Egypt

The Egyptian economy is the third largest of the African continent and well diversified. Over the past decade, GDP registered strong growth (+4% on average), driven by the dynamism of the mining, manufacturing, agriculture and tourism (albeit to a lesser extent since 2020) sectors. The Covid-19 outbreak affected the economy though the dramatic contraction of international trade (i.e. Suez Canal revenues), the significant loss of tourism activity (8% of GDP) and the drying up of remittance inflows (9% of GDP). Despite all this adversity, Egypt’s economy outperformed most emerging market peers and grew by +3.5% in fiscal year (FY, ending in June) 2019/20, and by +3.3% in FY 2020/21, despite continued sanitary restrictions and disruptions to global value chains. As sanitary restrictions were relaxed after mid-2021 and tourism activity picked up, economic growth accelerated to +6.6% in FY 2021/22.

However, the economic outlook has markedly deteriorated in 2022 as a consequence of the impacts of the Russia-Ukraine war. These impacts include sharply increased food prices (Egypt is a net food importer), higher energy prices and a decline in tourism (both Russia and Ukraine were important tourism markets for Egypt, and the global economic slowdown adds to this). High inflation, a tumbling currency and rising interest rates will reduce domestic demand in FY 2022/23, with consumer spending barely expanding, government spending set to slow due to necessary austerity and investment contracting. We forecast real GDP growth to moderate to around +2% in FY 2022/23.

Consumer price inflation surged from an average 4.5% in 2021 to 16.2% y/y in October 2022, mainly driven by the increased food and energy prices and a sharp depreciation of the Egyptian pound (EGP). The currency, which had been been under an unofficially managed exchange rate regime since 2019, came under pressure in 2022 as the rising food import bill boosted the current account deficit and, combined with portfolio investment outflows, also led to declining foreign exchange (FX) reserves – a combination of developments that markedly worsened investor sentiment. In March 2022, the EGP was devalued by -16% but the pressure on it continued thereafter. Eventually, the Central Bank of Egypt (CBE) floated the EGP in late October 2022, after which it depreciated by around -25% within two weeks. Simultaneously, the CBE hiked all its policy interest rates by 200bps, including the benchmark overnight deposit rate to 13.25%. We expect that another interest rate hike of around 200bps will be needed in order to stabilize the EGP for longer and to bring inflation back to the CBE’s target range of 7% ± 2pps by 2024. In the meantime, headline inflation should peak around the turn of the years 2022/23 and is forecast to average 13.2% in 2022 and 12.5% in 2023.

Egypt's business climate is below average in our assessment of 185 economies. The World Bank’s Worldwide Governance Indicators 2022 survey reflects significant weaknesses with regard to the level of perceived corruption as well as the regulatory and legal frameworks. The Heritage Foundation’s Index of Economic Freedom (IEF) survey 2022 confirms this, ranking Egypt 152 out of 184 economies (down from rank 130 in the 2021 survey). The IEF notes lingering institutional weaknesses, including a judicial system that lacks the capacity to defend property rights effectively. Egypt’s deterioration in the IEF is largely due to a worsened score for trade freedom, likely reflecting the introduction of letters of credit required for imports. These import controls may be phased out in the context of a new IMF program. Lastly, Egypt ranks 133 out of 210 economies on our proprietary Environmental Sustainability Index, reflecting particularly poor scores for renewable energy, water stress and recycling rate. The country scores better with regard to energy use and CO2 emissions per GDP, and the general vulnerability to climate change.

The president maintains tight control over institutions, backed by the army, but the autocratic governing system poses an underlying risk of social unrest. Going forward, rising social discontent related to high youth unemployment, low purchasing power after the sanitary crisis and the currency depreciation in 2022, as well as surging food prices, pose some implementation risks to the forthcoming reform agenda under the new IMF program. Egypt is also facing security and geopolitical risks that are mainly related to potential contagion of instability from neighboring countries, notably Libya, Sudan and Ethiopia. Other than that, Egypt has generally good international relations, especially with the GCC, from which it will need and obtain financial support in the next few years, complementing the IMF funding.