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Sunday, 15 April 2018

Gov’t budget bridging is out, sees inflation dropping to low of 10% in FY2018-19

BUDGET WATCH- Government sees inflation dropping to low of 10% in FY2018-19: The Finance Ministry issued its pre-budget report for FY2018-19 on Friday (pdf) in which it outlines the broad strokes of the budget and its priorities for the economy and public spending. The government is predicting that inflation will continue to cool into 2019, predicting an average annual headline inflation rate of 13.2%, with levels seen dropping as low as 10% during FY2018-19. (The central bank has previously said it sees inflation falling to 13% by the end of 4Q2018.)

The report is out as the House formally kicks off its budget debate today with scheduled appearances by Finance Minister Amr El Garhy and Planning Minister Hala El Said.

The budget assumes that yields on government debt will be 14.7%. Falling yields have raised concerns that Egyptian treasuries will be less attractive, especially after the central bank began its monetary easing in February. Foreign holdings in Egyptian treasuries, which have surged over the past year on the back of the country’s high yielding debt, continued to rise, to USD 23.1 bn at the end of March 2018.

Other highlights:

  • GDP growth of 5.8%, up from an estimated 5.2% in FY2017-18;
  • A budget deficit of 8.4%, up from 9.8% in the current fiscal year on the back of a 21.6% increase in revenues to EGP 989.2 bn — EGP 770.3 bn of which from tax collections — and a 15.4% y-o-y rise in public spending;
  • A primary budget surplus of 2%, up from 0.3% this current fiscal year;
  • Public debt will stands at 91-92% of GDP;
  • Unemployment will fall below 11%.

Six-month import cover, no change in FDI target: The ministry says it wants to see foreign currency reserves sufficient to cover more than six months of imports. Separately, the government is aiming to grow foreign direct investment to USD 10 bn next fiscal year, Investment Minister Sahar Nasr tells Al Shorouk. The target is unchanged from the current fiscal year, as FDI has been growing slower than expected.

The report is effectively the Finance Ministry’s policy statement for the new fiscal year. On the revenue side, the ministry wants to grow the tax base, in large part through financial inclusion initiatives. We know that the government is planning adopt an SMEs Act, which it hopes will offer incentives to encourage small business owners to join the formal economy. Economic growth is also expected to be reflected in the increase in revenues. Looking at expenditures, the ministry is also hoping to increase spending on infrastructure and services to EGP 100 bn, in addition to raising social welfare spending on both food subsidies and the Takaful and Karama cash benefit programs. These would be balanced by cuts to energy subsidies. The ministry also said it would prioritize a “more efficient energy price” and market — signaling that it plans to move forward with energy deregulation. The ministry is also looking to maximize cost-cutting and efficient spending through the state IPO program. The ministry has allocated funding to population control programs, including the “Two is enough” program.

Report sees oil prices as largest risk to achieving budget targets: Oil prices moving beyond an expected average of USD 65-70 per bbl led the list of risks the Finance Ministry estimates would negatively impact the budget as OPEC and Russia continue with production cuts. The FY2018-19 budget assumes oil prices will average USD 67.20 per bbl. Bloomberg had noted last week that Saudi Arabia may try and push the production cuts to a price of USD 80 per bbl. Other major risks noted by the Finance Ministry include:

  • The US Federal Reserve increasing interest rates substantially, potentially cutting inflows to emerging markets;
  • Regional political instability could dissuade foreign investors from the market;
  • Slower growth in the European Union — Egypt’s largest trading partner — on the back of Brexit;
  • A US-China trade war, and a growing trend in international protectionism;
  • A substantial change in the FX rate.

What the report doesn’t say: First and foremost, the report does not clarify the extent of the energy subsidy cuts expected next fiscal year. A document obtained by Reuters had said that the government wants to cut fuel subsidies by about 26% y-o-y to EGP 89.08 bn — and simultaneously slash electricity subsidies by almost half to EGP 16 bn from EGP 30 bn. The report also makes no mention of how much the government plans to spend on health and education. It does note that the year will see the first implementation of the Universal Healthcare Act. Earlier statements had put total social welfare spending at EGP 322 bn.

Fuel subsidy spending in FY2017-18 could drop on lower consumption: Finance Minister Amr El Garhy said that Egypt’s consumption of petroleum products has fallen by 2-3% since the beginning of FY2017-18. The government expects fuel subsidy spending to fall this current fiscal year to EGP 110-115 bn, from an initial allocation EGP 120 bn, he said in a statement on Thursday.

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