Economy returning to brighter prospects, need balance between monetary targets and fiscal reforms -BNP Paribas

Three factors have helped the Egyptian economy “return to brighter prospects,” Pascal Devaux writes in a research note for BNP Paribas (pdf): The EGP float, major fiscal reforms with the support of international donor funds, and the “accelerated” development of natural gas resources that are expected to “trigger a significant reduction in the trade deficit and ensure the country’s energy supply.” However, Devaux says the reforms came at the cost of impacting households’ purchasing power and that the ensuing monetary responses create “a threat for public finances.” Devaux expects FDI to be concentrated in the energy sector with higher interest rates scaling back investment decisions. “Excluding the energy sector, nonresident investment decisions are generally made by companies that are already present in the Egyptian market, and many foreign companies are taking a wait-and-see approach. An increase in public investment, which is one of the government’s priorities, could provide additional support.” He stresses that some moves brought about imbalances to the market: “in an economy with a low level of bank penetration, the massive increase in interest rates did not bring down inflation, but increased the cost of servicing the public debt.”