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Tuesday, 20 October 2020

Egypt’s economy is on track to finish the year having grown 3.5%

NOSTRADAMUS AGREES: Egypt’s economy will finish the year having grown 3.5%. That’s our takeaway after Fitch said in a recent report that it sees the economy growing at a 3.5% clip this year, adding its projection to similar forecasts from the International Monetary Fund (which recently revised upwards its 2020 growth projections to 3.5% from the 2% it forecast in June) as well as Deutsche Bank (where the projection is 3.5% growth spanning FY2020-2021). For color: European Bank for Reconstruction and Development also revised its short-term projections for Egypt, predicting economic growth of 5% in 2021 and 2% in 2020, making Egypt “the only economy across all of the EBRD regions likely to escape recession in the 2020 calendar year.”

Inflation to pick up in the final quarter: Fitch said in a separate report it expects core inflation to increase from the current 3.3% to 5.3% by the end of the year. Inflation has been on a downward trajectory for much of this year. The headline rate rose last month for the first time since May but at 3.7% remains close to record lows. The central bank’s 50 bps rate cut last month may help to stimulate inflation in the remaining months of the year.

Pickup in price growth + risk of global market volatility mean rates are staying put this year: Fitch’s “core view” remains that the Central Bank of Egypt (CBE) will keep rates on hold through the end of 2020, even though lower-than-expected inflation figures “could conceivably prompt the IMF to push for further interest rate cuts.” Fitch also anticipates a fresh bout of volatility in global financial markets, which could help pressure investors to sell out of emerging markets. With FX inflows from tourism and the Suez Canal dipping because of the pandemic, Fitch says any liquidity crunch would give the CBE further impetus to keep rates steady. The report notes that there nonetheless remains space for further monetary easing this year, considering Egypt’s real interest rates “are still the most attractive globally.”

Expect to see 50 bps-worth of rate cuts in 2021, particularly as inflation figures should remain relatively muted next year, Fitch says. “Indeed, while recovering economic activity will fuel demand-pull pressures to some extent … cost-push pressures will be contained in the absence of major further subsidy cuts.”

The EGP may dip against the USD: Fitch also predicts the EGP will come under a bit of pressure to hit EGP 16.25 against the greenback by the end of the year, amounting to a 3.9% slide from the current 15.64 EGP-USD rate.

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