Morgan Stanley observed a sentiment of "cautious optimism" over Egypt’s economy among local stakeholders during its recent trip to Cairo, where its representatives met with policymakers and experts to gauge the overall economic outlook and compare it with the bank’s own forecasts across different sectors, according to a research note seen by EnterpriseAM.

The bank is more optimistic about inflation than local players: Morgan Stanley’s base case sees inflation reaching 14.5% by the end of 2025, slightly lower than the local market participants’ consensus of around 16-18%. The less optimistic forecast from locals is driven by concerns about the inflationary impact of additional fiscal measures — mainly additional energy price hikes — as well as a “potential removal of some VAT exemptions further down the road, as per IMF program requirements,” the report reads. Locals see the government carrying out two more fuel price hikes in 2025 for a cumulative adjustment of 20-30%.

The short-term inflation forecast: Local analysts see January inflation slowing marginally to 24%, aided by a “recent softness” in fruit and vegetable prices. As for February and March, stronger consumer demand for Ramadan is expected to accelerate monthly inflation, but strong base effects from last year will still push year-on-year inflation to drop to 14-15%, Morgan Stanley predicts.

Remember- Annual headline urban inflation fell to 24.1% in December of last year, down from 25.5% in November. This marked the nation’s lowest inflation reading since December 2022 when inflation recorded 21.3%. On a monthly basis, headline inflation also calmed, falling 0.3 percentage points to 0.2%.

Morgan Stanley forecasts significant rate cuts taking place this year: Morgan Stanley sees the Central Bank of Egypt cutting rates by 200 bps this month and expects the overnight deposit rate to stand at 17.25% by the end of the year — a 1k basis point decrease from where it is at today.

ICYMI- Goldman Sachs sees interest rates dropping to 13% by year-end, it said following its visit to Cairo last month.

Locals remain bullish on the EGP: “Greater FX flexibility compared to the past, and disinflation towards the mid-teens accompanied by gradual rate cuts, might accelerate de-dollarization in support of EGP. Most local market participants see USD-EGP moving in a range of 48-52 in the remainder of the year.” This is a far cry from what local participants told Goldman Sachs during its visit to Cairo, with local experts penciling in predictions of the exchange rate reaching EGP 59/USD by the end of the year.

Current account deficit expected to remain high despite calming geopolitical tensions: Locals see the current account deficit remaining high due to several factors that include a higher energy deficit, as well as uncertainty over how fast Suez Canal transit will resume — the timeline for which remains unclear, despite an apparent de-escalation of geopolitical tensions. Morgan Stanley projects the current account deficit for this fiscal year to reach USD 18 bn, up from its previous forecast of USD 14.2 bn. The revised forecast is at the lower end of local analysts' estimates, which range between USD 18-20 bn.

Refresher- Egypt’s current account deficit more than doubled in 1Q FY 2024-2025, reaching USD 5.9 bn compared to USD 2.8 bn recorded during the same period last fiscal year thanks to a sharp increase in the trade deficit and a significant decline in Suez Canal revenues.

The deficit is expected to be fully funded: Factors such as “good momentum in FDI supported by regional partners, a multilateral funding pipeline (including support from the IMF, EU, and the World Bank) and the potential for further portfolio inflows” have prompted expectations from local experts that Egypt’s current account deficit will be fully funded in the near future. Meanwhile, tourism revenues and remittances picking up again have helped support Egypt’s FX inflows.

Remittances expected to recover to pre-2022 levels: Morgan Stanley forecasts USD 32 bn in inflows from workers residing abroad in FY 2024-25 (amounting to around USD 8 bn per quarter), exceeding pre-2022 levels.

Remember- The first five months of the current fiscal year saw a 77% y-o-y rise in remittances to USD 13.8 bn, while inflows in the first 11 months of 2024 rose 47.1% y-o-y to USD 26.3 bn. Remittances are expected to make up 8% of the country’s entire GDP in 2024, up from 5% in 2023 and 6.1% in 2022.

