EM EMEA Flash – Egypt Economic Update

Egypt Economic Update – July 2024

• Economic growth. The IMF has revised down its growth forecast for Egypt, projecting 2.7% real GDP growth for FY2024/25 and 4.1% for FY2025/26, due to global economic challenges and domestic policy adjustments. Separately, on 29 July, the IMF’s executive board ratified Egypt’s third review of its extended fund facility, which the country had passed last month. This unlocks a further USD820m in support.

• Inflation. Egypt’s headline inflation slowed to 27.5% y/y in June, down from 28.1% y/y in May. This was the slowest annual price growth since January 2023, due to the elimination of the parallel exchange rate following the official devaluation in March and increased foreign exchange availability, which significantly eased price pressures. Given that real policy rates remain significantly above neutral on a forward-looking basis while fiscal policy is tightening, we see room for further disinflation through next year.

• Interest rates. The Central Bank of Egypt (CBE) kept its deposit and lending rates on hold at 27.25% and 28.25%, respectively, in line with our (and consensus) expectations on 18 July. Going forward, we maintain our dovish near-term view and price in a 100bps cut at the next MPC meeting, scheduled for 5 September.

• FX view. Following the devaluation of the Egyptian Pound (EGP) in March 2024, traders have benefitted by positioning long EGP against the US dollar (USD), to take advantage of a deep valuation buffer and elevated carry. This was also justified by favourable external financing and policy developments, including the UAE’s USD35bn investment, an increased IMF programme and 600bp of policy rate hikes, which contributed to bringing ex ante real rates into double digit territory. Since then, the trade recommendation has benefited from carry accumulation and from some degree of spot appreciation thanks to strong international demand for local T-bills following the devaluation and the confluence of positive developments on inflows.