Fitch Solutions’ research unit BMI is out with a somewhat somber 4Q 2024 risk report for Egypt, with the research service highlighting the ongoing economic impact of the war in Gaza and sluggish oil and gas production as weighing on Egypt’s fortunes in the coming period.

One caveat: It’s worth bearing in mind that at least parts of this report were written around 8 August, three days after a global stock selloff saw investors flee Egyptian and emerging market debt instruments for safe haven assets and five days after the assassination of Ismail Haniyeh in Tehran saw regional tensions reach new heights.

Times are tough, but BMI is standing by its forecasts for the current fiscal year: In agreement with the new Madbouly government and 0.1 percentage points above what the IMF is forecasting, the BMI has held steady with its forecast that growth will pick it up to 4.2% during FY 2024-25.

There’s no one factor driving the uptick, with the research unit pointing to expected higher foreign investment, a recovery in domestic manufacturing as producers take advantage of the weak EGP to increase exports, and an end to the war in Gaza by the close of 2024 bringing traffic back through the Suez Canal and increasing investor appetite for Egypt.

BMI also wound down its growth figures for the last fiscal year, with it now saying that the economy grew 3.0% in FY 2023-24, down 0.2 percentage points from its previous estimate of 3.2%. But it’s not all bad news, with the group calculating that growth bottomed out at 2.2% y-o-y in the third quarter of the fiscal year, before then jumping up to 4.8% in the last quarter — which uncoincidentally followed the float of the EGP and flow of tens of bns of investment coming into the country.

But going forwards, risks remain — especially if Israel’s murderous war on Gaza continues into 2025: Israel’s war on Gaza and the risk of regional escalation are turning away some investors, ensuring a volatile EGP, and making the country’s economic recovery fragile. With BMI’s growth projection for next year based on the assumption that Israel’s war will end before the end of the calendar year, a prolonged war and especially one that expands into Lebanon could have serious consequences for Egypt’s economy. A longer war would continue to pressure Suez Canal transit receipts, turn away investors, crash the tourism industry, and potentially lead to Israel turning off its gas exports to Egypt, preventing the country filling energy shortages or using liquefaction facilities to re-export gas.

A global economic slowdown could also weigh on Egypt’s recovery, especially if lower oil prices translate into economic trouble for GCC states, a source of much-needed investment as public investment declines amid high debt service costs. In the mix too is the effect that slower GCC growth could have on remittances, which have recovered significantly in recent months with the end of the parallel market.

Lower gas production could prove a real problem for long-term growth, with the research unit expecting more growth to stagnate in a few years in lieu of further oil and gas discoveries — a rate the report deems just enough to absorb new labor market entrants. BMI sees growth falling to 4.1% in the fiscal year ending 2027 and to continue plus or minus 0.1 percentage point until at least the fiscal year ending 2033, when its forecasts ends.

Our energy shortages are also weighing on our exports, as while non-oil exports are set to grow during the coming period, their impact will be capped by a need to import more hydrocarbons.

Alongside this, consumer spending is set to slow by 2.8% in the current fiscal in light of sticky inflation, lower real wages, and a lag in the impact of monetary loosening, which the report does not expect to begin before 1Q 2025.

Speaking of inflation: The report sees average inflation coming in at 29.0% in 2024 and 18.1% in 2025, “before converging to an average of 7.0% y-o-y between 2026 and 2033.”

We should expect currency volatility through the end of the year: The research service projects that the EGP will trade between EGP 47.90 and EGP 49.50 to the greenback until year-end with an average of EGP 49.19, penciling in greater exchange rate volatility than previously expected due to heightened geopolitical risk. The EGP is likely to weaken further in 2025, according to the report, with the exchange rate projected to settle at EGP 49.67 to the greenback by the end of the year.

Increased FX reserves not likely to be a bulwark against big external shocks: The report expects FX reserves to rise to USD 41.7 bn by the end of the fiscal year ending 2025, enough to cover approximately 5.6 months of imports, off the back of increased investment and a possible debt issuance in 2025. However, our high debt service obligations and exhaustion of most sources of funds mean that the economy will still struggle to explore large-scale shocks, the report says.

Egypt remains exposed to hot money’s vacillations: The report estimates that foreigners hold around half of treasury bills with a maturity of up to 12 months, amounting to about 90% of FX reserves. According to BMI, “any large shock or an intensification in geopolitical risks could lead to the reversal of these flows.”

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