Why Egypt Is An Emerging Market Stand Out

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Includes: EGPT
by: Dylan Waller
Summary

Egypt's economic growth will reach 5.8% in 2020 and 6.0% in 2021, which certainly makes Egypt an emerging market stand out.

Tourism revenues grew by 50% during 2018 and tourism is expected to maintain a double-digit growth rate for the next 4-5 years.

The World Bank projects that Egypt's inflation rate can fall to 10.7% by 2021.

Egypt continues to trade at a discount to both frontier and emerging markets and the country's PE is in line with levels experienced when macro conditions were less favorable.

Twin deficits have been improving substantially.

Growth Outlook is favorable: Egypt is poised to outperform other emerging markets in terms of economic growth. According to The World Bank projections, Egypt's economic growth will reach 5.8% in 2020 and 6.0% in 2021, which certainly makes Egypt an emerging market stand out. This will be driven by increased gas production and the surge in tourism. The country's international tourist arrivals are beginning to approach the highs experienced prior to the revolution in 2011. Tourism revenues grew by 50% during 2018 and tourism is expected to maintain a double-digit growth rate for the next 4-5 years. One key transition that needs to happen is for there to be an increased presence of the private sector and diversification of the economy. This is crucial for sustaining long-term economic growth and for providing new employment opportunities, given the country's high youth unemployment rate. Notably, the country's unemployment rate did fall from 10.6% last year to 8.1% this quarter.

Inflation has continued to improve substantially following the peak that occurred due to the flotation of the Egyptian pound. Egypt's inflation rate remained between 13-14.1% during the past two months, which was mostly driven by the surge in the price of fruits and vegetables.

Egypt

Inflation has the potential to reach the single-digit levels in the 2020s, which will allow for additional rate cuts. Egypt's central bank was able to cut rates significantly this year following the improvement seen in inflation. The World Bank projects that Egypt's inflation rate can fall to 10.7% by 2021. The CBE will not likely be able to cut rates until the end of this year, given the recent increase in inflation.

Rate cuts during 2019

Rate cuts during 2019

Other improvements: Egypt's economic reforms have begun to bear fruit and the country has seen a substantial improvement in its tourism industry (flights from Russia were resumed), which is a key driver of the country's growth. Egypt attracted 11.3 million visitors last year, which was a 40% annual increase. Other notable improvements have included the reduction of the country's twin deficits and the slight decline in the country's public debt levels, which are very high by emerging market standards. Egypt is targeting a debt to GDP ratio of 89% this fiscal year.

Current Account Balance

Ca Balance has improved substantially

Egypt's current account balance is slowly beginning to approach a surplus following the economic turnaround experienced since 2016. Notably, the country's exports rose by around 11% during the first 9 months of 2018. The country's current account deficit will likely remain around 2% of GDP during the next two years.

Foreign Exchange Reserves

Foreign exchange reserves have soared

Another stand out feature of Egypt includes its high level of foreign exchange reserves, a level that is higher than nearly all frontier and emerging markets. This has been a key supporter of the country's currency following the devaluation seen in 2016. Foreign exchange reserves cover roughly 6.8 months of imports and are equivalent to around 17% of GDP ( as of 2018 according to the IMF). Foreign exchange reserves have nearly tripled from the lows seen in 2016.

Macro Outlook

2016

2017

2018

2019 F

2020 F

2021 F

Real GDP Growth

4.3%

4.2%

5.3%

5.5%

5.8%

6.0%

Private consumption growth

4.7%

4.2%

1.0%

1.6%

2.5%

2.5%

Government consumption growth

3.9%

2.5%

1.6%

2.7%

3.9%

3.1%

Inflation

10.2%

23.3%

21.6%

14.5%

12.5%

10.7%

Current Account Balance

-6.0%

-6.1%

-2.4%

-2.5%

-2.6%

-2.5%

Fiscal Balance

-12.5%

-10.9%

-9.7%

-8.6%

-7.5%

-7.0%

Lower middle income poverty rate

15.9%

15.7%

15.7%

15.8%

15.7%

15.6%

Upper middle income poverty rate

61.5%

61.2%

61.3%

61.4%

61.3%

61.2%

Source: World Bank April Report

Stock Market Appeal

Egypt continues to trade at a discount to both frontier and emerging markets and the country's PE is in line with levels experienced when macro conditions were less favorable. Moreover, Egypt's smaller weighting in MSCI Emerging Markets ( only 3 constituents) has led some emerging market investors to ignore the market, though there is certainly a strong case for investors to go overweight.

Chart

Data by YCharts

MSCI Egypt currently trades at a PE of 9.5 and forward PE of 8.25, which is an approximate 27% discount to MSCI emerging markets. Moreover, the average ROE for the market is 31%. A lot has improved in the market since 2016, though risks that are still lingering include the high level of public debt, political risks that could threaten the growth of the tourism industry and the country's high youth unemployment levels. However, the market is priced at an attractive level given the improvements seen in the past three years. VanEck Egypt ETF (NYSEARCA:EGPT) offers US investors exposure to the equity market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.