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(The below article is an excerpt of a note by Charles Robertson, global chief economist at Renaissance Capital, that was emailed to the media.)
Egypt is a Trump trade and a structural reform story that is attracting investors.
We remain bullish on Egypt for a host of reasons. We see Egypt as the second “Trump trade” after Russia, given the new US president’s admiration for President Sisi. This is likely to reinforce international financial institution support for reform in the country, already seen in the new IMF deal. The government has demonstrated its zeal for reform by cutting subsidies since it took power in 2013 and introducing VAT, and it now promises much needed legal reforms too. Meanwhile UK and Russian energy companies have in the past two months invested over a billion dollars into Egypt’s new Zohr gas field, which could turn Egypt into a net energy exporter again by 2019; portfolio investors are also returning. The recent eurobond was oversubscribed and looks like good value.
Most important is Egypt has the cheapest currency in emerging markets, frontier markets or Africa, based on our 22-year real effective exchange rate (REER) model, which suggests fair value for the currency is EGP12.9/$, but local sentiment has become more cautious on the currency in the past two months. In Cairo, corporates and banks have shifted from talk of EGP14.5/$ in 2017 to EGP17-18/$, and suggest EGP24-28/$ may be realistic by 2021. We think shock over the scale of the devaluation and inflation worries are to blame for this shift. We argue the Egyptian pound could still strengthen to EGP15.5/$ this year, providing inflation is capped at around 20-25%, which might require rate hikes from the Central Bank of Egypt (CBE) in February or March to suppress inflation expectations.
We expect growth to be 3% this fiscal year (the government and IMF forecast 4%) but to double to 6% in the next three fiscal years starting in 2017/2018 (above IMF expectations). Connected to that we see the current account shrinking faster than the IMF assumes, which in turn should help the Egyptian pound strengthen and push inflation down. We struggle to see any scenario (bar inflation above 40%) that would justify sustained currency weakness from here.