Economy feels the impact of reform effort
Egypt was the only regional economy to have seen its credit ratings remain stable during the Covid-19 pandemic. This underscores the impact that a series of economic reforms are having.
Having overseen an extensive series of economic reforms in recent years, Egypt was one of the fastest growing emerging markets before the Covid-19 outbreak. This performance reflects the positive impact of a series of reforms undertaken by the government that have won it the plaudits of the big international institutions. The World Bank has attested to the success of Egypt’s macroeconomic stabilisation programme in supporting growth, generating a solid primary budget surplus, reducing the debt-to-GDP ratio, and replenishing reserves.
The overall macro-economic picture has been positive in spite of the serious challenges that Egypt has endured under the Covid-19 pandemic. The country’s recent economic growth record has been impressive, increasing to 5.6% in FY2018/19 (up from 5.3% the previous year), thanks to strong performances in sectors such as wholesale and retail trade, agriculture and manufacturing. By way of comparison, this compares with 2.3% average GDP growth seen during 2011-2014.
A consequence of Egypt’s reform efforts has been its ability to tap new sources of funding support from the IMF. In June 2020, the Fund finalised the previously agreed 12-month stand-by agreement that provides Egypt access to $5.2bn. This followed the $2.8bn in emergency funding that Egypt secured on May 12 as part of the IMF’s rapid financing instrument programme.
In August 2020, US investment bank JP Morgan highlighted the fact that Egypt is the only country in the Middle East and Africa that successfully concluded the annual cycle of credit rating review while retaining the confidence of all three global rating institutions, Standard & Poor’s, Moody’s and Fitch.
“Sovereign evaluation and credit rating have been stabilised with a stable outlook for the Egyptian economy,” the Ministry of Finance said in a statement in August. “It is an important achievement for Egypt, and a strong indication of the success of the economic reform programme, which won the trust of credit rating institutions and the international investment community.”
The combination of the new IMF deal and general improvement in global risk appetite has triggered a return of foreign capital to Egypt, notes consultancy Capital Economics. Foreign holdings of government debt rose by $4bn over the course of June and first two weeks of July 2020.
Investors are attracted by the country’s large and diversified economy, a large domestic funding base and projected foreign exchange reserves that Moody’s says are sufficient to cover maturing external liabilities over the next three years.
Comparatively low levels of foreign currency denominated and external government debt also support Egypt’s credit profile, in addition to a sizable domestic market that provides a funding base for the government, notes the ratings agency — citing evidence that despite high exposure, Egypt’s credit metrics are broadly resilient to financing shocks, in part due to policy credibility and effectiveness.
According to Moody’s, the national economic reforms that were undertaken between 2016 and 2019 helped create the fiscal space and structural flexibility to counter the negative impact of the coronavirus shock on the economy.
Moody’s has hinted that its rating could be upgraded if, over the medium term, there’s a marked improvement in debt affordability and reduction in gross financing needs, resulting from a lengthening track record of credible and effective fiscal, economic and debt management and a sustained improvement in the labour market and in non-hydrocarbon exports.
“This credit outlook reflects the resilience of Egypt’s credit profile against financing shocks despite high exposure, a positive for its credit profile. This is driven by its effective and credible government policies,” said Elisa Parisi-Capone, a senior analyst at Moody’s. “A lengthening track record of credible and effective fiscal, economic and debt management would also reflect positively on Egypt’s credit profile.”
“The Egyptian economy is currently very diverse, offering unique investment opportunities in a growing number of fields, ranging between manufacturing, the service industry, tourism, agriculture, healthcare, energy, and more,” says Hisham Ezz Al-Arab, chairman and managing director of Commercial International Bank. “Additionally, the country’s strategic location and abundant gas reserves, plus its youthful and growing population, make up a strategic market for any company to penetrate.”
The country is rolling out its sustainable development strategy, ‘Egypt’s Vision 2030’, a road map that aims at maximising the benefit from the nation’s elements and competitive advantages.
“The strategy adopts the concept of sustainable development as a general framework aiming to improve the quality of life in the present time, without prejudice to the rights of future generations to live a better life,” says Mr Ezz Al‑Arab.
