KUWAIT: With more than a year having passed since the March 2024 currency devaluation in Egypt, the policy of a more flexible FX regime has started to become more deeply embedded even amid major economic challenges caused by the US’s ‘liberation day’ tariff announcements, an emerging market debt sell-off and ongoing regional conflict.
There has also been a very limited drawdown of banking sector net foreign assets over the past period (previously used as a tool to stabilize the currency). A clear commitment to this FX policy is especially crucial for Egypt as the IMF program comes to an end (late 2026). The government has also continued its fiscal consolidation measures, raising oil prices by around 17 percent and maintaining progress even as fiscal pressures are helped by the lower global oil price environment. On top of this, both the finance and investment ministers have recently introduced new measures to enhance the business environment that include steps on taxation, the business climate and trade.
The Egyptian central bank commenced its policy easing cycle in April, cutting interest rates by 225bps to 25.5 percent following a plunge in inflation to 13.6 percent y/y in March (January 24 percent).Inflation should remain in the range of 14-16 percent for the rest of this year, providing space for interest rates to fall further: we expect them to end the year at 21-22 percent.
In 2026, we see inflation averaging 12 percent, allowing for a further 4-5 percent cut in interest rates. This new environment will improve credit transmission to the private sector and corporates’ appetite to borrow (see below). Furthermore, it will help to contain the ballooning interest payments that are eating up more than 50 percent of total public spending. Finally, we also see lower interest rates improving valuations of most companies, thus providing a boost to the privatization program.
Capacity utilization to pick up
Egypt’s GDP growth continues to show signs of solid recovery, reaching 4.3 percent y/y for Q4 24 from 3.5 percent in the previous quarter, and may have improved even further in Q1 25. The commencement of the monetary easing cycle (especially if accompanied by further cuts over the coming six months) will boost corporate borrowing, though initially, given still low capacity utilization levels of 60-70 percent, this borrowing may focus mostly on OPEX; while corporates will now have better visibility regarding CAPEX plans, the investment cycle may take more time to materialize.
Banks will start to shift more of their funds to corporate/retail lending versus treasury bills, especially as yields continue to fall; yields currently average 21 percent (net of tax), versus above 25 percent at the end of 2024. We also expect the economic recovery to give a strong push to nominal wages that causes a pickup in consumption activity. We see GDP growth accelerating to 3.66 percent and 4.7 percent in FY24/25 and FY25/26, respectively, from 2.4 percent in FY23/24. Sectors like export-led manufacturing, tourism, retail and wholesale trade, banking &financial services, in addition to IT services, will be the main sources of economic growth.
GCC support to help bridge funding gap
Following the UAE’s mega investment deal in 2024, we see other GCC countries playing a major role in plugging Egypt’s projected external financing gap of $10-12bn for 2025 and 2026. Indeed, commitments were received following President Sisi’s tour of the Gulf in April. Qatar is working towards a $7.5 billion (fresh FDI) investment into Egypt. While reportedly Kuwait could convert its current deposits ($4 billion) at the Central Bank of Egypt into EGP investments.
The materialization of such investments, possibly into the real estate sector, would mean further improvement in the net foreign asset position of Egypt’s banking system and give further confidence to the global markets with regards to the external financing dynamics. External debt maturities will drop to $14 billion in FY26/27 and $10 billion in the following years, thus alleviating the severe debt pressures seen over the past years where maturing external debt reached close to $30 billion a year.
Fallout from US tariffs
President Trump’s tariff hikes will have a medium-term impact on the outlook for global economic growth (slower) and oil prices (potentially lower). This might cause a slowdown in FDI flows into Egypt (especially energy-related).Slower global trade could also impact revenues from the Suez Canal (still recovering from earlier Red Sea blockages). On the other hand, lower oil prices would allow for cheaper energy imports and help the government reach its target of a 100 percent cost recovery ratio for petroleum products without big subsidy cuts that would spike inflation.