2013-12-09 09:53:22 - New Country Reports research report from Business Monitor International is now available from Fast Market Research
The first half of 2014 will be a difficult period for the Egyptian economy, as ongoing concerns surrounding a potential devaluation of the pound's de facto fixed exchange rate are likely to continue under -mining investment patterns. Sporadic outbursts in public unrest and ongoing 'policy drift' will undermine a more pronounced economic recovery.
Egypt will have little choice but to make more pronounced reforms to its domestic energy subsidy system. That said, we do not expect any major reforms ahead of parliamentary elections, which we expect to take place in april 2014.
The combined impact of currency devaluation and hikes to domestic energy prices will push consumer price inflation back into the double digits by the end of the year.
Egypt's geopolitical importance
will ensure that even if an IMF agreement is delayed for longer than expected, further foreign aid commitments will materialise over early 2014. Western powers such as the US and EU have an interest in ensuring the North African country does not experience a more pronounced economic and political crisis. However, it will be donations from the GCC which keeps Egypt afloat this year.
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We do not expect an IMF deal before H214, as the economic ra-tionale has waned somewhat since the influx of foreign aid and it is politically unpalatable at present.
Major Forecast changes
Following an influx in foreign aid in July and October 2013, it appears as though Egypt will be spared a more pronounced balance of pay -ments crisis until mid-2014. That said, as the aid inflows are likely to weaken the government's resolve to push ahead with necessary subsidy and tax reforms, we do not expect an IMF agreement to be signed in the near term. We are forecasting real GDP growth of 2.5% and 4.2% in FY2013/14 and FY2014/15 respectively.
Key risks to outlook
A failure to secure external financing (whether through the IMF or bilateral aid) raises the risks of a disorderly devaluation of the Egyptian pound.
Egypt may become stuck in a protracted democratic transition, in which case long-term growth would fall well below potential.
Partial Table of Contents:
Major Forecast changes
Key risks to outlook
chapter 1: political outlook
BMi political risk ratings
political risks Moderating, For now
- Political risks in Egypt have peaked, and we expect a slight moderation over the rest of the year. The interim government has brought a semblance of stability to Egypt's political scene and a degree of policy continuity which has not been present in Egypt for much of 2013. That said, there are significant challenges ahead regarding the new constitution and engagement with the Muslim Brotherhood.
Long- term political outlook
Four scenarios For the coming Decade
- Egypt's transition to a fully fledged democracy is likely to take several years at least, and there is no guarantee that it will achieve this goal. Although the momentum for democratisation is strong, we cannot preclude a return to authoritarianism in some form. Prolonged uncertainty and instability would be negative for economic reform, potentially undermining Egypt's appeal as an investment and tourism destination.
chapter 2: economic outlook
BMi economic risk ratings
economic activity i
economy improving, But substantial issues remain
- We are forecasting a slight acceleration in Egyptian real GDP growth over the coming quarters, given the improved political situation in the country. Our baseline scenario sees the economy expand by 2.5% in FY2013/14 and 4.2% in FY2014/15 (fiscal year running from July-June), up from an estimated 1.9% in FY2012/13. We expect real household consumption to be weighed down by elevated inflation and a decline in tourism revenues, while fixed investment will pick up as a result of greater clarity on the economic policy front as well as low base effects.
taBLe: econoMic actiVit Y
aid cut-off to Have Minimal economic impact
- We do not expect the US government's decision to reduce military aid to Egypt to have a significant economic impact. Whilst the political impact will be more noticeable, we think that regional support, both politically and economically, will mitigate any negative impact from the move. We expect the aid to be returned to previous levels once elections are organised in the coming months. 16
taBLe: GDp BY eXpenDiture
short-term optimism to Fade
- The modest improvements in Egypt's economic and political situation will provide short-term relief to the country's banking sector. The injection of US$16bn in Gulf aid over the past few months has served to stabilise the economic outlook of the country and also increase optimism. However, Egypt is far from out of the woods yet, and we expect concerns over its economic trajectory to return in the coming months which will raise repayment risks on sovereign debt, much of which is now held by the commercial banking sector.
taBLe: BanKinG sector oVerVie W
exchange rate policy
taBLe: eGp currencY Forecast
price controls to Have negligible impact
Full Table of Contents is available at:
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