Egypt’s economy is on track to grow this fiscal year, but needs to keep an eye on EGP flexibility + industrial investment –RenCap
EXCLUSIVE- Egypt’s economy is on track to grow this fiscal year, but needs to keep an eye on EGP flexibility + industrial investment –RenCap: Renaissance Capital is maintaining its expectations that Egypt will manage to eke out growth this fiscal year at around the same rate as FY2019-2020, thanks partly to the government’s decision against imposing a full lockdown, but the country now needs to focus on shoring up investments in domestic manufacturing, Global Chief Economist Charles Robertson and North Africa CEO Amr Helal told Enterprise.
Egypt deciding against a full lockdown helped to cushion the economic blow from the pandemic: While some EMs, including South Africa and India, decided to impose tight lockdown measures, there is a growing consensus among developing markets that a partial lockdown akin to Egypt’s is “the way to go”: Domestic demand and consumption are proving to be the key driver of growth as other sources of income come under pressure. There’s been a divergence in trends between countries that locked down successfully, like in East Asia and Europe, versus lower-income emerging markets — below USD 10-15k per capita GDP — where lockdown has not worked. The main hit to EM will ultimately come not from lockdowns, but as a result of the global slowdown thanks to lost demand in Europe and America, Robertson suggested.
Local consumption will continue to be the key driver of growth in Egypt and EMs at large: For data like retail sales, RenCap expects that by the end of 2020, developed markets will likely show a bigger hit than emerging markets, where people never really stopped going to work and shops were only closed for a few weeks or only at nighttime in countries like Egypt that imposed curfews. As a result, domestic demand should hold up a bit better in these countries.
It’s difficult to pinpoint an exact figure for growth forecasts, but Egypt is still on track to record 2-4% growth in FY2020-2021, which is the same view the bank put out in April. “I’ve got no confidence in a point figure,” Robertson said, but suggested it is more likely the current fiscal year will end at a growth rate on the lower end of the investment bank’s forecast range. He stressed that these assumptions are not set in stone and could change as the situation evolves.
Part of the difficulty in formulating a clear outlook is the lack of complete and timely data, Robertson said. “This is an example of why it would be great to see CAPMAS revamping its output both in terms of what it produces — as far as I’m aware, they don’t produce retail sales figures — but also in how quickly they produce the data.” He pointed to this data output as a potential structural figure that would be “hugely important” for policymakers, including the Central Bank of Egypt.
Expect the CBE to remain hawkish for now to shore up domestic confidence: Keeping inflation in check and achieving the year-end target of 9% is the CBE’s primary policy priority, not least because this has been a stated goal, meaning the CBE’s success in achieving that target is key for maintaining confidence.
The EGP’s performance is helping in that regard — and is also a key priority for the CBE: The easiest reference point for the average Egyptian or any person living in another emerging market looking to assess the strength of their country’s economy is how the domestic currency is faring, Robertson said. “If you can maintain a reasonably stable and strong currency, which is how I would characterize the EGP right now, that helps to maintain domestic confidence.” Aside from inflation, currency stability is another primary priority for the CBE, and it “just so happens” that these two goals are closely related and “coincide very well,” suggesting that the CBE will continue to be very cautious with its monetary easing.
On the EGP’s valuation: In the medium term, it’s “not ideal” to have an overvalued currency, Robertson said, noting that the investment bank sees the EGP as 21% overpriced at its current rate. RenCap’s view is based on its real effective exchange rate model, which compares inflation and exchange rates between countries to determine the currency valuations. “What we should see is that if Egyptian inflation is 10% more than in America, the currency needs to sell off by 10% to make sure that it’s not overvalued,” Robertson explained. The EGP has not depreciated steeply despite high inflation over the past three years, which is partially because the currency sold off at a rate that was steeper and more rapid than inflation would have dictated in 2016 when the CBE pulled the trigger on floating the currency.
Egypt remains very attractive for portfolio investors, even if the EGP were to slip to somewhere around 17 to the greenback, he said. Interest rates on one-year instruments remain high enough that a small depreciation by the end of 2020 would still allow portfolio investors to walk away with money in their pockets.
There’s “no reason to suggest” the EGP come under significant pressure, but “the valuation tells you that there is a medium-term risk that, over the next few years, the EGP is going to get cheaper. This could happen either very quickly or gradually,” Robertson said.
The antidote? Start boosting domestic manufacturing and foreign investment in local industry. Egypt currently has a high enough adult literacy rate and adequate energy security to truly begin industrialization, but investors also look for stability, Robertson said. He suggests that allowing for “a gentle depreciation” over the next few years through interest rate cuts would both help reduce the risk for currency volatility and encourage capex borrowing that would spur real economic growth.
We were supposed to see Chinese manufacturing investments in Egypt this year, but right now, who wants to build a factory? It’s unlikely that FDI is going to be pouring in this year for industrial and manufacturing projects, including factories that Chinese investors were planning to build in Egypt, but Helal sees ample options for investment in other industries. “If we look at agriculture, especially agri-foods that are export-oriented, we’re seeing a lot of investor interest in the sector, and we expect that trend to continue” thanks to the wide domestic market base and Egypt’s ability to tap into export markets, Helal said. Egypt also has competitive advantages on the export side, such as freight rates.
Watch this space: NBFS + fintech: Non-banking financial services and the fintech space are also generating investor interest, particularly restrictions imposed over the past several months driving consumers to digital payment channels, Helal said. “This also dovetails quite nicely with the government and the CBE’s initiatives to drive digitization and financial inclusion.”