{"id":584764,"date":"2023-04-05T00:00:00","date_gmt":"2023-04-05T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2023\/04\/05\/economic-reform-a-must-to-avoid-depreciation-inflation-cycle-goldman\/"},"modified":"2023-04-05T00:00:00","modified_gmt":"2023-04-05T00:00:00","slug":"economic-reform-a-must-to-avoid-depreciation-inflation-cycle-goldman","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2023\/04\/05\/economic-reform-a-must-to-avoid-depreciation-inflation-cycle-goldman\/","title":{"rendered":"Economic reform a must to avoid \u201cdepreciation-inflation cycle\u201d -Goldman"},"content":{"rendered":"

<\/span>Egypt faces a \u201cstark choice\u201d: Accelerate economic reforms or face further <\/span>\u201cpainful adjustment\u201d<\/span> in the form of more currency depreciation and a further drop in imports that could fuel inflation and stymie growth, Goldman Sachs\u2019 Farouk Soussa and Sara Grut write in a <\/span>new report to clients yesterday.<\/span><\/p>\n

The problem: The \u201csharp external adjustment\u201d we\u2019ve seen in the past year hasn\u2019t been enough to alleviate our payments imbalance. <\/span>The EGP has depreciated by more than 50% since last March, imports are down, inflation and interest rates are up, and growth has slowed \u2014 but all that hasn\u2019t been enough to alleviate balance of payments pressures on the economy, Goldman says. That means FX demand is still outstripping supply and the USD-EGP exchange rate in the parallel market is still rising \u2014 with potentially detrimental effects on the economy. <\/span><\/p>\n

The key: Exports. <\/span>Authorities face a stark choice: \u201cEither carry out reforms aimed at increasing exports and improving the financing mix, or move towards further painful adjustment.\u201d<\/span><\/p>\n

Why hasn\u2019t the depreciation been enough to right the imbalance so far? <\/span>Even though the EGP is now \u201csignificantly undervalued,\u201d FX scarcity persists and investors have not returned to the country in a significant way, Goldman reports. The bank cites several possible reasons for that: It\u2019s hard to suppress demand for key staples like food which make up a large chunk of our imports; exports and remittances remain weak; the FX demand backlog is yet to be cleared; dollarization persists as people hoard USD; and government spending remains high. <\/span><\/p>\n

The key danger, according to Goldman: Egypt enters a \u201cvicious circle\u201d of depreciation and inflation. <\/span>That could impact the country\u2019s capacity to service its external debt, damaging investor confidence. It would also pressure growth as a lack of imports and higher prices trigger demand destruction in the domestic economy. <\/span><\/p>\n

SO, WHAT DO WE DO? <\/span>\u201cAddressing Egypt\u2019s external imbalances means tackling the structural trade deficit which, at 10% of GDP, is one of the largest among major emerging markets,\u201d Goldman writes. To do so, the bank thinks the country needs to double down on its move to a more flexible exchange rate, <\/span>ramp up exports<\/span>, lower state spending by slowing down the implementation of national mega-projects, and follow through on its program of asset sales in state-owned companies. <\/span><\/p>\n

We\u2019re not doing well on the export front: <\/span>Total exports including hydrocarbons came in at just 10% of GDP in the five years up to covid, well below the 37% rate in Goldman\u2019s emerging markets sample. \u201c<\/span>The trade deficit is due to low exports, not excessive imports<\/span>,\u201d they write. <\/span><\/p>\n

Goldman lays out two potential scenarios for our economic future: <\/span><\/p>\n

#1- The best case: The government doubles down on its ambitious reform agenda, <\/span>\u201cboosting FDI inflows and gradually bringing down the current account deficit by supporting greater export growth in the medium term.\u201d In its \u201coptimistic scenario for asset sales and market access,\u201d Goldman sees:<\/span><\/p>\n