Morgan Stanely forecasts positive outlook for Egypt, expects further policy and FX moves

Cairo – March 7, 2024: In its latest report, Morgan Stanley revealed a somewhat optimistic outlook for Egypt’s economy on the back of yesterday’s events. The financial firm highlighted the positive impact of the 6 percent key interest rate hikes and pound devaluation, noting that “This time could be different on FX policy.”

Hande Kucuk, Economist at Morgan Stanley, stated that "Larger-than-expected moves in the policy rate and FX, and a commitment to reforms, underpinned by an augmented IMF loan of $8 billion, pave the way for increased FX inflows, but sustaining some level of FX flexibility will be key."

After a sharp devaluation on Wednesday on the back of a 6 percent rise of key interest rates, the LE stabilized at the start of Thursday trading at around LE 50 against the USD.

Morgan Stanley believes that Egypt is “fairly valued” at these levels. “The recent rally has left Egypt trading through Nigeria and Kenya. We think that this is fair, as through the recent sources of finances, Egypt has largely secured its medium-term external financing needs, assuming that asset sales do not slow down. Additionally, there is now a reasonable expectation that foreign investors will look at local rates…as the next trade suggesting increasing dollar inflows to buttress the multilateral and FDI flows,” it wrote.

The report emphasized the need to watch for sustained moves toward more FX flexibility, anticipating positive outcomes like increased FX inflows, reserve accumulation, and macroeconomic stabilization. According to Kucuk, "This time could be different on FX policy."

On the International Monetary Fund (IMF) deal, the financial firm expects that board approval could come around the end of March, potentially releasing around $750 million in loans.  

“Additional support from the World Bank (WB) and the European Union (EU) is anticipated, albeit deemed of secondary importance given Egypt's robust near-term outlook, especially with a significant Foreign Direct Investment (FDI) deal with the UAE,” Kucuk added.

Regarding Egypt’s official reserves, Morgan Stanley forecasted a jump of $23.5 billion in FY 24 to hit $58.3 billion, with potential growth to $67.4 billion in FY26, citing sources of external finance including the Ras El Hekma and IMF deals.

“The CBE had already made a bold move in allowing an FX adjustment to above 50, but the market will likely test the CBE's resolve in allowing market forces to determine the exchange rate, which could bring further upward moves,” she explained.

The report also predicts Moody's to remove its negative outlook, potentially upgrading it from Caa1 to B3.