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What Egypt needs to do to keep the money flowing to its economy ahead of March's election

  • Egypt is coasting on a wave of foreign investment and a $12 billion IMF funding package.
  • Despite domestic tensions, investors are taking an optimistic view of the Mideast's most populous nation.

Egypt is still grappling with domestic tensions, and has the uncertainty of a presidential election on the horizon.

Investors, however, appear unfazed, and are betting that a host of economic reforms and an International Monetary Fund (IMF) funding program will pay off. Foreign investment into Egypt's stock market recently hit the highest level since 2010, and direct investment is also on the rise.

Egypt, the most populous country in the Mideast, is riding a wave of optimism—even in spite of domestic unrest marked by terrorism and flare-ups in its volatile Sinai region.

Still, just two months ago, ratings agency S&P Global revised upward the country's outlook to stable, effectively affirming its ability to continue growth. A Reuters poll in July showed economists forecasting economic growth above 4 percent in 2018 and 2019, which should help Egypt whittle down a yawning public spending gap that hovers around 8 percent of its domestic growth.

"Egypt is a country with a still very large budget deficit," Jacob Kirkegaard, a senior fellow with the Peterson Institute for International Economics (PIIE) told CNBC in an interview. "Despite progress, [the deficit] still exists," he said

However, much of that debt is held domestically, meaning Egypt is unlikely to find itself at the mercy of foreign investors demanding higher returns on its debt. Separately, the country is awash in a $12 billion IMF funding program that should help further stabilize the economy.

Amid surging price pressures and slow progress toward reform, the IMF noted the central bank of Egypt is "committed" to reigning in the country's double-digit inflation.

Egyptian President Abdel Fattah al-Sisi.
Philippe Wojazer | Reuters
Egyptian President Abdel Fattah al-Sisi.

Egypt is less than two months removed from a deadly mosque bombing in the Sinai that killed more than 300. Still, market professionals say the populous North African nation offers significant potential, with some particularly attractive sectors.

"Long-term, Egypt needs better trade relationships and a more stable macro environment," Kirkegaard said, citing the need for the country to boost its links with the vast European Union market. He pointed to manufacturing, tourism and logistics as sectors that could make Egypt more competitive and boost foreign investment throughout the country.

According to Michael Daoud-Irsaneous, senior vice president of CEEMEA Sales at Auerbach Grayson, investors should also watch consumer consumption this year as inflation normalizes.

"In 2017, investors basically positioned themselves in the banks as well as direct plays on weaker currency," he said. "In 2018, the focus is shifting more towards consumer names that were under pricing pressure last year because of inflation, but now inflation is coming off."

Longer-term, foreign direct investment and portfolio investment have jumped significantly after the currency was unpegged from the dollar in 2016. In addition, significant natural gas finds are expecte to be tapped in 2018—a development that led Egypt to announce it would cease liquefied natgas imports once it starts tapping a massive natural gas repository off the country's coast.

"The Egyptian pound has also been stable since the large devaluation in November 2016, said Anthony Simond, investment manager at Aberdeen Standard Investments told CNBC, adding the currency was likely to appreciate in the near-term.

The country's presidential election, scheduled to be held in late March, presents the biggest stumbling block to investors. Incumbent Abdel Fattah el-Sisi is widely presumed to be seeking a second term, but told CNBC in an interview last year that he would only run if the public wanted him to do so.

"While we expect the incumbent President Sisi to extend his term in office, there could be some security concerns in the run up to the election, while also the government may loosen its policy in order to boost its popularity," Simond added.