Egypt effusive praise tempts securities stumble

Egyptian bonds and stocks, the latter up 15% on the Morgan Stanley Capital International core emerging markets index in the first quarter, continued to draw strong foreign investor inflows around the spring International Monetary Fund-World Bank gathering.

Government officials fanned out to promote an economic comeback and political stability narrative to public and private sector counterparts, with President Abdel Fattah al-Sisi showered by US President Donald Trump’s “great job” praise in a White House meeting. The former army chief won a landslide 97% election victory last year, and is on track to secure constitutional extensions that could keep him in the post another 15 years. He agreed to a $12 billion IMF program in 2016, due to expire later this year, which floated the currency and cut fuel subsidies to win sovereign ratings upgrades to “B” and “positive.”

The stock exchange prepared for another wave of state bank and enterprise partial sales following a burst decades ago, and with the pound finally settling at its market level, overseas portfolio managers snapped up local Treasury bills with double-digit yields. Foreign reserves have tripled to $45 billion from their precarious position before the Fund package, with offshore natural gas discovery joining tourism rebound to boost external accounts. However, inflation is almost 15% and the fiscal deficit is stuck in high single digits in relation to gross domestic product. Improving indicators otherwise may have come at the cost of runaway public debt, over 90% of GDP, to invite a “great job” rethink on the longer-term performance and reform path.

GDP growth in 2019 is set at 5.5% as a Middle East-North Africa region leader, aided by “mega-projects” such as Suez Canal widening and the $45 billion Cairo relocation to a new administrative capital. The government’s “Vision 2030” charts a diversification strategy for the coming decades that also slashes poverty to meet the United Nations’ Sustainable Development Goals. Banks have been directed to earmark one-fifth of loans over time to small and midsize business to support that sector. A foreign direct investment push is designed to increase the current $7 billion take, equal to 3% of GDP, after new bankruptcy, profit repatriation, and residency laws were passed. In their Washington rounds, officials noted that US company total commitments of around $25 billion represented 40% of their Africa total, and that Suez Canal modernization will complement the continent’s nascent sweeping free trade zone.

The fiscal targets in the $12 billion Fund agreement have been met despite the steep headline deficit, with a 2% primary surplus expected this year on higher tax collection. Food prices, and electricity and fuel tariff hikes with subsidy reduction, are the main inflation drivers. The currency is firm at around 17.5/dollar, and the central bank recently cut interest rates 100 basis points. The inflation goal is 9% by year-end with additional 3% leeway, and foreign investment in local government paper may double to $20 billion should it be within reach, but the more likely scenario is position unwinding that in turn weakens the pound. The current account gap will come in around 2% of GDP despite Zohr gas field production and tourism revenue approaching its pre-Arab Spring peak, with slumping Gulf remittances and expanding import appetite. Egyptian representatives conceded these points during the Bretton Woods meetings week but countered that the domestic consumption could draw on a large 85 million population as reported unemployment fell to a decade low of 9%. Standard Chartered Bank echoed these views in a January review, predicting Egypt’s ascent to a top 10 global economy in 2030, with $8 trillion in output as Africa’s giant.

Bank balance sheets revived the past five years with Moody’s Ratings assigning a positive outlook, with a 15% increase projected this year. Bad loans at 4.5% of portfolios are one-quarter the amount a decade ago, and capital adequacy is 15% of assets, according to 2018 figures. The loan/deposit ratio is low and local currency deposits are three-quarters of the total. Only 30% of citizens have formal accounts, and greater financial inclusion is to be achieved through digital and technological outreach under a joint industry-regulatory framework. Retail and Islamic lending are promising lines to match trends in neighboring countries, with the youth demographic inviting consumer credit. However, one-third of bank assets remain concentrated in government securities, and default or restructuring as widely feared before the IMF program may again be contemplated with exit over the coming months.