Stronger EGP is seen boosting economic outlook: The EGP’s rebound against the USD this year is poised to stimulate the country’s GDP growth over the coming years and ease risks from the current account deficit, Capital Economics’ James Swanston wrote in a research note seen by EnterpriseAM.

From pain to gain: Devaluation upside emerges. While the float of the EGP has caused short-term pain, it is now beginning to deliver some long-term benefits, CE noted. A significant sign of these gains is that the manufacturing component of the industrial production index reached a record high in May. This growth was fueled by increased output in key exporting industries, particularly textiles and chemicals.

Quick update before we dive in: The EGP continued its rally against the greenback yesterday, hitting its highest level in over a year. The USD was changing hands at EGP 48.30-48.40 at the National Bank of Egypt, Banque Misr, and CIB by the end of yesterday’s trading.

This rebound is boosted by “daily inflows of USD 150-350 mn, in addition to revenues derived from tourist expenditure,” a banking source told EnterpriseAM yesterday. The USD may fall below the EGP 48 mark before the end of this month, if economic indicators continue to support the local currency, the source anticipates. The source also noted the completion of the fifth and sixth reviews of our USD 8 bn IMF loan program — which is penciled in for September or October — would further strengthen the EGP in 4Q.

The EGP has gained nearly 5% so far this year. Real effective exchange rate — a measure of the trade-weighted exchange rate adjusted for inflation — has appreciated by around 10% YTD, CE noted. “Even so, it remains close to the low it reached following the devaluation in 2016 and is nearly 25% weaker than in early 2024. And there is growing evidence that the associated improvement in external competitiveness is bearing fruit,” the research note read.

Why this rally is not a red flag: The currency’s strength would have raised concerns in the past due to previous patterns of overvaluation and subsequent devaluations. But this time, the situation is different and the CE is not so alarmed. Why? Because the EGP’s recent gains largely mirror the USD’s weakness. Meanwhile, the EGP has fallen nearly 7% against the EUR this year and, on a trade-weighted basis, has been stable since January, the research note highlighted.

Egypt’s current account deficit is seen narrowing further, with services exports set to benefit from a surge in tourism revenues boosted by increased competitiveness, CE noted. Our current account deficit narrowed to USD 13.2 bn in the first nine months of the fiscal year 2024-2025. Most of the improvement came in 3Q, when the current account deficit narrowed 69.3% y-o-y on the back of surging remittances, higher tourism revenues, and a jump in non-oil exports. “On a seasonally-adjusted basis, Egypt’s current account deficit has improved sharply and is smaller than after a similar-sized fall in the EGP in 2016,” CE noted.

Speaking of tourism, more holidaymakers are looking at Egypt: The research note highlighted reports from Tui — Europe’s largest package holiday operator — that indicate that many travellers are shifting to more affordable destinations like Egypt instead of pricier European locations such as Spain. “In the four quarters to 1Q, tourism receipts rose to a 14-year high of 4.6% of GDP,” the research note read.

The Madbouly government is aiming to attract 18 mn tourists by the end of the year, contributing to the nation’s economic growth. In the first nine months of the last fiscal year, tourism revenues increased 15.4% y-o-y to USD 12.5 bn.

Another significant indicator is the surge in remittances inflows, which reached “a seven-year high of 9.3% of GDP” in the four quarters leading to the 1Q 2025, according to the research note. This increase is partly a result of improved FX conditions, which have boosted confidence among Egyptians abroad.

ALSO- A potential easing of regional tensions and a recovery in Red Sea shipping would boost Suez Canal revenues. The waterway, a vital source of FX revenues, has been severely impacted by continued Red Sea disruptions, with receipts dropping 54.1% y-o-y to USD 2.6 bn during the first nine months of the last fiscal year.

Macrostability returned: CE said that the improvement in the balance of payments signals that the country is restoring macroeconomic stability, noting that the priority for officials right now is to advance structural reforms aimed at unlocking stronger GDP growth over the medium-to-long term.

On the risks ahead: Growing global trade tensions pose a risk to Egypt, particularly the 10% base tariff imposed by the US, with the textiles industry emerging as a vulnerable sector, seeing as around half of its output is exported to the US, CE said. However, “the economic hit in aggregate should be small.”

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