Egypt’s pound float: short-term pain, long-term gain

The 50% fall in the Egyptian pound against the US dollar since the central bank floated the currency at the start of November will cause economic growth to slow sharply in the coming quarters. Interest rates have already been hiked by 300bp and we think monetary policy is likely to be tightened further. Inflation, which will also be boosted by the introduction of a value-added tax and fresh subsidy cuts, is on course to breach 20% y/y by the middle of next year. That will dampen consumer spending. Nonetheless, the decision to float the pound should improve Egypt’s longer-term prospects. The recent measures have helped the government to secure a US$12bn financing agreement from the IMF and there are early signs that private foreign investment is picking up. Restrictions on access to foreign currency, which had increasingly hindered economic activity, have now been dismantled. And a weaker pound will boost Egypt’s external competitiveness. Accordingly, while we expect the economy to expand by just 2.0% in 2017, GDP growth rates of 5-6% over the next five to ten years are no longer out of reach.