{"id":578701,"date":"2023-01-11T04:07:20","date_gmt":"2023-01-11T04:07:20","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2023\/01\/11\/this-morning-goldman-sachs-thinks-the-egp-has-further-to-fall-even-though-its-has-probably-already-overshot-its-fair-value\/"},"modified":"2023-01-11T04:07:20","modified_gmt":"2023-01-11T04:07:20","slug":"this-morning-goldman-sachs-thinks-the-egp-has-further-to-fall-even-though-its-has-probably-already-overshot-its-fair-value","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2023\/01\/11\/this-morning-goldman-sachs-thinks-the-egp-has-further-to-fall-even-though-its-has-probably-already-overshot-its-fair-value\/","title":{"rendered":"THIS MORNING: Goldman Sachs thinks the EGP has further to fall \u2014 even though its has probably already overshot its fair value"},"content":{"rendered":"

Good morning, friends, and welcome to the first \u201cbig\u201d news day of 2023. <\/strong><\/p>\n

THE BIG STORY HERE AT HOME remains the EGP<\/strong>, but we also have news of CIB getting in on the high-yield CD frenzy, the Finance Ministry\u2019s five-year tax policy document, and the World Bank\u2019s move to (slightly) downgrade Egypt\u2019s growth forecast.<\/p>\n

<\/a> EGP WATCH- The EGP fell around 0.25% against the greenback yesterday<\/strong> to settle at 27.70, according to the central bank rate, after dropping almost 2% on Monday<\/a>. The currency is down more than 11% since its level immediately before the central bank allowed it to slip further against the USD on 4 January<\/a>, and has fallen around 75% from its 15.78 \/ USD level immediately before the initial devaluation last March.<\/p>\n

The question we all need to be asking ourselves: Are we there yet? <\/strong>According to Goldman Sachs, not quite. \u201cWe believe that the adjustment is as yet incomplete and has significantly further to run before the supply-demand equilibrium in the FX market is restored,\u201d Goldman\u2019s Farouk Soussa wrote in a note to clients yesterday. While Soussa says we have made \u201cprogress in recent weeks,\u201d the absence of big inflows from the GCC and the Central Bank Egypt\u2019s limited ability to provide FX liquidity to the market \u201cimplies further EGP weakness and \/ or increases in local rates in the coming days.\u201d<\/p>\n

So, where will we settle? <\/strong>\u201cHow much further the EGP will depreciate is unclear to us,\u201d Soussa writes, reiterating that the EGP probably needs to hit the depreciation implied by the parallel market. While we\u2019re at EGP 27.70 to the greenback right now, \u201cthe ADR-implied parallel rate is closer to 35 EGP \/ USD (the gold price-implied rate is around 33 EGP \/ USD,\u201d he says.<\/p>\n

Still, we shouldn\u2019t lose hope: The EGP has already overshot its far value<\/strong> \u201cas implied by deviations of the real effective exchange rate from its long-run average,\u201d Soussa writes. As happened back in 2016, the overshoot is \u201clikely to prove temporary,\u201d he suggests, as it triggers both foreign direct and portfolio investment, bringing the EGP closer to its fair value \u201cin the medium- to long-term.\u201d<\/p>\n

MEANWHILE- CIB is getting in on the CDs frenzy<\/strong>, launching 18-month, 22.5%-yield certificates of deposit (CDs). The minimum buy-in is EGP 100k, according to its website<\/a>. Buyers can opt for a one-time payment of 22.5% when their CDs mature, or can go for monthly interest payouts at a reduced 20.0% annualized rate. The CDs from the nation\u2019s largest private-sector lender come on the heels of the one-year, 25% CDs<\/a> released by state-owned Banque Misr and National Bank of Egypt last week, which as of yesterday morning had attracted at least EGP 155 bn<\/a>.<\/p>\n

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THE TAXMAN ALWAYS RINGS TWICE- What to expect from the government\u2019s tax policy <\/strong>document:<\/strong> Finance Minister Mohamed Maait gave us an early look at the ministry\u2019s five-year tax policy document yesterday ahead of its unveiling in a few weeks by President Abdel Fattah El Sisi. The document could introduce changes to the capital gains and income tax<\/a> but the 22.5% corporate income tax rate will remain unchanged<\/strong>, Maait said. Tax amendments are on the Madbouly government\u2019s agenda as part of its commitments to the IMF under its USD 3 bn loan agreement. We have more on this in the Economy section below.<\/p>\n

We\u2019re getting what business longs for: Predictability. <\/strong>After the document\u2019s ratification, the tax system will remain untouched for five years\u2019 time, Maait said. The state has been working to drum up more investments after 2022 saw almost USD 20 bn<\/a> in outflows as rising interest rates around the world and soaring inflation triggered a global risk-off and sent Egypt\u2019s real interest rate into negative territory.<\/p>\n

ALSO- More details on the budget cutbacks to come: <\/strong>The Finance Ministry is currently working with the Planning Ministry on instructions for all state agencies on where they need to trim the fat. The cabinet announced budget cutbacks<\/a> for FY2022-2023 earlier this week in response to rising inflation (more on that below) and the ongoing FX crunch.<\/p>\n

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<\/a> GROWTH FORECAST- <\/strong>The World Bank has revised down its growth forecast for Egypt <\/strong>this fiscal year to 4.5%<\/strong> from a previous forecast of 4.8%, according to its latest Global Economic Prospects report (pdf)<\/a>. The multilateral lender said high inflation, weakening external demand in our manufacturing and tourism sectors, fiscal and monetary tightening, our \u201clarge\u201d current account deficit, and potential trade disruption from \u201crules governing sourcing of foreign currency\u201d would all work to bring growth down from the estimated 6.6% it registered in FY 2021-2022.<\/p>\n

The whole world is hurting: The bank slashed its global growth forecast for 2023 by <\/strong>almost half to 1.7%<\/strong>, down from its June prediction of 3.0%, on soaring inflation, aggressive policy tightening cycles and other knock-on effects of the war in Ukraine. The bank revised down growth forecasts for 95% of advanced economies and nearly 70% of EMs<\/strong>, it said in a statement<\/a> accompanying the report. For EMs, \u201cweakness in growth and business investment will compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change,\u201d said World Bank President David Malpass.<\/p>\n

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THE BIG STORY ABROAD in the international business press is <\/strong>the kickoff of Goldman Sachs\u2019 biggest cost-cutting drive since the global <\/strong>financial crisis.<\/strong> The cuts, which could see Goldman slash some 3k jobs, is getting top billing at the Financial Times<\/a>, while the WSJ<\/a> hones in on the recent rally in European stocks. Crypto exchange Coinbase, meanwhile, has laid off another 20% of its workforce, the New York Times<\/a> notes.<\/p>\n

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