Goldman Sachs offers its two cents on the economy: Goldman Sachs wrapped its investor trip to Egypt earlier this week to meet with analysts, market participants, and policy makers with five “key takeaways” on where they think the Egyptian economy is going in a note seen by Enterprise.

#1- Devaluation ahead of IMF staff-level agreement “unlikely to be inflationary”: It was “made clear” from discussion with officials that a staff-level agreement (SLA) by the IMF will follow Egypt establishing a more flexible exchange rate, Goldman Sachs’ Farouk Soussa wrote. Although FX demand volatility complicates any forecasts, Soussa notes that the strengthening of the EGP in the parallel market indicated the EGP could trade between 45-50 against the greenback in the event of a devaluation. A devaluation “of this magnitude is unlikely to be inflationary,” Soussa added, pointing to the EGP strengthening on the parallel market and an uptick in FX liquidity.

#2- And we may hear about an IMF agreement in the “next week or two”: Officials told the Goldman Sachs group that they’re working for an increased package that they think will be announced in “the coming days.” Soussa says that the government has done a lot already to strengthen fiscal sustainability, work towards a more flexible exchange rate, and promote the private sector’s role in the economy in line with the IMF’s action plan, but that any upcoming IMF announcement will come with “more such measures, including new, more stringent fiscal targets.”

#3- Ras El Hekma agreement was an “inflection point”: “We expect the scale and speed of the investment in Ras El Hekma to provide ample FX liquidity to meet Egypt’s financing needs in the near/medium term and allow the CBE to clear the FX backlog,” Soussa noted. In addition to representing a “clear inflection point for Egyptian risk assets,” in terms of FX pressures, Soussa wrote that the expected easing of FX supply pressures “is likely to sharply reduce speculative/hedging demand for FX, driving the parallel rate lower.” There’s good news too for external credit, as the “developments greatly reduce investor concerns regarding the medium-term external financing outlook,” and have already led to a rally in the country’s external debt.

#4- FX is set to flow back into the official banking system: New-found confidence that two-way liquidity is back in the official market “should see FX inflows pick up” from inside and outside the country. External sources of FX are expected to ramp up from inflows into the local debt market, remittances coming back through official channels, and large real estate project investments.

#5- But be warned, “medium-term uncertainties [are] likely to persist”: Although the Goldman Sachs group saw “no current indication of such policy slippage” from the government and that they remained committed to reform, “concerns” were raised that fresh inflows of FX — like from Ras El Hekma — could be used to finance additional government spending or other real estate projects. Soussa wrote that they heard concerns that the recent calming of external financing pressures could persuade the government to relax its commitment to reform, and that because of this, the IMF program “will act as an important external anchor for the reform process going forwards.”

Tags: