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Macroeconomic Potential in Egypt

Ecofegy

As an emerging market, Egypt has started to stand out after The World Bank projections estimated that the country’s economic growth will reach 5.8 percent in 2020 and 6 percent in 2021. These projections are based on the assumption that growth will be driven by increased gas production and the surge in tourism.

International tourist arrivals are starting to approach the highs experienced prior the 2011 Revolution. Egypt’s economic reforms have begun to bear fruit and the country has seen a substantial improvement in its tourism industry (flights from Russia were resumed), which is a key driver of the country’s growth. Egypt attracted 11.3 million visitors last year, which was a 40 percent annual increase. Tourism revenues grew by 50 percent during 2018 and tourism is expected to maintain a double-digit growth rate for the next 4-5 years.

That being said, an increased presence of the private sector and diversification of the economy are key transitions that need to occur to further give Egypt potential. This is crucial for sustaining long-term economic growth and for providing new employment opportunities, given the country’s high youth unemployment rate. Notably, the country’s unemployment rate fell from 10.6 percent last year to 8.1 percent this quarter.

On another note, inflation has continued to improve substantially following the peak that occurred due to the flotation of the Egyptian pound. Egypt’s inflation rate remained between 13-14.1 percent during the past two months, which was mostly driven by the surge in the price of fruits and vegetables.

There is potential for Inflation to reach the single-digit levels in the 2020s, which will allow for additional rate cuts. Egypt’s central bank was able to cut rates significantly this year following the improvement seen in inflation. The World Bank projects that Egypt’s inflation rate can fall to 10.7 percent by 2021. The Central Bank of Egypt will not likely be able to cut rates until the end of this year, given the recent increase in inflation.

Other notable improvements have included the reduction of the country’s twin deficits and the slight decline in the country’s public debt levels, which are very high by emerging market standards. Egypt is now targeting a debt to GDP ratio of 89 percent this fiscal year.

Egypt’s current account balance is slowly beginning to approach a surplus following the economic turnaround experienced since 2016. Notably, the country’s exports rose by around 11 percent during the first 9 months of 2018. The country’s current account deficit will likely remain around 2 percent of GDP during the next two years.

Another stand out feature of Egypt includes its high level of foreign exchange reserves, a level that is higher than nearly all frontier and emerging markets. This has been a key supporter of the country’s currency following the devaluation seen in 2016. Foreign exchange reserves cover roughly 6.8 months of imports and are equivalent to around 17 percent of GDP, according to the IMF. Foreign exchange reserves have nearly tripled from the lows seen in 2016.

The aforementioned factors, might be seen as an interesting venue for investors in generating returns. As an investor, one would not want to take the sole specific risk of investing in Egypt. That said, an investor can be exposed to the said country indirectly by investing in an Emerging Market fund.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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