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Pharos says budget deficit declines and primary surplus improves

Pharos says budget deficit declines and primary surplus improves

ArabFinance: Pharos Holding said in its report that the overall budget deficit as a percentage of GDP is expected to decrease to 8.4% in FY2018/19 from 9.8% in FY2017/18. This expected improvement in the overall budget deficit will come from two main sources:

  1. The expected improvement in budget revenues by 21.6% YoY to be EGP989 billion in FY2018/19 up from EGP813 billion in FY2017/18. The main reason behind the expected improvement in revenues is the expected tax revenue increase by 23.4% YoY to be EGP770 billion in FY2018/19 up from EGP624 billion in FY2017/18.
  2. The expected reduction in expenditure growth from 19.6% in FY2017/18 to 15.4% in FY2018/19 is backed by the subsidy cut and reallocating the expenditures toward infrastructure investments and social programs for lower income population. The expenditures is estimated to be EGP1.4 trillion in FY2018/19 up from EGP 1.2 trillion in FY2017/18. However, the cost of debt interests represent 38% of the expenditure with EGP541 billion.

The government’s expectations are more optimistic than Pharos estimates of budget deficit 8.9%, however it is pessimistic than the IMF estimates for budget deficit of 7.4% in FY2018/19.

The primary surplus as a percentage of GDP in FY2018/19 is expected to appear for the first time in 8 years to be 2% and it is almost the same for the IMF estimate of 2.1%. However, it is higher than Pharos estimates of 1.7%. The main reason behind the deviation from our estimates and the government’s ones is the assumptions they used in their valuation mainly:

  1. The average price of Brent oil is assumed to be USD67/bbl, while our estimate is USD69/bbl
  2. The average exchange rate assumed between the USD and EGP in the pre-budget is EGP17.25/USD, while our estimate is EGP18.63/USD and the IMF estimate is EGP18.7/USD
  3. The Wheat price used in the pre-budget by the government is the average of the American wheat at USD 184.2/ton, while the wheat price used in our estimates in the average international price of wheat at USD 192.5/ton
  4. The average interest rate assumed on government securities is 14.7%, while our estimate is 14.75%

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