Pressure on the EGP is easing now that the worst of the balance of payments crunch is over, Capital Economics says in a new report. Winds at Egypt’s back include the lifting of the worst covid-related restrictions, signs of a recovery in the tourism sector (even with Egypt still not on the European Union’s “safe list”) and an anticipated pick-up in LNG prices. The research firm, which has consistently called for the EGP to weaken, is nevertheless suggesting the currency could ease about 12% to EGP 18 to the greenback by the end of 2021.

Covid’s toll on the BoP: While noting that the country’s account position had steadily improved in the years prior to the pandemic, narrowing from 6.6% of GDP at the end of 2016 to just 2.4% in 1Q2020, exports have fallen since the crisis, causing the trade deficit to widen again. This was exacerbated by weaker natural gas sales, a decline in Suez Canal receipts, and a significant drop in tourism, which it noted fell by 11.4% y-o-y in 1Q2020 — thanks, covid.

Capital flight during the pandemic also hurt, as the share of treasury bills held by foreigners fell from 22% in February to less than 10% in May, the firm suggested.

But was it really all that bad in hindsight? CBE data last month showed that the current account deficit actually narrowed in 3Q FY2019-2020 (which corresponds to 1Q2020) to USD 2.8 bn from USD 4.5 bn a year earlier. While Capital Economics noted that a decline in remittances following an exodus of Gulf-based workers didn’t help, CBE data showed that remittances increased by USD 1.7 bn to USD 7.9 bn during 3Q2019-2020 despite the global headwinds in March. Meanwhile, non-oil trade deficit fell by USD 2.2 bn to USD 27.3 bn during the first three quarters of FY2019-2020, a trend that continued in the last quarter with a rise in exports and a decline in import – particularly for fuel.

Road to recovery paved by the return of the carry trade: The government securing fresh funding from the IMF — coupled with investors’ search for yield in a bad environment — has seen foreign capital return to Egypt. Foreign holdings of government debt rose by USD 4 bn over the course of June and the first two weeks of July, writes economist James Swanston, citing government officials.

The EGP has strengthened by 2% against the USD since July, with the CBE keeping interest rates unchanged to encourage capital inflows, the report notes.

But Capital Economics thinks we’re looking at EGP 18 to the greenback by the end of next year, a drop of 12%, adding that the IMF will likely encourage authorities to let the EGP weaken so a larger adjustment is not simply kicked down the line. While inflation is much lower than it has been over the past decade, it is still higher than in Egypt’s trading partners, meaning the currency needs to weaken in nominal terms to prevent the real exchange rate from appreciating and further eroding competitiveness, the report notes.