Event Report: Africa Expert Meeting on Egypt’s Macro Outlook Following a Turnaround in Liquidity in Q1-2024

The Africa Expert Meeting was opened by Ms. Rosmarijn Fens, the Managing Director of the Netherlands-African Business Council, and Mr. Guus Huijgen, Executive Director at Standard Chartered Bank. Ms. Carla Slim, an Economist for MENAP at the Standard Chartered Bank was the expert of the session. The following article outlines Ms. Slim’s presentation and the subsequent discussions which took place.

The virtual follow-up session highlighted the developments in Egypt’s macro-outlook following the floatation of the pound, the sharp raise of the interest rate by 600 bps, and the influx of foreign exchange (FX) investments. After promises to the International Monetary Fund (IMF) of a flexible exchange rate and the emergence of a pronounced black market for FX, the Egyptian government decided to float the Egyptian Pound (EGP) this March. Consequently, while gradually curbing the inflation rate, Egypt has further secured an $8 billion loan and grants package from the European Union to address migration issues, a $35 billion investment from the United Arab Emirates (UAE) to further develop tourism, and an extension of the IMF rescue package by $5 billion (reaching $8 billion) – extending confidence in the country’s economy. The session assessed the implications of these macroeconomic developments on the country’s growth and foreign liabilities position, particularly given external pressure by geopolitical conflicts alongside anxiousness within the local economy. Accordingly, the session was split into three different themes: near-term and long-term FX considerations, debt sustainability concerns, and the growth outlook. 

Near and Long-Term FX 

The FX liquidity within Egypt has vastly increased in Q1 of 2024, given the aforementioned foreign investments that have been input (the UAE, the EU, and the IMF). Composing the $35 billion investment from the UAE were $11 billion in deposits from the Central Bank of UAE in the Central Bank of Egypt, implying that only $24 billion of the $35 billion constituted a fresh inflow of FX. This large investment, which was the single largest FDI ticket in Egypt’s investment history and 6% of the UAE’s Gross Domestic Product (GDP), has ushered numerous different portfolio investors, purchasing local currency treasury bills ranging from 6 to 12 months and leading to an overarching $15-25 billion of portfolio investments in Egypt. Accordingly, between $50-60 billion were committed to Egypt, and more than $44 billions of these investments have materialised.  

The Egyptian government’s decision to float the EGP in March led to a devaluation from 31 EGP/$ to 50 EGP/$ and a subsequent appreciation to 48 EGP/$ due to the FX currency inflows. Nonetheless, the EGP is not fully floated; the floatation of the EGP is managed, with mechanisms in place to limit daily volatility which may endanger the inflation trend. However, this is in line with the IMF conditions for its extended loan and seems to stabilise the EGP at the current moment. 

The current investments and floatation of the pound, which are supported by additional structural reforms, will allow Egypt the time to correct previous FX liquidity challenges in a sustainable manner. However, these FX investments can be seen as stand-alone investments, since it cannot be anticipated that subsequent large FDI tickets will be input into Egypt. To support long-term financial stability, the government of Egypt is trying to boost Egypt’s exports since Egypt is currently a net importer.  

Debt Sustainability Concerns 

The current growth in Egypt has been supported by a large portion of debt-raising activities, which poses a long-term concern. From a fiscal and debt perspective, the portion of debt in Egypt’s GDP must decrease from the current 90-95% of GDP to 85% of GDP, and capital and infrastructure funding must also be cut by 10%. Thus, from an import management perspective in service of debt sustainability, the country will face a tightening and restriction on spending, with hopes to stop being a net importer and to avoid further currency shocks. Based on the current macroeconomic developments, credit rating agencies have upgraded Egypt’s outlook to positive, but the credit rating itself has yet to improve due to the burden of debt on the government. As it currently stands, 70% of the government’s revenue (from taxes, tariffs, etc) will go to pay interest on the accumulated loans. To improve debt sustainability, this proportion must be gradually reduced to 60%, then 50%, and eventually to a sustainable 30-40%. To reach these percentages, it is expected that the government will reduce the interest rates and simultaneously reduce the stock of public debt itself. Only then will the credit rating agencies improve Egypt’s ratings since the current liquidity improvements do not necessarily indicate solvency.  

Growth Outlook 

Given the improved liquidity backdrop and the simultaneous tightening of government spending, the prospected growth of Egypt will remain below its full potential. This is due to the previous fixing of the EGP, which led to the economy absorbing most of the shocks (with FX black markets and inflation), since the currency itself could not absorb the shocks. Nonetheless, it is expected that the fiscal outlook will very much improve since Egypt is currently in transition. The current risks lie in inflation and in the realisation of the promised capital (in loans) since the full amounts of the FX investments have yet to be dispersed. The dispersion of the FX investments is contingent upon the success of the policy reforms which must support the current transition of the economy. The inflation rate has decreased from its peak of 38% in September of 2023 to 32.5% at the current moment, which implies disinflation and leads to a positive outlook. The interest rates are expected to remain high until inflation decreases to 25%, after which the government and central bank will begin their tightening policies.  

Accordingly, while the liquidity has highly improved, Egypt is yet to operate in a completely normal manner since that will take further time and governmental reforms. Nonetheless, most debt sustainability concerns have been alleviated, despite the further steps which must be taken to boost the credit ratings.  While the growth outlook is not expected to increase sharply at the current moment, it is important to note that the long-term outlook remains positive. Following the transition, Egypt can be expected to grow 5-6% on a yearly basis. Furthermore, at the lowest point of the liquidity and economic challenges, the grow rate remained at 2.5%, which is considered to be positive.  

In trying to sell equipment from the Netherlands to Egypt, we receive feedback that there is no FX yet and that the interest rates are too high. However, some businesses that are linked to the military can access it. Can we expect a change in access? 

Yes, access will be broadened due to the current improvements in liquidity. Initially, the availability of foreign exchange (FX) was limited to the pharmaceutical and military sectors, but it is gradually expanding. However, a complete change in access cannot be expected overnight and will take shape in the coming weeks. We have received feedback that companies importing products or equipment, and providing the correct invoices and registration, are able to purchase in FX. 

What is your forecast on the exchange rate? 

The end of year forecast is 45 EGP/$. We assume that the EGP will slightly depreciate to 47 EGP/$ in 2025, 49 EGP/$ in 2026, and to cross 50 EGP/$ by 2027.   

During the last breakfast session, we spoke about Egypt being a net gas exporter which will influence its resilience and decrease its reliance on other countries. What is the update on this aspect? 

We still anticipate that Egypt will be a net energy exporter, encompassing gas, renewables, hydrogen, and more, and not solely a net gas exporter. Although Egypt has already achieved net energy exporter status, current geopolitical challenges and a growing population have hindered this position. Consequently, Egypt has become a net gas importer for the time being, but it is expected to return to being a net energy exporter by the following winter. 

About the Expert:

Carla Slim
Economist, MENAP
Standard Chartered Bank

Carla is an economist covering the Middle East, based in Dubai. She has a decade of experience in sell-side research, providing on-the-ground analysis to external and internal stakeholders of the Bank. She speaks at industry conferences and regularly appears in global and regional media. She was nominated in 2020 to represent the Bank at the Institute of International Finance’s (IIF’s) Future Leaders programme, which recognises young leaders in the financial services industry. Carla holds a Bachelor of Arts in economics from the American University of Beirut, and has completed the IIF’s course on forecasting macroeconomic variables in the Middle East. She speaks French, English and Arabic fluently.