EXECUTIVE SUMMARY
- Egypt's jumbo 600bp rate hike and subsequent FX devaluation from the Central Bank of Egypt point to significant reform progress, with an augmented IMF deal now agreed, which follows the recent announcement of significant UAE investment (see here).
- Following the ~40% decline in the USD/EGP from 30.9 to ~50, we maintain our base case for the USD/EGP to settle in the 40-45 band, before a gradual transition to a more free floating exchange rate transpires.
- Encouraging developments are moving at a rapid pace, with significant credit spread compression in the past few weeks on improving fundamentals, whilst prospects for FX upside and high nominal rates sets the scene for a return of the carry trade – Moody’s has also raised its Egyptian sovereign outlook from negative to positive on 7 March.
- However, risks and policy uncertainties abound – the growth turnaround requires patience, fresh fiscal and monetary tightening will take their toll and FX depreciation will see the budget deficit rise.
