Egypt’s eco­nomic out­look re­mains pos­i­tive, backed by tourism, nat­u­ral gas: Credit Suisse

Weak FDI, re­liance on hot money, in­fla­tion still chal­leng­ing

The Daily News Egypt - - Front Page - By Mo­hamed Samir

Through­out the past three years, Egypt ini­ti­ated a se­ries of tough, yet es­sen­tial eco­nomic re­forms, un­der­taken by the author­i­ties and sup­ported by the In­ter­na­tional Mon­e­tary Fund (IMF).

The eco­nomic re­form pro­gramme aims to trans­form the coun­try’s econ­omy through im­prov­ing pub­lic fi­nances, curb­ing the bud­get deficit, and get­ting the cur­rency shortage un­der con­trol, all while achiev­ing sus­tain­able growth.

The Egyp­tian econ­omy has started to re­cover, with GDP growth im­prov­ing, for­eign re­serves reach­ing their high­est level on record.This ren­ders 2018 a po­ten­tial turn­ing point for the coun­try, fol­low­ing years marked by tur­bu­lence and un­cer­tainty, ac­com­pa­nied by nu­mer­ous chal­lenges that faced the Egyp­tian econ­omy,from po­lit­i­cal un­rest and de­clin­ing tourism, to for­eign cur­rency and fuel shortages.

The coun­try’s eco­nomic mo­men­tum has eased, but Egypt’s fun­da­men­tal re­cov­ery story re­mains in­tact, ac­cord­ing to the Mid­dle East Over­view Out­look 2019 re­port is­sued by the Switzer­land-based in­vest­ment bank, and fi­nan­cial ser­vices com­pany, Credit Suisse Group. Credit Suisse main­tained a pos­i­tive eco­nomic out­look for the Egyp­tian econ­omy, yet they high­lighted some chal­lenges such as re­liance of re­serves on hot money flows,weak for­eign di­rect in­vest­ments (FDI), el­e­vated head­line in­fla­tion, and pol­icy un­cer­tainty ris­ing from un­ex­pected tax amend­ments.

“We con­tinue to see the re­cov­ery in tourism and tran­si­tion to be­ing a net gas ex­porter driv­ing growth and un­der­pin­ning cur­rency sta­bil­ity into 2019,” the re­port states.

Adding that from their van­tage point, Egypt’s eq­uity mar­ket sell-off is over­done, but with tech­ni­cals – anal­y­sis em­ployed to eval­u­ate in­vest­ments and iden­tify trad­ing op­por­tu­ni­ties by analysing sta­tis­ti­cal trends gath­ered from trad­ing ac­tiv­ity,such as price move­ment and vol­ume – still look­ing weak a near term re­cov­ery looks dif­fi­cult.

Eco­nomic mo­men­tum, growth slow­ing, long-term re­cov­ery re­mains in­tact

Ac­cord­ing to the re­port, the Pur­chas­ing Man­agers’ In­dex (PMI), which mea­sures the per­for­mance of man­u­fac­tur­ing and ser­vice sec­tors, dropped to an 11-month low on slow­ing eco­nomic mo­men­tum.Af­ter be­ing above 50 (ex­pan­sion) for two con­sec­u­tive months – the first time since Septem­ber 2015.

Con­se­quently,this is also re­flected in in­dus­trial pro­duc­tion growth,which has fallen from its Q3 of 2017 peak.

How­ever, Credit Suisse be­lieves that Egypt’s growth lev­els are still far from be­ing con­trac­tionary, and there are early signs of sta­bil­i­sa­tion.

The re­port in­di­cated that,tak­ing into con­sid­er­a­tion the scale of struc­tural re­form re­quired in Egypt, a re­cov­ery was never go­ing to be in a straight line, and that the in­vest­ment bank re­mains pos­i­tive and con­fi­dent of the long-term re­cov­ery trend.

In­fla­tion el­e­vated, still within CBE’s tar­get

Head­line in­fla­tion shot higher to 17.7% in Oc­to­ber 2018, pri­mar­ily on food in­fla­tion but also due to planned ad­just­ments in reg­u­lated prices, be­fore dropping to 15.7% in Novem­ber, yet it still above the CBE’s out­look of 13% (±3%) in Q4 of 2018.

