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Daniel Marc Richards - MENA Economist
Published Date: 28 July 2019
We forecast a modest acceleration in Egypt’s real GDP growth rate this fiscal year, projecting an expansion of 5.8%. This is just shy of the government’s targeted 6.0%, but would nevertheless represent an ongoing improvement on the uncertain years after 2011. Crucially, we see scope for an improvement in private sector activity and private consumption this fiscal year.
We forecast that ongoing fiscal consolidation efforts coupled with a more favourable external environment will see Egypt’s budget deficit narrow to 7.0% of GDP in the next fiscal year, from a preliminary 8.2% in the year ended June 30. The primary surplus will rise to 2.4% of GDP, according to our forecasts, but with the bulk of expenditure still channeled into unproductive debt servicing and subsidy payments, a balanced budget will remain some way off.
In light of 3Q 2018/19 balance of payments data, we have made an adjustment to our current account deficit for Egypt, now envisaging that the improvement in the country’s external position has topped out. We estimate that fiscal 2018/19 recorded a deficit of 2.7% of GDP (compared to 2.5% in 2017/18), and that this will widen modestly to 2.8% in the current fiscal year.
The Central Bank of Egypt (CBE) kept its benchmark interest rate unchanged at its July 11 meeting, as was widely anticipated, and we forecast that policy will remain static at the August 22 meeting also. However, the likelihood that the bank resumes its rate-cutting cycle in September, rather than November as we had previously projected, is now higher given the lower-than-expected inflation print in June.
The Egyptian pound has significantly outperformed the bulk of its emerging market peers over the past 18 months, and we have adjusted our end-2019 forecast accordingly. We now envisage a year-end level of EGP 16.75/USD, which would entail a modest depreciation from the EGP 16.61/USD handle at which it was trading at the time of writing on July 25.
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