The Egyptian Flag
The band colours represent oppression (black), overcome through bloody struggle (red), to be replaced by a bright future (white). Centered in the white band is a gold eagle of Saladin, the Egyptian national emblem, with a shield superimposed on its chest above a scroll bearing the name of the country in Arabic.
Egypt: At a glance
Structure of the economy
Following comprehensive economic reforms originated in the early-1990s, Egypt has developed a diversified economy across services (52% of GDP), industry (31% of GDP) and agriculture (12% of GDP). The Egyptian economy is now the second largest in Africa behind Nigeria. Key sectors include construction, financial services, hydrocarbons, manufacturing and tourism. Like many of its contemporaries, Egypt was badly impacted by the pandemic, that said, it is one of the few African countries to register a positive economic expansion over the last year, reaping the benefits of reform efforts over recent decades. Egypt enjoys a large exposure to global trade, where exports contribute 50% of GDP, with oil and gas its largest product (18% of total). The economy also has a large correlation to the secular outlook in Europe, which is its largest export partner (30% of exports). That said, the government still plays a large role in the economy, which the IMF has recently flagged as an impediment to Egypt’s “enormous growth potential”.
Egypt suffered a sharp economic shock in the wake of the pandemic via the sudden stop in tourism, which is worth 12% of GDP. That said, the economy still expanded despite the widespread disruption, with GDP growing at +2.8% last year. Looking forward, Egypt is well placed to recover swiftly; rebounding global growth and the gradual easing of cross-border travel will support tourism, remittances and exports. Likewise, aggressive infrastructure plans – focused on hydrocarbons, transport and tourism – is likely to underpin investment growth. As such the IMF has health growth projections for Egypt over the next two years; GDP is expected to expand at 2.5% this year and 5.7% in 2022.
The Central Bank of Egypt has acted swiftly to combat the impact of the pandemic; over the course of 2020, the Monetary Policy Committee (MPC) cut its lending rate by 400bps to 8.25%, with its latest intervention coming in November. The central bank also rolled out a number of programs to reduce pressure on borrowers and to enhance liquidity, including increased access to credit at reduced interest rates and a six-month debt moratorium on existing credit. Looking forward, we believe that the MPC will continue to ease monetary policy - even as many emerging market contemporaries begin their tightening cycles - to insulate the nascent economic recovery and combat muted price pressure.
While the fiscal position in 2021 is expected to marginally deteriorate following the government's response to the COVID crisis, the outlook is stable; International Monetary Fund (IMF) projections expect Debt/GDP to fall to 73% by 2025. Likewise, the composition of government debt is supportive; of the $115bn total, the vast majority is in longer term debt ($90bn) with only $23bln is in the market as bonds. The bulk of the debt is owed to the IMF, Arab countries and Developed Economies. Egypt continues to benefit from strong IMF backing, where it received $2.8bn via the Rapid Financing Instrument in May 2020 and $5.4bn from the Stand-by Arrangement in June 2020. After several years of discussions, in April this year, JP Morgan placed Egypt on watch for inclusion in the GBI-EM index with 14 bonds meeting the size/maturity criteria. Rough calculations suggest that Egyptian bonds could take up an index weight of 1.8%.
Egypt faces political risks on many fronts which poses profound challenges to its stability and security, both domestically and internationally. Firstly, Egypt continues to fight an insurgency in the Sinai against the Islamic State’s local affiliate. Likewise, military intervention in the Libyan civil war has undermined control of its Western border. Furthermore, there seems to be little prospect of a resolution to the long running dispute with Ethiopia over the Grand Ethiopian Renaissance Dam. In sum, President Sisi's Egypt, rather than a stabilizing force in the region, is fighting for power and influence against Qatar & Turkey.
Bottom line: Gold medal
We are very optimistic when it comes to the outlook for Egypt. From a bottom up standpoint, the recovery is on firm footing, reflected by favourable IMF forecasts over the next two years. Likewise, the domestic rebound continues to enjoy support from the CBE; muted inflation pressures continue to facilitate an easy policy stance to insulate the recovery. Furthermore, we are very optimistic when it comes to the fiscal outlook for Egypt; with IMF support, the debt profile is set to improve over the coming years. The ongoing progress in Egypt has placed the countries bonds on the watchlist for index inclusion, which is likely to generate structural demand. While much of the bottom-up story is highly supportive, it must be noted that the geopolitical situation remains unstable, with issues on multiple fronts.
From a structural perspective, as noted in our Roadmap for Q3 and Beyond, we believe that the current backdrop is complicated for emerging markets. That said, in our view, there are selective opportunities to extract alpha from EM. Firstly, under our US-Led Growth Theme, we believe that as further fiscal stimulus enters the system, at home and abroad, the foundations for the cyclical rebound are solid. This backdrop is likely to support allocations to some emerging markets; we favor the emerging markets which have a strong beta to the demand for commodities and capital goods. Likewise, as noted under our investment theme – Sticky Inflation, Structural Headwinds – we stick to our longstanding view that recent price pressures are transitory. As such, we believe that the Fed will introduce a controlled normalisation of monetary policy under the AIT framework, which will encourage extracted in selective carry positions. As such, from a structural perspective, we believe that Egypt is very well placed to benefit from the global demand for commodities and the likelihood of selective carry demand in EM.
1. United Nations
Olympics data: Olympiandatabase.com
All other data is ESLJ, 2021.
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