How­ever, the re­port in­di­cate that such rates are not a sig­nif­i­cant is­sue, es­pe­cially since core in­fla­tion has con­tin­ued its de­cline to the low­est level in al­most three years.

In a mea­sure to con­trol in­fla­tion, the CBE hiked in­ter­est rates by 700 bps since the 2016 de­val­u­a­tion, and the re­port fore­cast fur­ther rate cuts. How­ever, el­e­vated oil prices, in­vestor risk aver­sion to­ward emerg­ing mar­kets (EMs) and high head­line in­fla­tion will likely pre­vent any such cuts near-term and we look for a fur­ther rate cut in Q1 of 2019 at the ear­li­est.

Fis­cal deficit, debt pro­file on a re­cov­ery path

Ac­cord­ing to the re­port, Egypt recorded its first pri­mary sur­plus in 15 years for 2017/18,and the bank fore­cast it is on track for its tar­geted 2% pri­mary sur­plus next fis­cal year (FY).

These pos­i­tive de­vel­op­ments were also re­flected by Moody’s ac­tion to up­grade Egypt’s sov­er­eign rat­ing out­look to pos­i­tive (from sta­ble) in end-Au­gust, due to its busi­ness sec­tor re­forms and con­tin­ued im­prove­ments in its fis­cal and cur­rent ac­count bal­ances.

The re­port in­di­cates that, although debt lev­els are el­e­vated over­all,they are pro­jected to de­cline con­sis­tently over the com­ing years on fis­cal con­sol­i­da­tion. Re­pay­ments are ex­pected to ease af­ter peak­ing this FY.

LNG im­ports halt, im­prov­ing cur­rent ac­count po­si­tion

With pro­duc­tion at the Zohr gas field ahead of sched­ule, Egypt of­fi­cially stopped be­ing a net LNG im­porter this month. Daily gas out­put fell from 7bn cu­bic feet per day (bcf) in 2010 to 4 bcf in 2016 but rose for the first

time in sev­eral years to 4.5 bcf in 2017.

The re­port in­di­cated that over the next three years, pro­duc­tion is pro­jected to in­crease to 7.7 bcf, well above Egypt’s do­mes­tic needs of 5.2 bcf. On­go­ing ex­plo­ration ac­tiv­i­ties have the po­ten­tial to fur­ther boost Egypt’s pro­duc­tion ca­pac­ity.

Con­se­quently, strong im­prove­ment in Egypt’s cur­rent ac­count bal­ance are ex­pected,thus it is one of the key fac­tors be­hind the in­vest­ment bank’s ex­pec­ta­tions of the EGP’s sta­bil­ity into 2019.

Ex­ports, tourism, re­mit­tances, lead­ing the way to re­cov­ery

Egyp­tian ex­ports have clearly started to re­cover, driven by the re­moval of cur­rency-re­lated un­cer­tainty, the re­port states.

Fur­ther­more, look­ing at the longterm his­tory in both dol­lar terms and as a share of the GDP, it is clear that there is con­sid­er­able scope for fur­ther re­cov­ery over a mul­ti­year pe­riod.

Credit Suisse be­lieves that the ex­port in­dus­try is a crit­i­cal part of the econ­omy, and is also a key source of hard cur­rency, hence its re­cov­ery will be im­por­tant to mon­i­tor.

On the tourism front, the re­port in­di­cates that rev­enues show im­pres­sive strength, af­firm­ing its po­si­tion as an im­por­tant source of both forex and labour em­ploy­ment.

The sec­tor is firmly in re­cov­ery, with tourism rev­enues ap­proach­ing pre­vi­ous peak lev­els de­spite the num­ber of tourists still well be­low the 2011 peak – which the re­port be­lieves is due to a change in the mix of tourists and the EGP de­pre­ci­a­tion. The re­cov­ery and sus­tain­abil­ity of these flows is ab­so­lutely key.

How­ever, the in­vest­ment bank be­lieves, that Rus­sia’s de­ci­sion to re­in­state flights to Cairo af­ter a break of al­most 2.5 years is pos­i­tive, as restor­ing flights to Egypt’s re­sort cities of Sharm El-Sheikh and Hurghada, would fur­ther boost tourism ar­rivals, es­pe­cially since it could prompt the UK to re­sume its own flights as well. Both Rus­sia and the UK are among Egypt’s most im­por­tant sources of tourists.

