A recent visit to Cairo by BNP Paribas reps reaffirmed the bank’s “positive outlook on the Egyptian economy, whilst highlighted the key challenge of competitiveness in the medium term,” according to trip notes sent to Enterprise (pdf). “Ongoing reforms (monetary and fiscal) have put the Egyptian economy on the right track. Nevertheless, the medium-term prospects are still challenged… The next challenges are execution of remaining reforms as well as achieving a sustained and inclusive economic growth.”

Economist Pascal Devaux writes that the “FX market is increasingly liquid and EGP flotation has been a success by the CBE. The BoP is improving rapidly and overseas repatriation is progressing as well. All backlogs have been eliminated and the USD interbank market is growing. IMF objectives in terms of net international reserves (NIR) have been outperformed.” Devaux points to a “relative consensus that the EGP will appreciate in 2018,” but, in the medium term, “we expect a gradual depreciation in order to preserve Egypt’s external competitiveness in a context of high, albeit declining, inflation and uncertain progress in factor productivity.”

The trip notes suggest that, the main potential drivers of the Egyptian economy are in construction, low and medium-tech manufacturing, and the labour-intensive agricultural sector.

Consumer demand has been impacted, the report notes, but food expenditures remain relatively resilient, even though consumers are now more price sensitive and cutting non-essentials.

Inflation has peaked — and hit the middle-class particularly hard. Inflation has likely peaked in 3Q2017, BNP Paribas said, and has had “the greatest impact on mid and mid-upper income households given consumption patterns and the use of private healthcare and education services.”

On the macro level, BNP Paribas sees the risk of fiscal slippage as a result of upcoming presidential elections “is less likely. But that is to be confirmed in view of the upcoming social protection measures… The two main risks to fiscal consolidation are commodity price shocks (considered to be unlikely in the coming years) and execution risk of the next rounds of reform.” For the banking sector, Devaux writes that “a consolidation of the banking sector is needed as smaller banks are not viable in the long term. However, they are not under stress to force consolidation and their risk appetite remains limited.