Fitch trims our growth outlook for FY 2025-26

Fitch Solutions’ research unit BMI now expects the Egyptian economy to grow 4.7% in the fiscal year 2025-2026, down 0.3 percentage points from its previous 5% projection, it said in its latestcountry risk report for Egypt. The research unit cited the indirect impact of US tariffs, which triggered market uncertainty, weaker global trade, and external demand from key export markets.

We’re still growing: Despite the forecast being revised down, growth is still expected to pick up from the 3.9% projected for the current fiscal year. Private consumption will be the key driver of growth in the next fiscal year, strengthening sharply on the back of salary hikes in both the public and private sectors, lower borrowing costs, and the most recent social protection package. Investment activity is also expected to continue its recovery, boosting economic growth, BMI added.

The forecast is more optimistic than most: The Madbouly government sees the economy growing 4.5% in FY 2025-2026, before rising further to 5.0% in FY 2026-2027. Meanwhile, the International Monetary Fund has recently upgraded Egypt’s growth forecast for the next fiscal year to 4.3%, and the European Bank for Reconstruction and Development sees growth coming in at 4.4% in the next fiscal year.

US tariffs are expected to have “limited impact” on Egypt, seeing as exports from Egypt to the US made up just 0.8% of the country’s GDP in 2024 and the average effective tariff rate on local goods is 10.7%, lower than the tariffs imposed on most emerging markets, BMI said. “The present tariff scheme will probably boost the competitiveness of Egyptian apparel and clothing (which make up half of the country’s exports to the US) given the much higher duties imposed on goods from Mainland China and South East Asia.”

We still have reason to worry: Swings in investor sentiment are the most significant indirect impact from the US tariffs on Egypt, “given that foreigners hold about USD 35 bn of EGP-denominated T-bills with about USD 22 bn at high flight risk in the event of a surge in risk perception,” according to BMI. The research unit added that risk-off sentiment triggered about USD 2 bn in portfolio investment existing Egypt in the week after the 2 April tariff announcement. Consequently, the EGP weakened against the greenback.

What does the temporary tariff truce mean for us? “The 90-day tariff pause helped calm markets, reverse the capital inflows into Egypt and allowed the EGP to recoup its losses,” BMI said.

Speaking of the exchange rate: The EGP’s short-lived drop in response to the capital flight “signalled the authorities’ commitment to a more flexible exchange rate,” BMI says, predicting that the authorities will allow the exchange rate to weaken slightly in case of acute shocks, “absorbing some the shock rather than deplete foreign reserves as they have done in previous crises.” BMI expects the EGP to trade between 50-55 to the USD in 2025, before ending the year at 52.50.

ICYMI- The EGP hit a post-float low of 51.72-51.75 against the greenback last month shortly after the tariff announcement. It has since strengthened, with the USD currently changing hands below the EGP 50 mark.

Good news, bad news: While BMI expects Suez Canal navigation to start normalizing in the next fiscal year, the research unit warns that “weaker global trade will slow the recovery in traffic” in the waterway. Disruptions in the Red Sea have cut the number of ships transiting the canal by half since 3Q 2023, trimming its contribution to GDP from 2.2% to 1.1%, with monthly FX losses amounting to some USD 500 mn.

Other notable predictions: BMI sees Egypt’s current account deficit narrowing to 5.2% of GDP in FY 2025-2026, down from an estimated 7.1% this year, thanks to “ballooning” imports. “This would still entail a deficit of about USD 18.5 bn in FY 2025-2026 … based on strong import growth of about 7.0%, driven by consumer goods, raw materials and capital goods.” The deficit would narrow further to 4.3% of GDP (USD 15.5 bn) if import growth is weaker than the current expectations.

Don’t celebrate the dip in oil prices just yet: BMI believes that “lower oil prices will have limited impact on Egypt's import bill, as we expect energy imports in volume terms to rise to meet domestic demand in light of declining local hydrocarbon production.”

On the monetary policy front, BMI revised down its previous forecast of 900 bps worth of rate cuts throughout 2025 to 500 bps, with the key driver being “the IMF calling on Egyptian policymakers to be cautious in their monetary policy easing cycle due to the potential inflationary impact of the US tariffs.”