In re­gard to re­mit­tances, a sur­pris­ing in­crease in re­mit­tances has led to sharp up­ward re­vi­sions in the IMF’s pro­jec­tions and has also pro­vided sup­port to Egypt’s cur­rent ac­count bal­ance.

How­ever,ac­cord­ing to the re­port, this is un­likely to be sus­tain­able since it has been driven in part by ex­pats leav­ing Saudi Ara­bia in the wake of its Saud­i­s­a­tion ef­forts.The level at which re­mit­tances will sta­bilise at is crit­i­cal.

More­over, the re­port high­lights, slow for­eign di­rect in­vest­ments (FDI) is the pri­mary area of dis­ap­point­ment in Egypt’s eco­nomic de­vel­op­ment. Not only it has sig­nif­i­cantly lagged ex­pec­ta­tions, but the mo­men­tum has slowed,

with the 12-month mov­ing av­er­age hav­ing peaked in end-2016.

Ex­ter­nal bal­ances show­ing strong im­prove­ment, all time high re­serves sup­port cur­rency

Re­serves con­tinue to reach new all-time highs, backed by the IMF pro­gramme,suc­cess­ful bond is­suances,and an on­go­ing re­cov­ery in tourism.

“We re­main con­cerned over the re­liance on ‘hot money’ flows, but we see re­serves as be­ing suf­fi­cient to keep from an­other EGP de­val­u­a­tion,” said the re­port.

The re­port in­di­cates that tak­ing into con­sid­er­a­tion, the CBE re­cent de­ci­sion to end the repa­tri­a­tion mech­a­nism,fluc­tu­a­tion around EGP 18 can be ex­pected, as all flows will now go through the in­ter­bank mar­ket.

How­ever, the in­vest­ment bank fore­cast that the gov­ern­ment will want to avoid sharp weak­ness in the EGP as this could at­tract spec­u­la­tive pres­sures and may risk so­cial un­rest.

Con­se­quently, the re­port ex­pects just a mod­est EGP weak­ness, de­spite the sus­tained dol­lar strength and risk aver­sion against EMs.

T-bills con­tinue to of­fer com­pelling re­turns, de­spite de­cline

For­eign hold­ings of Egyp­tian trea­sury bills (T-Bills) have de­clined sig­nif­i­cantly in re­cent months, although they

re­main just above peak-2010 lev­els. Moody’s up­graded Egypt’s out­look to Pos­i­tive from Sta­ble in Au­gust 2018.

As a re­sult, Credit Suisse con­tinue to hold a pos­i­tive view on T-bills, which they be­lieve are over­sold, not­ing that yields ap­pear to be rolling over.

“We see lim­ited down­side risk to re­turns from EGP weak­ness.The can­cel­la­tion of long-term T-bond auc­tions in Septem­ber was wor­ry­ing, but we be­lieve it was a func­tion of EM trade ten­sions and not Egypt’s fun­da­men­tals. In­deed, we be­lieve it points to en­cour­ag­ing dis­ci­pline from the Egyp­tian gov­ern­ment,” the re­port added.

Credit Suisse main­tains pos­i­tive view on eq­ui­ties, against re­cent sell-off

The re­port cites, the re­cent sell-off in Egypt and EM eq­ui­ties cou­pled with con­tin­ued growth in Egyp­tian earn­ings ex­pec­ta­tions has pushed Egypt’s price to an earn­ings ra­tio (P/E) which is at a 3-year low.

How­ever,the in­vest­ment bank main­tains their pos­i­tive view on Egypt, and sees the re­cent sell-off as an op­por­tu­nity to add ex­po­sure.Tak­ing into con­sid­er­a­tion the re­cov­ery in earn­ings fore­casts since the de­val­u­a­tion, although in dol­lar terms,the econ­omy has just now re­turned to pre-de­val­u­a­tion lev­els.

The re­port in­di­cated that it is im­por­tant to keep in mind that over the past two years, earn­ing per share fore­casts have in­creased 42% in Egypt in USD terms (65% in nom­i­nal EGP) com­pared to 14% for the Mid­dle East and 28% for Mor­gan Stan­ley Cap­i­tal In­ter­na­tional (MSCI) EMs.



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