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Wednesday, 18 December 2019

Egypt’s private sector activity expected to recover in 2020 amid “favorable” economic environment -EFG

Egypt’s private sector activity expected to recover in 2020 amid “favorable” economic environment -EFG: As Egypt’s economy enters 2020 with fiscal consolidation coming to an end and without macro tightening on the horizon, private sector activity is set to begin gradually recovering next year, EFG Hermes’ research team says in its 2020 yearbook. “We do expect, though, this recovery to be gradual as the economy slowly pushes away the dust of austerity. Egypt is a domestic demand-based economy, so it will take time for investment to recover until consumer demand also picks up.” Consumer demand has remained muted, growing at less than 1% while population growth is at around 2.5%.

CBE to put the pedal to the metal on monetary easing next year: With inflation expected to stabilize in the 6-7% range, EFG sees the Central Bank of Egypt (CBE) having ample room to cut interest rates by 150-200 bps in 2020. These cuts would bring rates to below pre-float levels “while still offering foreign portfolio investors a lucrative real yield.” The CBE will likely want to keep Egypt’s carry trade attractive to investors with a positive real rate margin of 2-3%, according to EFG.

Weak liquidity, muted private consumption growth threaten to drag down Egypt’s equities: The investment bank points to a “slower-than-expected drop in CDs rates leading to a continuation of weak local liquidity” coupled with private consumption growth remaining weaker than anticipated as the key risks for Egyptian equities next year. EFG notes that the EGP has appreciated around 10% YTD (breaking the EGP 16 / USD 1 barrier earlier this week) and the real effective rate exchange (REER) “is now at the LT average.” The FX rate is expected to see limited volatility next year, with EFG expecting less than 5% change.

Corporate earnings growth in Egypt is expected to be among the fastest across the countries EFG covers, with the investment bank penciling in earnings growth of 15% or more next year. Pakistan, Kenya, and Sri Lanka are also expected to have equally high earnings growth rates. “Macro headwinds remain strong in a number of our markets, and the likelihood of a truly cyclical earnings recovery seems to be highest in Egypt and Saudi Arabia.” Bloomberg had said last month that corporate earnings have now bounced back to pre-float levels in USD terms, three years after the EGP float, which initially dragged down earnings with inflation soaring to highs of 33%.


How Egypt’s 2019 performance compares to its peers: At 36%, the MSCI Egypt Index has seen returns sixfold that of MENA (6%) and more than three times that of EM (11%). “With rates getting close to pre-2016 levels and EPS growth still on track, we see no reason why Egypt should be trading at a 25% discount to Frontier-x-GCC markets.”

How EMs are expected to fare next year: Emerging and frontier markets should see strong performance early next year against a “favorable” backdrop, including successive rate cuts across EMs and a brief period of monetary easing in the US. EFG also expects oil prices to remain stable in 2020. The detente in the US-China trade war and a weaker USD will also give EMs a chance to breathe, and should start to see inflows pick up again after weakening since 2Q2019.

ETF inflows to EMs have historically been at their strongest during the first quarter of the year, EFG notes, suggesting that 1Q2020 will see a sustained uptick in inflows that will likely taper off around the middle of the year. While this is the historic trend, EM inflows are expected to be undermined by next year’s US presidential elections, which also tend to drag down EM performance. With elections set for November, “any 1Q rallies may fade as we enter 2H20e,” the investment bank says.

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