Egyptian growth outperforming globally

The Egyptian economy has held up well in the face of the Covid-19 challenge, registering growth of 3.6% in fiscal 2019/20 (ended June 2020) according to preliminary figures. While this is down from the average 4.7% growth recorded over the preceding five years, it compares favourably to most other countries globally as the world has struggled to manage competing economic and healthcare demands driven by the coronavirus pandemic. This year we forecast growth of 3.5%, accelerating to 6.1% in FY 2021/2022.

Quarterly data show a -1.7% y/y contraction in the fourth quarter (April-June) as the crisis peaked, but the economy returned to growth in the first quarter of the present fiscal year at 0.7%. The outlook at present is mixed given that travel restrictions from key visitor source countries in Europe will continue to negatively impact the tourism sector. Nevertheless, indications are that the economy will have continued to expand in the subsequent months, and we anticipate that it will continue to do so.

Real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

The fall in unemployment from 9.6% in Q2 2020 to a record low of 7.3% in Q3 will help support domestic demand, and the Central Bank of Egypt (CBE) has stated that ‘most demand side leading indicators for October and November 2020 show continued signs of recovery’. Meanwhile, three consecutive positive PMI survey readings over September-November also suggest that the recovery has been steady. Although the December figure fell back to a contractionary 48.2, it is still an improvement from the levels seen at the peak of the pandemic crisis. Egypt’s PMI fell to a low of 29.7 in April but the fourth quarter averaged a positive 50.2. The situation in Europe will likely forestall especially strong growth in Egypt over the next several months, but as vaccination programmes progress we expect a recovery to take hold there also, which would be an added fillip to the Egyptian economy.

Egypt PMI survey

Source: Markit IHS, Emirates NBD Research

Room for one more cut

Egyptian CPI inflation dipped to 5.4% in December, from 5.7% the previous month. This was the slowest pace of price growth since October, and was the first month since August that inflation had fallen. Food prices, which fell -1.2% y/y, drove the deceleration. This was the final inflation print before the first MPC meeting of the year on February 4, but we maintain our view that the benchmark overnight deposit rate will be kept on hold at 8.25% once again. The CBE kept rates on hold at its last meeting of 2020, on December 24. The benchmark overnight deposit rate stands at 8.25% and the overnight lending rate at 9.25%, following a cumulative 400bps of cuts last year, the bulk of which came in an unscheduled 300bps cut in response to the escalating coronavirus pandemic crisis.

Egypt benchmark interest rates, %

Source: Bloomberg, Emirates NBD Research

The bank will have some room to implement modest further cuts this year, and we have penciled in a further 50bps cut in the second quarter, taking the overnight deposit rate to 7.75%. This will as ever be dependent on domestic inflation and global investing trends however, and the risk is that an overshoot in price growth or a rise in risk-off sentiment because of concerns over Fed tapering would see the CBE stand pat instead. The bank has long been cautious with the pace of its rate-cutting, and will likely wish to remain attractive to international portfolio investors even in the event of a resumption in risk-off sentiment. According to finance minister Mohamed Maait, foreign investment in local debt had risen to USD 24bn at the end of November, having fallen to a three-year low of just USD 7bn in May as the coronavirus crisis drove a global flight to safety.