The Global Significance of Egypt’s Improving Macro Picture and Sovereign Discount

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Egypt's Economic Progress in 2018: Challenges and Opportunities to Examine Moving Forward

Frontier and emerging markets (Vietnam)

Dylan Waller

Thematic (Sector/Industry)

Egypt's economy has continued to have significant improvements in recent months, which most notably included the decline in inflation and rate cuts during the beginning of this year.  However, inflation has picked up a bit in recent months ( February and March) and is currently slightly above the IMF’s target.   The rate cuts in recent months will benefit businesses by decreasing the cost of capital, while at the same time not put too much pressure on banks.Recent reports from the World Bank and the IMF in April speak positively of Egypt’s economic progress and Fitch’s also recently increased its Egypt’s long term foreign currency issuer default rating to B+ from B with a stable outlook.  These improvements have included the reduction of public debt, increased economic growth, lower inflation/rate cuts, as well as the tightening of the country's twin deficits.  The World Bank projects that Egypt’s economic growth will reach 5.8% in 2020 and 6.0% in 2021, which certainly makes Egypt an emerging market stand out. The main risks for the market moving forward include external factors, the country's high unemployment and various political/security risks, which could offset the growth in tourism.  Egypt also has a relatively high level of external debt.  Egypt needs to continue diversifying economic growth and developing a robust private sector that will diversify sources of growth and provided appropriate economic activity for the increased urbanized population.  Other key risks include the potential weakening of the Egyptian pound and the impact of higher oil prices.Despite favorable macro developments and the notable improvements seen in Egypt since 2016, the market has been vulnerable to the decline in investments into emerging markets in general.  MSCI Egypt traded at 9.8X PE as of the end of March 2019, which is an approximate 25% discount to both MSCI Frontier Markets and MSCI Emerging Markets. This valuation is a bit asymmetric given the relatively favorable macro standing of Egypt, entrepreneurial/innovative measures of select companies and the presence of multiple high growth sectors.

Egypt's economy has continued to have significant improvements in recent months, which most notably included the decline in inflation and rate cuts during the beginning of this year.  However, inflation has picked up a bit in recent months ( February and March) and is currently slightly above the IMF’s target.   The rate cuts in recent months will benefit businesses by decreasing the cost of capital, while at the same time not put too much pressure on banks.Recent reports from the World Bank and the IMF in April speak positively of Egypt’s economic progress and Fitch’s also recently increased its Egypt’s long term foreign currency issuer default rating to B+ from B with a stable outlook.  These improvements have included the reduction of public debt, increased economic growth, lower inflation/rate cuts, as well as the tightening of the country's twin deficits.  The World Bank projects that Egypt’s economic growth will reach 5.8% in 2020 and 6.0% in 2021, which certainly makes Egypt an emerging market stand out.  The main risks for the market moving forward include external factors, the country's high unemployment and various political/security risks, which could offset the growth in tourism.  Egypt also has a relatively high level of external debt.  Egypt needs to continue diversifying economic growth and developing a robust private sector that will diversify sources of growth and provided appropriate economic activity for the increased urbanized population.  Other key risks include the potential weakening of the Egyptian pound and the impact of higher oil prices.Despite favorable macro developments and the notable improvements seen in Egypt since 2016, the market has been vulnerable to the decline in investments into emerging markets in general.  MSCI Egypt traded at 9.8X PE as of the end of March 2019, which is an approximate 25% discount to both MSCI Frontier Markets and MSCI Emerging Markets. This valuation is a bit asymmetric given the relatively favorable macro standing of Egypt, entrepreneurial/innovative measures of select companies and the presence of multiple high growth sectors.

Egypt Economic Update