Economic Analysis - Reforms Will Boost Growth In 2018 - JAN 2018

BMI View: Egypt ' s economy will continue to strengthen as the structural reforms implemented as part of an IMF deal reached in November 2016 bear fruit. Private consumption and fixed investment will be the primary growth drivers, with slowing price growth set to benefit Egyptian households.

Positive data and recent developments out of Egypt have caused us to become more bullish towards the North African economy, which has embarked upon a solid recovery trajectory since going to the IMF in November 2016. A series of structural reforms carried out as a condition of the USD12bn bailout have seen investor interest in the country piqued, and we have revised up our real GDP forecasts, now projecting an expansion of 4.9% in 2017/18 (from a previous forecast of 3.4%) and 4.6% the year after, following an estimated 4.1% in 2016/2017. We had anticipated that the extremely high inflation seen since the massive devaluation of the currency in November would have severely constrained private consumption, but despite anecdotal accounts of hardship, growth appears to have remained buoyant according to 3Q16/17 data to March. While there remain pertinent risks on both the political and economic fronts, Egypt appears to be past the worst of its recent crisis, and we see significant opportunities for growth, which will be driven primarily by private consumption and fixed investment.

Private Consumption & Investment Will Drive Growth
Egypt - Component Contribution To Real GDP Growth, pp
e/f = BMI estimate/forecast. Source: Central Bank of Egypt, BMI

We anticipate a stronger expansion in private consumption levels in the coming fiscal year, as falling inflation and decreasing unemployment will boost spending power. Private consumption grew by 4.2% y-o-y in real terms over the nine months to March 2017, despite inflation that averaged 30.7% over the same period. Given that inflation is set to see a dramatic fall at the end of the year, as the effects of the November 2016 currency devaluation pass through, we expect that the Egyptian consumer story will strengthen further. We forecast that price growth will slow to 15.0% at the close of 2017, and average 14.4% next year, which will enable loosening of monetary policy - we forecast 300 basis points of cuts in 2018 ( see ' Rate-Cutting To Begin In 2018 ' , October 20 2017). While this remains high, and households will remain under pressure owing to the ongoing reforms which have seen utility tariffs and taxes rise, we see scope for greater spending. This will be bolstered by job creation as the economy expands; unemployment fell to 12.0% in the quarter ended June 2017, compared to 12.5% a year earlier, prior to the IMF bailout.

Growth Will Remain Resilient
Egypt - Real GDP Growth, % y-o-y
e/f = BMI estimate/forecast. Source: Central Bank of Egypt, BMI

While the structural reforms carried out as part of the IMF programme have weighed on households in recent months, they have also made the country far more attractive to foreign direct investment. The country is a cheaper place in which to invest since the currency devaluation, and efforts to cut red tape have also encouraged greater interest. In recent months a series of international brands have announced that they are building their exposure to Egypt. These include Mercedes Benz, which is taking advantage of the new conditions to re-enter the market through the development of a new regional distribution facility. Tech-taxi firm Uber has also announced its entry into Egypt, with an initial investment of USD20mn, while Siemens is heavily involved with the Egyptian power sector. Over the nine-month period to March, FDI into Egypt was up 12% y-o-y. Much of this has been directed to the petrochemicals sector, and the USD8.6bn Tahrir Chemicals Complex in particular has been a key driver of this.

As the economy strengthens, and the consumer becomes less constrained by very high inflation, we anticipate ongoing growth in fixed investment, which will help mitigate the risk posed by capital flight as interest rates fall ( see ' EGP: Capital Flight Fears Overblown ' , October 18 2017). A new investment law passed in 2017 will encourage further foreign investment, as will the relaxation of capital controls, while ongoing efforts to cut red tape will encourage the growth of domestic SMEs. Government capital spending will also likely see some modest recovery as the authorities take receipt of substantial dollar- and euro-denominated loans in H118.

Holding Up Despite Challenges
3Q2015/16 3Q2016/17
Egypt - Real GDP Growth, % y-o-y. Source: Central Bank of Egypt, BMI
GDP at Market Prices 4.2 3.8
Final private consumption 5.5 4.4
Final government consumption 3.6 2.4
Investments 7.6 15.0
Change in stock -19.5 -9.2
Exports of Goods and Services -19.2 72.4
Imports of Goods and Services -4.9 47.0