| Kippreport.com

Egypt growth may halve, budget gap, inflation to rise

February 10, 2011 1:04 by Reuters

BUDGET GAP UP

Facing public anger and a presidential election in September, the government is likely to keep spending high. Lower taxes, higher subsidies and pressures to give more money to unemployed are poised to undermine the fiscal health.

“We have already seen a 15 percent rise in salaries and we will probably see more government expenditure and more emphasis on wealth distribution within Egypt (taking) from the more privileged in the society and giving to the poor,” said Farouk Soussa, Middle East chief economist for Citi in Dubai. As a result, the government budget gap is likely to balloon towards 10 percent of GDP this year, BNP Paribas estimates, above the government’s 2010/11 guidance of 7.9 percent.

Moreover, inflation that is running at around an annual 10 percent is seen creeping higher on the back of loose fiscal policy and the weak pound currency.

“Our analysis shows that a 1 percent depreciation in the Egyptian pound versus a 50:50 euro/dollar basket adds approximately 0.3-0.4 percentage points to headline inflation,” said Dina Ahmad, CEEMEA strategist at BNP Paribas in London.

“Pass-through is therefore quite substantial and would need to be addressed by the central bank either defending the currency or hiking rates,” she said.

RATE HIKE POSSIBLE

The pound retreated 2.4 percent against the dollar since the beginning of the protests, that claimed some 300 lives so far. It erased part of its losses on Tuesday, following the central bank’s intervention, and was quoted at 5.8800 to the dollar as of 1100 GMT on Wednesday.

Analysts said some $36 billion in central bank reserves at the end of December gave it enough fire power to face imminent capital outflows, but that longer term political instability and the risk of a run on local banks could push the pound much lower, paving the way for capital controls.

It also had an estimated $7 billion to $21 billion of additional assets with commercial banks, its so-called unofficial reserves.

“Over the short term, we expect the Egyptian pound to fall by 20 percent,” said John Sfakianakis, chief economist at Banque Saudi Fransi.

Non-deliverable currency forwards implied on Wednesday that the pound would soften to 6.600/900 to the dollar over the next 12 months.

To stave off inflation, the central bank could also opt to hike interest rates aggressively ahead of its planned policy meeting on March 10 to counter capital flight.

“We believe the central bank will hike rates by 100 basis points in an emergency meeting this month as inflation is likely to surge on the back of a weaker pound,” Ahmad said.

(By Martin Dokoupil. Editing by Ron Askew)

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Tags: Egypt, Egypt crisis, Egypt currency, Egypt economy, Egypt inflation, Egypt outflows, Egypt protests, egypt tourism, egyptian banks, Egyptian currency, Egyptian economy, Egyptian pound, Egyptian protests, egyptian tourism