The Central Bank of Egypt's (CBE) decision to float the currency should improve the US dollar availability and relieve producers from resorting to the parallel market. Yet, from a corporate perspective it will cause an inflation hike, since 60% of the cost of goods sold across the sector are USD-denominated. A number of consumer names in Egypt are net importers of raw materials. Foreign-exchange-linked cost growth has already impacted sector margins as of Q2 of FY2016, when food producers stopped receiving US dollars from commercial banks, according to Arqaam Capital's report "MENA Consumer and Retail: 2017 Outlook". On the other hand, non-food producers, such as Ghabbour Auto, have been sourcing foreign exchange (FX) needs from the parallel market for almost two years and have already begun to reap the benefits of price hikes. Currency-linked cost growth will largely take its toll on end-consumers through price hikes. In the medium-term, wage growth is expected to be lower than inflation, resulting in lowering consumption volumes. Arqaam Capital forecasted inflation to reach 20-25% in FY17, largely driven by the Egyptian pound flotation and energy subsidy cuts, both of which would likely exert further pressure on consumer purchasing power and disposable income. On the short term, volume decline is expected across all sectors, despite various pricing strategies implemented to evade inflation consequences. The report cites that price increases have been aggressive, which is expected to continue in 2017 as importers and local vendors adjust selling prices to absorb cost growth, as a result of the currency flotation, increases in energy prices, and revised customs tariffs. Customs duties on imported sugar will be removed; however, there will be no restrictions on imports of strategic goods. The government also announced a rise in prices for several core commodities that the government buys, including sugar cane, corn, and rice. Moreover, the next inflation-driven shocks are expected to include a further fuel price hike in July 2017, a small increment in the VAT rate from the current 13% to 14% in the same month, a rise in pharmaceuticals prices in mid-Q1 2017, and a possible hike in fertiliser prices by mid-2017. The report concludes that from the consumer's perspective, the situation is likely to get worse. Arqaam Capital believes that 2017 will be a year of adjustment for the average Egyptian household, as their purchasing power has been significantly shrunk, and whose real wage growth is unlikely to calibrate with inflation in the coming 12 months.
