Bullish consensus on Egypt’s economic stabilisation: Bank of America Merrill Lynch

A bullish consensus on the Egyptian economy was expressed at the recent IMF and World Bank annual Spring Meetings in Washington DC about the prospects for emerging markets, according to Bank of America Merrill Lynch’s Emerging Insight report issued on Monday.

The report cited Egypt’s meetings as confirming the bank’s view that the macro stabilisation of the Egyptian economy continues and that reform momentum is intact without hesitations. This can be seen in the government’s decision to eliminate all fuel subsidies (except LPG), and an automatic fuel price indexation mechanism is likely to be introduced by December or the end of the fiscal year.

The planned petroleum product subsidies allocation for fiscal year (FY) 2018/19 accounted for EGP 89.75bn compared to EGP 110bn in the FY 2017/18 budget, while electricity subsidies registered at EGP 16bn, down from EGP 30bn in the same period, in the draft budget sent to parliament for approval.

Furthermore, the Egyptian government is on track to achieve a small 0.2% of GDP primary surplus in FY 2017/18.The authorities aim to bring the primary surplus to 2% of GDP next fiscal year, and maintain it there going forward, the report indicates.

The bank believes that various other factors played a role in the unchallenged confidence in the Egyptian economy,as next year’s fiscal adjustment will include electricity subsidy reform, wage bill control, and improved tax mobilisation.

The Central Bank of Egypt (CBE)’s maintenance of a gradual, data-dependent, easing stance, along with the focus on seasonally-adjusted inflation figures, suggests that the CBE could pause any further reduction in interest rates ahead of possible fuel subsidy reform in July, the bank forecasted.

Consequently, this would mean a total easing of up to 300 basis points (bps) this fiscal year, versus their earlier expectations of 400 bps, the report indicated.

In summary, the report concludes that, with regard to Europe, the Middle East, and Africa region, the bullish consensus on Egypt, especially with regards to T-bills and external credit, and Russian rouble, felt largely confirmed in DC.

Meanwhile, on Turkish lira and Ukrainian credit, DC brought some wrinkles to worry about, such as fiscal stimulus and pension and gas reform. However, market participants are currently in a mood to ignore these warnings.

On the other hand, a negative consensus emerged in South Africa relative to other high yielders, but its absolute positioning is still high considering the major index risk in 2018.

Sub-Saharan Africa, especially Ghana and Nigeria, is the main hunting ground for new investment ideas among high yielders.