Boston, MA -- (SBWire) -- 10/24/2013 --Core Views

The second half of 2013 will be a difficult period for the Egyptian economy, as ongoing concerns surrounding a potential devaluation of the pound's de facto fixed exchange rate are likely to continue undermining investment patterns. Sporadic outbursts in public unrest and ongoing 'policy drift' will undermine a more pronounced economic recovery.

Egypt will have little choice but to make more pronounced reforms to its domestic energy subsidy system. That said, we do not expect any major reforms ahead of parliamentary elections, which we expect to take place in March 2014.

The combined impact of currency devaluation and hikes to domestic energy prices will push consumer price inflation back into the double digits by the end of the year.

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Egypt's geopolitical importance will ensure that even if an IMF agreement is delayed for longer than expected, further foreign aid commitments will materialise over 2013. Western powers such as the US and EU have an interest in ensuring the North African country does not experience a more pronounced economic and political crisis. However, it will be donations from the GCC which keeps Egypt afloat this year.

We do not expect an IMF deal in 2013, as the economic rationale has waned somewhat since the influx of foreign aid and it is politically unpalatable at present.

Major Forecast Changes

Following an influx in foreign aid in July 2013, it appears as though Egypt will be spared a more pronounced balance of payments crisis this year. That said, as the aid inflows are likely to weaken the government's resolve to push ahead with necessary subsidy and tax reforms, we do not expect an IMF agreement to be signed in the near term. We are forecasting real GDP growth of 2.5% and 4.2% in FY2013/14 and FY2014/15, respectively.

Key Risks To Outlook

A failure to secure external financing (whether through the IMF or bilateral aid) raises the risks of a disorderly devaluation of the Egyptian pound.

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