Egypt has been through quite a lot lately. First it witnessed mass protests as rationing of staples led to a lot of anguish from its citizens. Then in April, it fell victim to suicide bombings targeted towards religious minorities.
These and other developments come at a time when Egypt is economically vulnerable, having come off of a devaluation of the Egyptian pound in November last year, which was partly responsible for a surge in inflation which, at its peak, stood at 31.5% in April this year.
The currency had to be devalued, in addition to increases in taxes and a reduction in subsidies, in order for the country to secure a much needed $12 billion loan from the International Monetary Fund.
Being pushed into the corner
In order to reduce its budget deficit, the Egyptian government recently hiked fuel prices by up to 50% for the second time since November 2016. According to Deputy Finance Minister Ahmed Kojak, this increase is expected to add 3 to 4.5 percentage points to inflation.
Further, electricity prices will be raised by up to 42% for households starting in August. However, Electricity Minister Mohamed Shaker was also reported as saying that the government had decided to provide energy subsidies for three more years than originally expected.
These measures — part of the three-year reform program — have been taking a toll on the populace, half of which lives close to or below the poverty line.
Short-term pain, long term-gain?
Egypt is not alone in the reform boat. Argentina is in a similar situation. President Mauricio Macri has devalued the Argentine peso and reduced subsidies in order to get the economy back on track. In both cases, inflation has surged and the governments have experienced a backlash from the public.
However, purely from an investment perspective, these reform measures are confidence inducing. Equities tracking both of these countries have posted gains this year.
But there’s an important difference. While ETFs tracking Argentina have led frontier markets this year with high double-digit gains, the returns of the Egyptian ETF is in low single digits.
Apart from stocks, some recent monetary policy decisions have major implications for the country’s bonds as well. Let’s first look at these decisions in the next article.
