Pedestrians use the stairs outside of Egypt’s central bank in Cairo, Egypt. (Photographer: Shawn Baldwin/Bloomberg)

Egypt's Economy Rebounds as Inflation Drops, Inflows Rise

(Bloomberg) -- Egypt’s headline inflation rate rose at its slowest pace in nearly a year in November while the current account deficit fell by more than 65 percent in the first quarter of the fiscal year, offering the latest evidence that the economy is rebounding 12 months after the currency flotation.

Urban consumer prices rose 26 percent in November compared to 30.8 percent a year earlier, according to the official statistics agency. The month-on-month inflation rate eased to 1 percent compared to 1.1 percent in October. Food and beverage prices, the single largest component of the basket, rose by 32.3 percent.

Separately, the central bank said the current-account deficit had fallen to $1.6 billion in the first quarter of 2017-18, partly due to a rise in travel receipts between July and September to $2.7 billion from $767.7 million a year earlier. The overall balance of payments surplus rose to $5.1 billion from $1.9 billion.

“The economy is turning a corner: 2017 was a very difficult year and 2018 is probably going to be a better year and the recent data backs that up,” said Simon Kitchen, head of strategy at EFG-Hermes, Egypt’s largest investment bank. The cheaper pound has made exports more competitive, growth in imports has slowed and tourism is recovering, he said. “Looking ahead to next year you’ve got the gas story coming through as well,” he said, referring to Egypt’s plans to begin gas production at the giant offshore Zohr field.

Rate Cut?

Egypt floated the pound in November 2016 to ease an acute foreign-exchange shortage that crippled trade and stymied investment. The move unleashed foreign investment into Egyptian treasury bills and bonds. The pound halved in value, however, fueling soaring inflation in a country where more than half the 95 million residents live on or near the poverty line.

Officials have said the move was a necessary, if painful, pivot point for an economy that had struggled to rebound following the 2011 ouster of President Hosni Mubarak. The central bank had forecast that inflation would ease from highs in near 35 percent as the base effects of the currency flotation begin to wear off.

Economists said they expected the central bank to start cutting interest rates in the first half of 2018. EFG-Hermes expects a reduction of some 400 basis points through next year. Reham El Desoki, senior economist at Arqaam Capital in Cairo, forecast a 500 basis-point reduction overall.

“This is generally within expectations. I think it is likely that the central bank will begin cutting rates but not at the next meeting in December, at the one after,” El Desoki said.

FDI Slower

The central bank has repeatedly raised interest rates since the flotation to damp soaring prices, but faced criticism from business leaders who said the high cost of borrowing would stifle growth and delay investment by companies. It held the benchmark rate at 18.75 percent at its last meeting in October and has set an inflation target of 13 percent, plus or minus three percentage points, for the fourth quarter of 2018, and single digits thereafter.

The central bank said net unrequited current transfers rose by 37.3 percent to $6 billion, mainly as a result of a $1.6 billion increase in workers’ remittances.

The gains in the economy, however, have been mainly in investments in government debt with net portfolio investment for the quarter reaching $7.5 billion. Net inflows of foreign direct investment reached $1.6 billion for the quarter but resulted directly from an 84.2 percent increase in oil sector investments. FDI in the non-oil sector, necessary to create jobs and boost growth, has been slower to recover.

“For companies that were put off Egypt by political instability and FX troubles over the past five years, it takes them a while to come around so you might see a recovery in non-oil FDI in the next year,” Kitchen said.

©2017 Bloomberg L.P.