27-Sep-2017
Egypt Economics - Embrace the relief as reforms pay off
Falling rates, tourism and gas to provide relief
We expect the economy to start enjoying a period of relief over the coming 12-18 months after a period of intense pressure as fiscal consolidation pressures subside, confirming our view that inflation has peaked, and so have interest rates. In addition to an easing monetary policy, the economy will benefit from: i) further recovery of the tourism sector, especially with strong indication of resumption of flights from Russia; ii) increased natural gas production, as Zohr field commences production in December; iii) recovering purchasing power as wage growth gradually narrows the gap with inflation and uncertainty subsides; and iv) further EGP appreciation, though we maintain our view that EGP17 is likely to be a ceiling for such appreciation.
Easing cycle to kick off in 4Q17
We expect CBE to hold policy rates steady at its meeting on Thursday, expecting the easing cycle to commence by November. CBE might be wary of quickly reversing the policy gains the two latest rate hikes brought, most notably a slowdown in private sector credit growth and stabilisation in monetary policy. As such, we expect the easing to start in November and forecast 300-400bps reduction in policy rates in the coming 12 months. The relatively limited move in rates (considering a 10% increase in rates since December 2015) arises from the fact that inflation would remain relatively high, especially with a third round of subsidy cut planned for mid-2018. We note the market is already well ahead of the curve, with yields on government debt recently plunging by nearly 400bps, edging closer to pre-devaluation levels.
Investment recovery likely more of a 2019 story
A rather moderate pace of rates cuts and gradual transmission of new investment regulations into the real economy are key factors in our expectation that the envisaged investment recovery will gain pace more so in 2019. Meanwhile, strengthening economic growth in 2018 will be driven primarily by improved industrial utilisation as infrastructure investments over the past couple of years, especially in gas and power production, pay off. FDI is already showing signs of recovery, reaching an eight-year high of USD8bn in FY16/17, albeit driven largely by the oil and gas sector.
Mohamed Abu Basha
We expect the economy to start enjoying a period of relief over the coming 12-18 months after a period of intense pressure as fiscal consolidation pressures subside, confirming our view that inflation has peaked, and so have interest rates. In addition to an easing monetary policy, the economy will benefit from: i) further recovery of the tourism sector, especially with strong indication of resumption of flights from Russia; ii) increased natural gas production, as Zohr field commences production in December; iii) recovering purchasing power as wage growth gradually narrows the gap with inflation and uncertainty subsides; and iv) further EGP appreciation, though we maintain our view that EGP17 is likely to be a ceiling for such appreciation.
Easing cycle to kick off in 4Q17
We expect CBE to hold policy rates steady at its meeting on Thursday, expecting the easing cycle to commence by November. CBE might be wary of quickly reversing the policy gains the two latest rate hikes brought, most notably a slowdown in private sector credit growth and stabilisation in monetary policy. As such, we expect the easing to start in November and forecast 300-400bps reduction in policy rates in the coming 12 months. The relatively limited move in rates (considering a 10% increase in rates since December 2015) arises from the fact that inflation would remain relatively high, especially with a third round of subsidy cut planned for mid-2018. We note the market is already well ahead of the curve, with yields on government debt recently plunging by nearly 400bps, edging closer to pre-devaluation levels.
Investment recovery likely more of a 2019 story
A rather moderate pace of rates cuts and gradual transmission of new investment regulations into the real economy are key factors in our expectation that the envisaged investment recovery will gain pace more so in 2019. Meanwhile, strengthening economic growth in 2018 will be driven primarily by improved industrial utilisation as infrastructure investments over the past couple of years, especially in gas and power production, pay off. FDI is already showing signs of recovery, reaching an eight-year high of USD8bn in FY16/17, albeit driven largely by the oil and gas sector.
Mohamed Abu Basha