EUR 21.33 For Business Accounts Only

Egypt strategy | Egypt fulfils selectivity criteria among EMs

Egypt’s risk-return profile among top EM. In addition to offering the highest real rate, currently at 8.25%, Egypt’s five-year CDS declined y-t-d to 330bps vs. increases for some EM peers. Egypt has fiscal space (cEGP5-10bn), allowing it to stimulate the economy without causing an inflationary deficit (latest inflation at 4.5% vs. 7%+/-2% target). This allows for the monetary flexibility needed to adjust to global conditions, with no imminent pressures to move policy rates in the short-term. We generally expect a balanced outlook to the EGP, as: i) a broader monetary framework helps balance local liquidity against FCY, ii) external buffers exceed 9x months of import, and iii) positive real rates support LCY investments. While we expect some exchange rate movements within a 2-4% range, on the back of a delayed pickup in tourism revenues, coupled with lower portfolio flows, we do not see a significant impact on price levels.

Global volatility enforces investor selectivity criteria; Egypt stands out. Continued pressure from unpredictable volatility in US ten-year yield (+81pp y-t-d) and market performance, along with divergent local dynamics, call for selectivity among EM. Egypt fulfils most of the selectivity criteria, including: i) primary fiscal surplus (1.5%), ii) ample local liquidity (LTD at 48%), and iii) attractive valuations (c40% discount to EM). A potential increase in foreign participation (currently at c10%) could provide awaited support for the equity market.

External buffers cushion against potential shocks; Real wage recovery to spur consumption in 2H21. Buffers reached USD56bn, as of February (vs. bottom of USD35bn in Apr-20), enabling BoP to withstand average monthly portfolio outflows of USD1bn for six months, while maintaining an import coverage of 8x, on our figures. Although we see limited potential for an incremental increase in portfolio flows, we expect remittances to remain a key source of FCY (50% of imports in 1Q20/21 vs. 44% in 1Q19/20), supported by an anticipated c10% average monthly rise in tourism revenues, and Eurobond issuance of USD3-4bn in 3Q21. Locally, a 17% hike in minimum wage and 13% wage increase will pave the way for real wage recovery (+3%), spurring consumption in 2H21.

Lower yields key trigger for market pickup. A pickup in tourism revenues and/or potential inclusion in the JP Morgan bond index (possibly in 1H22) are awaited market triggers, in our view. This will help stimulate more sustainable sources of foreign currency and achieve lower yields. Based on previous inclusions within the JPM EM bond index, we see local treasury yields dropping 100-150bps post inclusion, and equity market picking up by 15-40% over six months from inclusion.