Use scenario planning to navigate a volatile and uncertain year
Egypt will face high inflation and a fluctuating exchange rate, and MNCs should formulate comprehensive plans that account for various levels of growth, inflation, currency depreciation, and import restrictions.
In addition, despite the repeal of letter-of-credit requirements, MNCs should prepare for an inconsistent recovery of imports. FX reserves remain critically low, and authorities will prioritize essential goods and commodities, leading to intermittent delays in accessing imports.
While there are near-term challenges, Egypt still has a promising longer-term outlook due to a diversified economy, strong consumption, and a strategic location. MNCs should explore localization opportunities, which may now be more feasible, as domestic assets are cheaper and domestic labor is better priced.
Overview
- After multiple currency devaluations in 2022, the Central Bank of Egypt (CBE) switched to a flexible exchange rate regime in early 2023 to comply with IMF conditions for the recent US$ 3 billion loan.
- The government unveiled the next phase of its privatization program in February 2023, shortlisting 32 state- or military-owned companies in which it intends to sell stakes.
- Inflation has surged since the currency began depreciating, with the inflation rate reaching 26.5% YOY in January 2023 after averaging 14.8% in 2022.
- After a year of import restrictions, Egypt repealed letter-of-credit requirements for imports in late December 2022, meaning firms can revert to the previous documentary collection system.
Our View
Egypt will endure a challenging 2023 and planned reforms will only drive gradual improvements. We forecast that Egypt will secure real GDP growth of 4.1% YOY in 2023 following an estimated growth of 4% in 2022; however, MNCs should note that this growth is driven by rising exports rather than domestic consumption. Despite still-robust growth figures, Egypt’s economy will struggle amid high consumer and producer inflation, suppressed private and government consumption, and low confidence. Following the move to a flexible exchange rate, currency volatility will persist in 2023, with the EGP continuing its depreciating trend against the dollar; we forecast that it will average between 30 to 36.8 to the dollar in 2023, with a downside scenario entailing depreciation past the 40 mark. The recently announced privatization program is not Egypt’s first, and the one-year deadline to partially privatize 32 companies is likely unrealistic given previous delays in listing state-owned firms.
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