Egypt’s limited fiscal space means that a “large-scale” privatization program is essential if it is going to bring an end to the ongoing FX liquidity crisis and plug our multi-bn USD financing gap, Morgan Stanley analysts wrote in a note yesterday.

The bulge bracket investment bank estimates that Egypt could bring in as much as USD 7 bn through asset sales by next year (USD 2 bn by the end of the fiscal year in June and USD 5 bn in FY 2023-2024), helping to increase FX liquidity, bolster public finances and narrow its financing gap, which it puts at USD 23-24 bn through to the end of FY 2023-24.

“This in turn should tame further expectations of FX depreciation and ensure a smooth transition to a durably flexible regime, potentially lowering the bar for portfolio investors and buying time for the authorities to implement the structural reforms to level the playing field and boost FDI inflows further,” the bank writes.

But large-scale privatization is not going to be easy: Vested interests and difficulties changing the regulatory framework will pose obstacles to achieving the kind of overhaul necessary to put the country’s economy on a more sustainable path. And the challenge of selling off state assets could increase as the government moves deeper into the program, when it focuses on smaller companies with less well-kept records, the bank says.

Delays could be costly: Stalling sales between now and the end of the fiscal year in June could “deteriorate investor sentiment and lead to prolonged FX liquidity issues,” the bank writes. This would raise expectations of further EGP depreciation and higher inflation, putting further pressure on the current and the interest rate.

It’s not enough to let the EGP slide further against the greenback: “While preventing a persistent misalignment of the exchange rate is crucial, relying on FX adjustment alone, i.e., letting the EGP depreciate further until it starts to attract foreign flows, is not a panacea given already high levels of inflation and the social costs associated with it,” the analysts write.

The government can only do so much to limit the impact of inflation:

  • Fiscal space is limited: The country’s debt / GDP ratio of 92%, and high spend on bread and fuel subsidies, means that the government doesn’t have much room to provide relief for inflation;
  • As is monetary policy: The Central Bank of Egypt can only raise interest rates so far due to the country’s large interest burden and tight global financial conditions.

FDI + portfolio inflows could total almost USD 44 bn by June 2025: Reform uncertainty and tight global financial conditions means that Morgan Stanley’s base case for reserves and inflows from FDI and portfolio investments are below the IMF’s projections. The bank expects reserves to climb by USD 5.4 bn by the end of FY 2024-2025 — below the IMF’s projections of USD 20.3 bn. Its estimates for FDI and portfolio inflows are USD 7.1 bn and USD 5.8 bn below IMF forecasts. Morgan Stanley thinks Egypt will attract USD 28.3 bn in FDI and USD 15.6 bn from portfolio investors by June 2025.

Key forecasts:

  • Inflation is forecast to to peak at 38% by September and fall to 13.6% by the end 2024;
  • Interest rates: The bank expects the CBE to raise rates by 400 bps to 20.25% by July. Last month’s red-hot inflation figures and rising pressure on the currency means that this will likely be front-loaded, with rates rising by at least 200 bps this month.
  • Economic growth will slow to 4.3% this fiscal year before rising to 5% in FY 2023-2024.
  • The budget deficit will widen to 7.6% this fiscal year and 8.1% in FY 2023-2024 even as the primary surplus inches upwards.
  • Debt-to-GDP: Egypt’s debt as a proportion of GDP will increase from 92% to 96% in FY 2022-2023, before falling back to 94% next year.
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