The Egyptian Center for Economic Studies (ECES) recently convened a symposium to scrutinize the state of financial markets. The consensus among experts was one of cautious optimism regarding Egypt’s financial market prospects, even in the face of soaring inflation.
Abla Abdelatif, the ECES’s Executive Director of Research, emphasized the critical need for a deeper understanding of financial markets, citing their significant influence and interconnectivity.
Abdelatif highlighted that the ECES’s research primarily examines markets in developed nations such as the United States, the United Kingdom, the European Union, China, and Canada, as well as those in emerging economies like Brazil, India, South Africa, and Turkey.
The ECES’s report delves into the ramifications of shifts in developed markets on both emerging economies and Egypt’s financial landscape, while deliberately avoiding any predictions about future market movements.
Omar El-Shenety, Executive Partner at Zilla Capital, pointed out that market dynamics in developed countries often precipitate changes in emerging markets, with Egypt’s economy being no exception.
El-Shenety noted that the year 2023 saw a marked escalation in global commodity prices, propelling inflation rates in nations such as the United States and the European Union to the 8-9% range—considered exceptionally high for these regions. This inflation spike prompted interest rate hikes. However, a subsequent dip in commodity prices during the final quarter of 2023 and the initial quarter of 2024 led to a moderation of inflation rates to approximately 2-3%.
Market analysts are speculating on a potential downturn in interest rates globally, following the ebbing tide of inflation—a trend with significant implications for emerging markets, including Egypt.
El-Shenety explained that reduced interest rates typically translate to lower borrowing costs and enhanced corporate profitability. He observed that these changes are reverberating through global markets, with China being a notable outlier due to its ongoing mortgage crisis.
Despite these global trends, emerging markets are grappling with persistent inflation, with rates hovering between 15-20%. It is anticipated that these markets will eventually mirror the deflationary patterns seen elsewhere, although this has yet to materialize as hoped.
In Egypt’s case, the early months of the year were marred by concerns over potential defaults on international commitments. However, a turning point came in March with the ratification of agreements with the International Monetary Fund (IMF) and the United Arab Emirates concerning the Ras al-Hikma investment project. These developments bolstered Egypt’s credit rating and economic prospects, as evidenced by a reduction in bond interest rates from 32% to 26%. Despite these positive indicators, the tangible effects on domestic growth remain elusive, and inflation persists at an elevated 33-36%, fueled by currency devaluation, rising energy costs, and monetary expansion. Consequently, inflationary pressures are expected to intensify.
As for the Egyptian Exchange (EGX), it surged by roughly 70% in 2023, reaching unprecedented heights before the currency flotation. The subsequent downturn post-flotation suggests that the initial surge may have been driven more by hedging strategies than by investment activities.
Aladdin Saba, Founding Partner of BPI Partners, emphasized the need to analyze the relationship between global inflation and Egypt’s inflation rates. Despite a stable exchange rate, Egypt often experiences unexpected surges in inflation.
Saba observed that the Egyptian Stock Exchange’s (EGX) growth over the past year was primarily driven by hedging activities. He anticipates further increases and underscores the importance of transparent tax policies in the financial market as a cornerstone for investment.
He also noted that rising interest rates in Egypt inflate corporate expenses, leading to increased prices and higher inflation. Conversely, reducing interest rates could positively impact inflation by decreasing production costs.
Ahmed Kouchouk, Vice Minister of Finance for Fiscal Policies, reported that the consensus at the IMF and World Bank’s spring meetings was a gradual and slower reduction of interest rates in 2024. He cautioned against taking the international institutions’ energy price forecasts of $70 to $80 per barrel at face value, given the complex political factors at play.
Kouchouk referenced an IMF report on the Arab region’s economic performance, which predicted that ongoing tensions in the Red Sea region could diminish regional exports by approximately 10% and stunt annual growth rates by 1%. The report also chronicled a significant downturn in all economic indicators for the region over the past two decades.
He highlighted that food commodities, which make up 45% of the inflation basket, are the primary drivers of inflation in Egypt. Thus, any fluctuation in food prices can have a substantial impact on inflation levels.
Hany Tawfik, Chairperson of the International Investors Group, remarked that the stock market has become more of a value store than an accurate gauge of company performance, which contributed to last year’s market upswing. He acknowledged the utility of “hot money” but advised against its use in exchange rate stabilization.
Tawfik predicted a monthly increase in the dollar-to-pound exchange rate of $1-$2, correlating with shifts in the country’s inflation rate.
At the ECES financial markets symposium, Tawfik noted that despite international institutions revising their outlook on Egypt’s economy, their assessment of the country’s debt repayment risks remains unchanged.
He concluded that Egypt’s exclusion from global indices renders comparisons with other emerging markets irrelevant. He advocated for Egypt to establish clear payment strategies, maintain reasonable borrowing rates, and structure its financial policies systematically.