Capital Economics gives Egypt a progress report: London-based research outfit Capital Economics’ MENA team hosted a 20-minute briefing (watch, runtime: 22:51) discussing Egypt’s progress on implementing economic reforms and policy one year after the Central Bank of Egypt’s decision to float the EGP and adopt a flexible exchange rate regime. The research unit delved into the latest policy decisions and the persisting challenges, before giving its two cents on the big questions that pertain to Egypt’s economy moving forward.

The shift in policy has begun to bear fruit: “We are starting to see the tides turn. The policy shift has allowed for a steady flow of capital inflows into Egypt, it’s becoming more stably financed by direct investment inflows, we’re seeing news about foreign companies investing more and taking more on in terms of expanding activities, and we’re also starting to see certain exports perform better,” senior economist James Swanston said, “This has reflected in recent PMI readings as well,” Swanston added.

Remember: Egypt’s non-oil business activity continued to see expansion for the second month running in February — but at a slower pace — in what marked the first back-to-back improvement in business conditions in over four years. The data reflects the best opening two months of the year in the survey's history.

But progress on some fronts has stalled due to a number of factors: Loss of Suez Canal revenues has had a strain on Egypt’s balance of payments, and has coincided with the near-term impact of the float of the EGP — imports became more costly, and the impact of the country’s external capacity for exports haven’t been felt yet. Meanwhile, the tightening of fiscal policy, interest rate hikes, and inflation have caused a slowdown in economic growth.

Thankfully, however, it’s not looking like it will be a repeat of 2016: Egypt “appears to have loosened its grip on its currency, allowing it to move more freely” — at the same time, fiscal policy has remained tight, “which is one area where they have made sustained progress since 2016,” the firm’s deputy chief emerging markets economist Jason Tuvey said. Comparative progress on the privatization program, and apparent attempts at reducing the military’s footprint in the economy are other key factors, he added.

And this is making investors more confident in Egypt’s economy: The EGP being allowed to move more freely is a key aspect of the government’s new approach that is giving the wider reform agenda credibility at home and abroad, Swanston said. The approach also reassures foreign investors that they can plan investments with the knowledge that the EGP’s exchange rate reflects the actual price you can sell it for and that there shouldn’t be any heavy devaluations down the line.

The forecasted post-devaluation FDI boom didn’t materialize as many had hoped, but the longer term view is positive: “We expect slow and steady progress on reforms, and we expect FDI to slowly creep up in Egypt. We’ve seen some tentative signs that firms are taking more interest in Egypt,” Tuvey said.

There’s also no evidence of the EGP being overvalued: Capital Economics sees the currency weakening to EGP 55 against the greenback by the end of this year. However, “we could be in for a surprise with all the capital inflows. If exports start to perform better, the currency could appreciate,” Swanston added.

Inflation targets may also soon be in reach: Capital Economics also expects inflation to slow down to the CBE’s target of an average of 7% ±2 percentage points over the coming months, and hover around that range over the course of the year, according to Swanston. Lower inflation will then prompt the CBE to begin its loosening cycle in April, he added.

Slowing inflation will have a big role to play in the next Monetary Policy Committee meeting: “Previous statements by the CBE have pointed at wanting to see a sharper and sustained fall in the headline inflation rate, and with earlier falls in the EGP now falling out of the annual price comparison, we suspect that February and March's inflation data will provide policymakers with the evidence to loosen monetary policy,” Swanston previously told EnterpriseAM.

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