The market remains highly vulnerable to global shocks
MNCs should strategize how to mitigate tighter access to FX domestically in Egypt as well as heightened price sensitivity keeping demand growth from businesses and consumers moderate and inconsistent through 2022. Expect difficult import restrictions and delayed payments. While demand will not see a significant contraction (given the moderated customs exchange rate), MNCs must still evaluate reducing operational FX-dominated costs, segment customers based on receivables risk, support price revisions with marketing investments, and continue emphasizing added value as demand softens amid price sensitivity.
Overview
Inflation in Egypt reached 8.8% in February, with higher food costs of nearly 18% driving the hike. March 2022 inflation is likely to remain as high, given that Egypt’s heavy reliance on imported raw materials will expose it to high global commodity prices. The central bank of Egypt (CBE) raised rates by 100 basis points on March 21, 2022, in direct response to soaring inflation and rising pressure coming from investors abandoning emerging-market securities for safer markets since the invasion of Ukraine. The CBE devalued the Egyptian pound to EGP 18.2 against the US dollar as it looks to protect reserves and respond to mounting pressures amid global inflation. The customs exchange rate (traded rate for imports) was adjusted at a more moderate rate of EGP 16, partially offsetting the adverse impacts on consumers and businesses domestically.
Our View
Per FrontierView’s analysis, Egypt is highly vulnerable to global shocks, and its economic stability is therefore susceptible to fragility. The EGP will depreciate on average in 2022, (currently at EGP 18.2 with room to depreciate further to EGP 19.5). The government’s decision to stimulate the economy during the pandemic through debt utilization leaves it now in a state of higher debt-distress risk as the US Federal Reserve hikes rates through 2022 and emerging-markets sentiments weaken. In order to protect the attractiveness of its carry trade flows, Egypt will need to hike rates further, as real interest rates fall to a mere 1.45% (after the 100 basis-point hike and based on the February inflation figure of 8.8%). Furthermore, pressure on its current deficit will worsen as exports soften and tourism from Ukraine and Russia is disrupted. Should global inflation worsen or an emerging-market sell-off occur, the EGP will be highly exposed to severe volatility—a downside whereby the currency depreciates beyond EGP 20 against the US dollar.
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