Egypt’s plausible growth forecasts

Egypt’s Finance Ministry is targeting a 6.5 percent growth rate for Egypt’s economy in the financial year 2019/2020, up from 5.8 percent expected for the current financial year, according to the state bulletin for the general budget for the financial year 2019/2020.

The Ministry of Planning announced that growth rates increased during the first quarter of 2018/2019 to 5.3 percent, up from 5.2 percent during the first quarter of 2017/2018.

The government is seeking to lower the budget deficit as a proportion of GDP to seven percent in the coming financial year, down from 8.4 percent expected for 2018/2019.

“Reaching a budget deficit of seven per cent is possible if the government completely lifts the subsidies from energy products, which is expected to happen next year,” said Sally Mikhail, senior equity analyst at Arabiya Online, an online brokerage company.

The budget bulletin expects the total deficit to reach 427.8 billion pounds next year, down from 438.8 pounds anticipated for the current financial year.

“The government’s plan to lay off workers in the state’s administrative bodies will decrease the wage bill the government has to pay. The state has already taken a few steps in this direction,” Mikhail added.

Iman Negm, a senior economist at Prime Securities, an investment bank, believes that cutting the deficit to seven per cent will be difficult to achieve as a result of the increase in the cost of debt.

Interest rates on domestic debt have reached an average of 19 per cent and are unlikely to decrease in the coming months. The investment banks had anticipated a decrease in interest rates, but rising inflation rates have delayed the decision.

According to International Monetary Fund (IMF) figures, Egypt’s average annual inflation rate is expected to decrease during this financial year to reach 20.9 per cent, down from 23.5 percent in the past fiscal year. It is expected to drop to 14 per cent next year, then seven per cent by 2023.

The Central Bank of Egypt (CBE) is targeting an inflation rate of 13 percent (plus or minus three percent) during the last quarter of 2018/2019, reaching single digits in the coming years.

Minister of Finance Mohamed Maait had earlier stated that the government was seeking a growth rate of 5.7 to six percent for this financial year, up from 5.3 per cent last year.

The ministry targets lowering the average interest rates on treasury bills for the coming financial year to 11.9 per cent, down from 14.9 per cent expected in this year’s budget.

In comparison to this year’s rates, Negm believes that the forecasts for lower interest rates on treasury bills are too optimistic.

“They may decrease by two per cent at the end of next year, which will lower the cost of debt, but not as much as the budget bulletin anticipates,” commented Radwa Al-Sweifi, head of research at Pharos Securities.

The ministry has said it wants to begin applying a new strategy aimed at lowering the government’s public debt based on less costly local and foreign funding and using easy term financing from regional or international financial institutions.

It also intends to issue longer maturity treasury bills and bonds and expand the investor base as well as vary the debt instruments and currencies debts are issued in. The government will also be working on providing new funding tools such as sukuk bonds and stimulating the secondary market in these.

Taken together, the government hopes these measures should help cut the cost of debt-servicing.

“The current global emerging markets crisis could positively affect Egypt. When compared with Argentina and Turkey, Egypt could turn out to be the better choice. As a result, investments may arrive in Egypt from such countries,” Mikhail said.

A 6.5 percent growth rate could be achieved, believes Al-Sweifi, “if private and public-sector investments increase.” She added that there would be an increase in consumption once inflation drops to an average of 15 per cent next year.

The IMF had expected Egypt’s growth rates to reach 5.5 percent this fiscal year, up from 4.2 percent last year. It expects the growth rate to rise to six percent in 2023.

Negm pointed out that “it is difficult to achieve a 6.5 percent growth rate with the continuing rise of interest rates, which increase the burden of debt servicing and impedes the private sector from increasing its activities,” however.

She believes a more realistic growth rate could be 5.6 percent.

“Lifting the subsidies on energy products will result in an inflationary recession caused by the rising prices of commodities and services with the rising prices of energy products. This will lower consumption and decrease the chances of growth for the private sector,” Mikhail said.

Source: Ahram Online