The bank also sees the tourism sector making a recovery, with tourism revenues expected to sit at USD 15 bn by the end of FY 2024-2025, before rising to USD 15.5 bn in the following fiscal year, aided by the easing of geopolitical tensions in the Middle East and Russia and Ukraine, as well as increased investment in hotel capacity and tourism infrastructure.

The drop in commercial banks’ net foreign asset position may be temporary: The drop incommercial banks’ net foreign assets near the end of last year may be down to “some profit-taking by foreign investors into year-end, and a temporary mismatch between FX inflows and outflows amid large payments of debt arrears,” local market participants told Morgan Stanley.

“What happened in commercial banks in December is not a concerning phenomenon — in some cases, it can even be a healthy one,” banking expert Mohamed Abdel Aal told us. “It’s an indication that the facilitations approved by foreign correspondents for Egyptian commercial banks have been consumed — indicating that there’s been commercial activity in settling letters of credit and movement in foreign trade financing. Additionally, the exit of foreign investors from public debt securities (hot money) contributed to the deficit — but this is a dynamic market that fluctuates throughout the year. Ultimately, the final safety net is that it remains backed by net reserves at the CBE,” Abdel Aal explained.

ENERGY DEFICIT WILL STAY FOR SOME TIME-

The energy balance will continue to be a problem for the foreseeable future: Local analysts expect Egypt's energy balance to remain in deficit during FY 2024-2025 and FY 2025-2026, which the report attributes to lower gas production amid higher local demand. However, policy measures such as clearing arrears owed to foreign energy companies, providing incentives for investment in explorations and new fields, and increasing the share of renewables in power generation have prompted some local experts to see Egypt returning to being a net exporter of LNG starting 2027, according to the report.

Some see this happening even sooner: Others see Egypt re-entering the LNG export market in 2026 instead of 2027 as previously planned due to new oil and gas discoveries — including the recently discovered Nefertari well in the North Marakia area — and the implementation of the Cypriot gas liquefaction agreement, a senior government official told EnterpriseAM. The Nefertari well is expected to come online soon, while drilling is set to begin across three new development wells in the Zohr gas field, the source added.

More oil discoveries could be just around the corner: Energy companies are currently conducting seismic surveys in new areas of the Western Mediterranean based on directives from the Oil Ministry. In addition, the government launched gas exploration and production tenders for 12 new concession areas, which are expected to yield further discoveries, our source added.

Egypt is unlikely to become energy-sufficient until 2027 or 2028, the source said, adding that the expansion of renewable energy projects could significantly change this outlook.

Remember-Italian energy giant Eni resumed drilling operations at the Zohr gas field — Egypt’s and the Mediterranean's largest — after the Saipem drillship arrived in Egyptian waters last week. Drilling activity is expected to proceed through 1Q 2025.

Not everyone is as optimistic on the energy front: Industry players told Goldman Sachs that they remain doubtful that production can return to previous highs without any significant discoveries, leading to a general view that the energy deficit will remain significant for the medium term.

Remember: The Madbouly government reportedly cleared up USD 1 bn in arrears owed to foreign oil companies in the first week of January. A new schedule to settle the accumulated USD 6.5 bn arrears had been agreed with companies, with repayments set to run from this month until June 2025. The Oil Ministry is also offering incentives to energy players, including increasing production-sharing ratios with foreign companies in exchange for new investments, enhancing exploration efforts, and increasing extraction rates with the aim of boosting local production.

The macro outlook, on the whole, appears positive: “The FX unification in March, a multilateral funding pipeline and a reform agenda under the IMF program have put Egypt on a viable path to macro stabilization in the medium term, in our view,” the bank said, adding that this — coupled with stronger coordination between the Finance Ministry, the CBE, and cabinet members — has collectively “improved locals' confidence in the policy mix … The IMF Board's approval of the fourth review is seen as imminent.”

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