October 2021 Egypt Market Report

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Report Summary

• Egypt should be an early beneficiary of a recovery in trade and tourism. While supply chain disruptions have led to a temporary slowdown in trade patterns, we expect to see tourism recover well during Egypt’s peak season of Q4 2021 – Q1 2022. On trade, we monitor developments in the Euro area, which is Egypt’s largest trade partner.

• One of the headwinds to this recovery, in our view, is the overvalued exchange rate which has dampened economic activity thus far. The managed float is not long-term sustainable, in our view, and is likely to face increased pressure as global government bond yields rise. We believe the risk of a modest and gradual devaluation on a 6-12 month view has risen and revise our USD/EGP target to 16.5. The central bank striving to keep EGP steady is a risk, as we believe this could lead to a larger and more sudden devaluation at a later stage.
  

• Equity valuations remain close to historical lows and we believe a stronger earnings growth recovery should support a more sustained equity market performance. Such a recovery appears to have started already in October and we expect this trend to continue. Our primary concerns are: (a) low liquidity in equities; (b) political risk related to Ethiopia’s dam on the upstream Nile River; and (c) rising food inflation as a potential source of social unrest, though we would expect increased government subsidies to ensure food remains affordable. Doing so would likely weigh on the fiscal deficit, but we do not see that as being problematic.
  

• T-bills continue to offer an attractive return relative to the low yields prevailing in EM, even in the face of a modest devaluation. But the risk/reward pay-off is less compelling than before as yields have contracted further and the risk of a modest EGP devaluation on a 6-12 month view has risen.

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