Egypt is expected to keep booming as dust settles on its presidential election

  • President Abdul Fattah al-Sisi won an overwhelming election victory that was marred by low turnout and negligible opposition, but investors are enamored with Egypt's recovery.
  • The country's double-digit inflation has been on the wane, and the government is implementing needed reforms.
  • Egypt "is beginning to reap the rewards of a painful currency devaluation and tighter fiscal policy," a market watcher told CNBC.
Egyptian President Abdel Fattah al-Sisi.
Philippe Wojazer | Reuters
Egyptian President Abdel Fattah al-Sisi.

Egypt's presidential election has been faulted for having placed a rubber stamp on a new term for Abdul Fattah al-Sisi, who won in a landslide with little opposition. Nevertheless, investors are still enthusiastic buyers of the country's recovery story.

With a new infusion of IMF funding in Egypt's coffers, and another $3 billion being lined up by the Islamic Development Bank (IDB), analysts say that the country's economy is showing real signs of stability — shrugging off the effects of civil strife that frequently rears its head, and previously runaway inflation.

Investors are giving the country a second look, Egypt is primed to offer solid returns, and see an uptick in foreign direct investment despite fears of surging global interest rates.

"The IMF program has helped restore investor confidence and has allowed Egypt to make major adjustments to its economic imbalance," Denise Simon, co-head of emerging market debt with Lazard Asset Management, told CNBC recently.

In spite of lingering problems, Egypt "is beginning to reap the rewards of a painful currency devaluation and tighter fiscal policy."

A gambit made by the central bank in 2016 to lift currency controls appears to have paid off. Price pressures, while still high, have come down from a stratospheric 33 percent last July to under 12 percent, its lowest in two years.

"The risk is that policy missteps could trigger capital flight, lead to a depreciation of the Egyptian pound and a corresponding increase in import inflation, but in our view, this risk remains limited at the moment," said Ed al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle.

Cargo ships navigate in the Suez Canal between Port Said and Ismailia, about 100 kms northeast of Cairo.
Cris Bouroncle | AFP | Getty Images
Cargo ships navigate in the Suez Canal between Port Said and Ismailia, about 100 kms northeast of Cairo.

FX boom

Foreign investment has been steadily showing signs of picking up, primarily due to the decline of the Egyptian pound and al-Sisi's government working to improve the country's business climate.

As of February of this year, Egypt's foreign currency reserves topped a record $42.5 billion. In February, Egypt also issued $4 billion of dollar-denominated international bonds, with was heavily oversubscribed.

The spillover effects of slicing the value of the pound in 2016 was enough of an economic shot to spur the economy without sending inflation on a new leg higher. Some analysts think prices peaked last year, and could fall to single digits by 2019.

Currently, two of the three major credit rating agencies have Egypt ranked lower than some emerging market peers, yet the cost of insuring its debt (against default) is significantly lower.

So what's driving investor confidence in a country that is prone to not only domestic, but also regional unrest? Analysts point to the steadily improving macro environment, coupled with the real potential for much-needed mega-projects such as infrastructure.

"We have a positive view on Egypt given improved geopolitical support, its healthy macroeconomic backdrop, and positive investor sentiment," Asha Mehta, lead portfolio manager for Acadian Asset Management's Frontier Emerging Markets arm.

Amid improved political stability, a recovery in income after inflation and falling price pressures, Acadian is "finding opportunity in the consumer sectors." Additionally, significant FDI into capital intensive projects create opportunity in the transportation and real estate sectors, Mehta told CNBC.

Finally, as interest rates fall and policy stability takes hold, the banking sector also looks appealing to investment, the analyst said.

Meanwhile, the IDB's $3 billion investment in the country is a proposed three-year deal that will bring multiple projects around the country to fruition, and there is an initiative underway of a $500 million-dollar fund to support small and medium-sized projects as well.

From electric trains to a proposed high-speed railway linking the Red Sea to the Mediterranean, capital is being directed at improving the country's domestic circumstances.

Market participants seem willing to worry less and take risks, which have appeared to ease a bit so far in 2018. Going forward, Lazard's Simon explained a key task for policy makers will be to execute policies that support sustainable economic growth and investment.

"I continue to see opportunities in both dollar-denominated sovereign bonds and local T-bills," Simon explained. " Yields on sovereign bonds are in the 6-8 percent range, and I see room for significant spread tightening as Egypt benefits from IMF support," and an ambitious reform agenda.

Egypt is a consensus favorite relative to its peers, given the stabilizing political and economic environment. "Middle Eastern markets have limited upside given current valuations and limited upcoming catalysts, aside from Saudi Arabia," said Acadian's Mehta.