State asset sales to underpin stronger economic growth this year -BMI: The Egyptian economy will see improved growth this fiscal year on the back of the government’s privatization program, though the war in Gaza will add to the headwinds bearing down on the economy, according to BMI, a research unit of Fitch Solutions. Economic growth will accelerate to 4.2% this year from 3.8% in FY 2022-2023 as progress on asset sales draws new FDI that will “more than offset” the impact of falling demand and limited ability to cut imports, it wrote in a recent report.

Remember: The government rebooted its privatization program earlier this year, selling stakes in Telecom Egypt, Al Ezz Dekheila, Elab, Ethydco, and EDC, and Eastern Company. Next in line are stakes in its hotels holding company and the military-owned fuel retailer Wataniya.

Slower than expected: BMI’s latest outlook is a slight downgrade from its previous 4.4% forecast following the outbreak of war in Gaza, which it says will drag on investment, consumption, and exports. The war will add “another layer of uncertainty” and encourage businesses to adopt “a ‘wait-and-see’ approach” towards investment, the report says. It has also created “significant risks” for the tourism sector, and forced the government to curb import-intensive projects.

BMI aligns with the government’s forecast: The government this month raised its growth target for the current fiscal year to 4.2%.

It’s not the first int’l institution to downgrade its Egypt growth outlook in recent weeks: Both the IMF and World Bank cut their growth forecasts last month on the back of the ongoing FX crisis and the government’s rising borrowing costs. The lenders are now expecting the Egyptian economy to grow 3.6% and 3.7% respectively during the current fiscal year.

Downside risks: The war could take a heavier toll on the economy if it spills into other countries in the region, to which BMI assigns a 40% probability. “This would result in a more pronounced slowdown in investment activity, reduce travel and tourism receipts, lead to a more prolonged disruption to gas exports, increase oil prices, and lead to a higher import bill,” the report says.

More from BMI:

  • EGP could weaken 45% against the USD by March: The EGP is expected to weaken to 40-45 / USD by the end of 1Q 2024 following the central bank’s anticipated currency devaluation, which BMI expects to take place in February.
  • Major rate hikes ahead: BMI expects the central bank to hold off on further interest rate hikes until 2024, when it expects rates to rise by 300 bps during the first six months of the year in the wake of the devaluation.
  • Inflation to temper thanks to the base effect: Inflation is expected to cool to an average of 27.4% y-o-y in 2024 from 34.1% this year, as a favorable base effect outweighs the inflationary impact of the devaluation.
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