CAIRO: Inflation and interest rates have soared. Growth rates are contracting. The stock market has fallen to erratic lows. Though Egypt’s economic picture seems bleak, Beltone Financial argues the country will survive the global financial storm.
“While growth in Egypt is slowing, the economy is in a better situation to weather the fallout of global shocks than other countries in the region, said Reham ElDesoki, economist at regional investment bank Beltone Financial.
“With Egypt’s heavy population, there is still strong growth in private consumption, especially now that inflation is declining.
Slower than expected rises in food prices cut urban inflation in Egypt to 21.5 percent in the year to September, down from a 16-year high of 23.6 percent the month before. This was the first decline in inflation since December last year.
International food prices hit nine-month lows in September and have since tumbled further as investors pulled their money out of turbulent markets.
“With the gradual decline in inflation – which we expect to accelerate in 2009 – and possibly interest rates, we expect private consumption growth to remain relatively stable around the current average of 5 percent annually, possibly dipping to 4 percent, Reham noted in a research document released by the bank on Tuesday.
Though inflation rates are currently cooling off, the rate is still substantially high compared to a 10.5 percent last January. “Inflationary pressures still persist. Declines in international food and energy costs will take a longer time to reflect locally, she explained. “This is the nature of the Egyptian market. There is no immediate reaction [to such declines].
She estimated inflation rates to gradually fall down, ending the year at 24-22 percent. Inflation could later slip to an average of 19 percent in fiscal year 2008/09 and 13 percent in 2009.
“Rates could fall as low as 10 percent by mid-2009. However, they could shoot up again afterwards, as we expect the government to hike energy prices during the second half of next year.
Rising inflation rates have piled pressure on the central bank to raise interest rates for the sixth time this year by a cumulative 2.75 percent. The latest move took the bank’s overnight deposit rate to 11.5 percent and its overnight lending rate to 13.5 percent.
With inflation rates finally subsiding, ElDesoki believes the central bank’s monetary tightening policy has now come to its end. “Inflation has come down by a percentage that could [tempt] the central bank to cut interest rates this year.
She cited the governor’s remarks in mid-October that monetary policy will act to support economic growth.
“We will pursue the policy that will still achieve our overall objective, but we will not by any means ignore what is happening in the market and [will] make sure that the growth will happen and we will support that in the near future, Central Bank Governor Farouk El-Okdah said in October.
ElDesoki explained that this statement supports premise of the monetary tightening cycle coming to an end. “While the statement could even imply a possible reduction in the corridor interest rates, we believe that November 2008 would be too early a time for such an action and expect that the central bank could be inclined to cut rates by 50 basis points in December, at the earliest, she noted in Beltone’s document.
Beltone forecasts Egypt’s growth rates to shrink to 6.6 percent in FY2008/09 and 5.8 percent in FY2009/10, down from the previous peak level of 7.2 percent in FY07/08.
The Cairo-based investment bank pointed out that high inflation and interest rates – coupled with a looming recession in the US and Europe and its ripple effects on private consumption, foreign investment, and exports – would drag Egypt’s growth rates in the coming period.
Still, the bank sees glimmer of hope in “nascent sectors of the economy that could boost future growth. These largely untapped sectors include agriculture, food industries, infrastructure and transportation, construction operations geared towards the middle and low income residential and business classes, wholesale and retail trade; healthcare services and private education.
“We believe these sectors will have significant potential for growth, investment opportunities, and profitability, going forward, the bank noted.
ElDesoki also stressed on importance of investing in infrastructure projects, as they are labor-intensive that would trigger a slowdown in unemployment rates and boost growth rates.
“By infrastructure, I don’t mean just roads and bridges. It also includes investing in utilities such as power and water generation, education, and healthcare.