Egypt's economy continues to grow robustly, with a promising outlook, and is expected to achieve 5.5% GDP growth in fiscal year (FY) 2021/22, Deutsche Bank said in a new report. "Going forward, we expect the robust growth rebound to continue and forecast 5.5% YoY growth for FY 2021/22. The pick up will be on the back of a recovery in demand, manufacturing, agriculture and telecommunications and IT under Egypt's second phase of the National Programme for Economic and Social Reforms (NPESR), higher exports (due to high oil prices and an expected recovery in global demand) and higher tourism revenues as travel restrictions are lifted," said Deutsche Bank in its recent report on Egypt released earlier this month. The Bank added:" Further, ongoing fiscal consolidation (below 2% of GDP primary surplus for FY2020/21, as stated by the IMF), a reduction of the overall fiscal deficit to 5.5% by FY 2023/24 and inflation remaining comfortably within the target range (7%+/-2%) are expected to further support the growth rebound". "Moreover, the continued financial support from the IMF, which is conditional on the fiscal consolidation and economic policies, will also provide a necessary impetus. The IMF recently approved an allocation of USD 2.9 bn in special drawing rights (SDRs) to Egypt which will also help support growth," the report added. The Bank noted that the strength of the recovery in growth remains uncertain due to risks related to the pandemic such as the possibility of new variants emerging. "Global monetary conditions are beginning to tighten thus putting some pressure on portfolio inflows. Large external financing needs and a high public debt ratio (88% in FY 2019/20) also pose vulnerabilities to the recovery. Vaccination levels and inflation The report stated that the government has stepped up vaccination efforts to mitigate the impact from the fourth wave. However, vaccine supplies remain another hurdle. The Bank now sees upside risks to its year-end forecast of 5% inflation and revised it up to 5.1%, With household demand expected to pick up further, the strong rebound in industrial production and an improvement in PMI output indices, as well as pressures from commodity price increases, there remains scope for a more sustained pickup in inflation. Overall, in the bank's baseline scenario, it expects annual headline inflation to stay well below the inflation target of 7% by the end of the year (DB forecast 5.1% avg for Q4), but price pressures to gradually rise next year, with risk of reaching 7% in H2-22. Scope for rate hikes The bank said that risks skewed towards tightening rather than easing Despite its view of a further rise in inflationary pressures, it expects the CBE to keep rates on hold throughout the year. "We justify this with the still comfortable reserve buffer, the high real interest rates and despite the temporary spike in inflation still benign price pressures that leave inflation well below the target," said Deutsche Bank. The bank stressed that the language of the CBE is slowly turning a bit more cautious concerning external developments. As most EM countries have started their tightening cycles and will most likely deliver more hikes over the upcoming months and argued that potential rate cuts are off the table in Egypt, however, rates on hold until well into 2022 should still be likely. "This said, given the recent rise in the oil price, and with commodities and food prices at multi-year highs, we could see room for tightening in H2-22, when headline inflation reaches levels close to 7.0% on a more permanent basis" the Bank added. Deutsche Bank now forecasts a 25bp rate hike in Q4-22 but sees room for more if it underestimates inflation pressures. "Risks to the current account outlook ahead remains mixed. While, a strong domestic recovery ahead is expected to boost imports and take the current account lower, an expected recovery in tourism revenues and increase in remittances from abroad (especially from GCC countries) ahead should act in the opposite direction" said the bank.
