances. We forecast CAD widened to 5.2% of GDP in FY2015/16 and will narrow slightly to 4.5% of GDP in FY2016/17 due to the Saudi grant and lower imports. These forecasts are pending a potential upcoming EGP adjustment – likely linked to an IMF deal – which would help narrow the CAD largely through further downward pressure on imports.
• Tourism revenue weakest since 1997 Tourism revenue suffered in 1Q in the aftermath of the Russian airplane’s crash in November, and was down 44% Q-o-Q and 62% Y-o-Y to a 20-year low of USD0.6bn highlighting the challenges faced by the sector and the pressure it is yielding on Egypt’s external balances. The sector’s revenues were USD1.8bn lower in the six months to March, indicating annualised revenue losses of cUSD4bn.
• Remittances extend declines on weak GCC growth, offshore market A wider CAD came as remittances extended their declines for the fourth consecutive quarter in 1Q16, falling 17% Y-o-Y but up 3% Q-o-Q. We attribute the decline primarily to the challenging macro conditions in the GCC countries – the origin of c50% of total remittances. The offshore parallel market - where Egyptian expats exchange their foreign currency outside of Egypt – may also be a contributor to this decline.
• FDI recovers strongly, CBE liabilities key for funding record CAD The positive news was the strong recovery in FDI, which grew 61% Q-o-Q and 9% Y-o-Y to a seven-year high of USD2.8bn. The hydrocarbon sector and greenfield investments drove the recovery which, however, fell short of fully funding the widening CAD. The latter continued to be primarily funded through accumulation of foreign liabilities by the CBE which raised USD3.0bn of new foreign liabilities – mostly originating from swap agreements with international financial institutions, in our view – with local banks also accumulating foreign liabilities of USD2.5bn in 1Q16. Suppliers’ credit of USD1.2bn has been a key source of funding import growth amidst FX shortages.

Mohamed Abu Basha