Egypt’s economic prospects hindered by external financing needs: Morgan Stanley
Egypt’s external financing needs are standing in the way of its economic development and may hinder its medium-term growth, according to a report by Morgan Stanley.
The investment management and financial services firm recommended the North African country implement structural reforms through a large-scale privatization program in order to boost its economy.
The US-based company also noted the shift to a permanently flexible exchange rate system would also help reduce the Egyptian economy’s sensitivity to global shocks.
“Egypt has favorable prospects for medium-term growth, but the large external financing needs weigh on the macroeconomic outlook,” said the report.
Even though the continuous depreciation of the Egyptian pound since 2022 will aid in shrinking the current account deficit, there is limited recovery in its official reserves.
The report attributed this to the uncertainty around the rate of reform and the tightening of financial conditions in the global economy, which will likely limit foreign direct investment flows.
Egypt’s economic struggles, exacerbated by the fallout from Russia’s invasion of Ukraine, were brought into focus in December when the International Monetary Fund approved a $3 billion Extended Fund Facility loan.
The Morgan Stanley report said this support from the IMF is “insufficient to close the financing gap and provide the country's foreign exchange needs in the near term”.
Egypt has the potential to sell up to $7 billion worth of assets by 2024 as it seeks to boost foreign exchange liquidity and public finances, as well as narrow its financing gap.
The country’s financial gap is currently pegged at $23 billion to $24 billion by the end of fiscal year 2023/2024, reported Morgan Stanley
“This in turn should tame further expectations of FX depreciation and ensure a smooth transition to a durably flexible regime, potentially lowering the bar for portfolio investors and buying time for the authorities to implement the structural reforms to level the playing field and boost FDI inflows further,” added the report.
The US-based company also noted the shift to a permanently flexible exchange rate system would also help reduce the Egyptian economy’s sensitivity to global shocks.
“Egypt has favorable prospects for medium-term growth, but the large external financing needs weigh on the macroeconomic outlook,” said the report.
Even though the continuous depreciation of the Egyptian pound since 2022 will aid in shrinking the current account deficit, there is limited recovery in its official reserves.
The report attributed this to the uncertainty around the rate of reform and the tightening of financial conditions in the global economy, which will likely limit foreign direct investment flows.
Egypt’s economic struggles, exacerbated by the fallout from Russia’s invasion of Ukraine, were brought into focus in December when the International Monetary Fund approved a $3 billion Extended Fund Facility loan.
The Morgan Stanley report said this support from the IMF is “insufficient to close the financing gap and provide the country's foreign exchange needs in the near term”.
Egypt has the potential to sell up to $7 billion worth of assets by 2024 as it seeks to boost foreign exchange liquidity and public finances, as well as narrow its financing gap.
The country’s financial gap is currently pegged at $23 billion to $24 billion by the end of fiscal year 2023/2024, reported Morgan Stanley
“This in turn should tame further expectations of FX depreciation and ensure a smooth transition to a durably flexible regime, potentially lowering the bar for portfolio investors and buying time for the authorities to implement the structural reforms to level the playing field and boost FDI inflows further,” added the report.