The government is actively supporting the economy, both through its reform efforts and through various spending initiatives. Much of this is inspired by the need to cope with the Covid-19 situation. In July, it launched a new initiative to stimulate consumption and encourage local products. This includes granting ration card holders an additional 10% discount, with a total value of E£12bn, secured from the current fiscal year 2020/2021 budget.
The initiative also provides for the possibility of online purchase and instalments with reduced interest rates. The aim is to motivate investors to expand their production activities, inject new funding and provide job opportunities, in a way that contributes to improving economic performance.
According to a CBE report issued in July of this year, Egypt’s pillars of growth are becoming more diversified and more sustainable, mainly due to the positive performance of investment and net exports rather than consumption, which has been the main driver of growth for many years.
On the sectoral side, growth has been driven by manufacturing, natural gas, tourism, construction, and telecommunications as the main drivers of growth, highlighting the shift to a more sustainable sector structure. Net export performance contributed positively to growth by 2.3 percentage points in FY18/19, compared with a contribution of 1.9% during FY17/18.
The fiscal position has also strengthened. According to the CBE report, the primary surplus has reached E£51.6bn — 0.9% of GDP during the July-May of FY2019/20, compared with a primary surplus of E£58.2bn during the same period last year. Total revenues reached E£787bn, an increase of 2.2% compared with the same period of last year.
Inflation has been contained, falling to a nine-month low of 3.4% in August 2020. The annual average inflation rate reduced to 5.7% during FY19/20, compared with 13.9% during the previous year.
The balance of payments also showed a surplus of $400m in the first half of the FY2019/2020 fiscal year, compared with a deficit of $1.8bn during the same period last year. This comes in light of a subdued current deficit which declined by $700m to reach $4.6bn during the period. The improvement reflects an 11.4% increase in non-oil merchandise exports due to escalating exports of gold, radio and TV transmitters and receivers, drugs, vaccines, pharmaceuticals, and organic and inorganic compounds, which overcame the decline in oil exports to $5bn due to the drop in the exports of crude oil and oil products, despite the increase in the exports of natural gas. Suez Canal receipts increased by 3.5% to reach $3bn. Remittances rose by $ 1.7bn (13.5% up) to reach $3.6bn.
There is another source of encouragement for Egyptian policymakers, in light of international oil companies’ success in new natural gas discoveries in Egypt’s offshore territories. At the end of July 2020, oil companies ENI, BP and Total successfully tested a new natural gas discovery in Egypt’s shallow waters. According to the developers, once in production, the well is estimated to deliver up to 100 million standard cubic feet of gas.
The government is, meanwhile, strongly focused on persevering with its economic reform programme. According to the IMF, in order to enhance the role of the private sector, the government will publish an updated report on the financial situation of state-owned enterprises and on economic authorities that undertake investments on behalf of the government. The government also aims to submit draft amendments to the previously submitted Egyptian Competition Law by the end of December 2020 to level the playing field for private and public agents for procurement purposes. A new customs law by March 2021 will aim to reduce non-tariff trade barriers and facilitate trade by streamlining customs and valuation procedures.
In August, Finance Minister Mohamed Maait affirmed that economic reforms were the key to the country’s resilience in the face of internal and external shocks, which have enabled it to quickly deal with the challenges and repercussions that were imposed by the pandemic. He said that the government pursued a proactive policy in dealing with the pandemic, citing a financial package in support of the Egyptian economy that amounts to 2% of GDP to support various sectors.
Government support measures have been substantial, both in scale and impact. In late March, President Abdel-Fattah El-Sissi announced a E£100bn economic and fiscal stimulus package. By the end of May, E£63bn of this had been disbursed, of which E£50bn was earmarked for the tourism industry. Under the government’s “social solidarity” scheme, E£27.6bn will be disbursed to 2.4 million families, totalling around 10 million citizens.
Another £20bn will be channelled through the CBE for the direct purchase of shares in the stock exchange. The president also announced a 14% annual raise for pensioners, set to take effect in fiscal 2021 (year ending June 2021), and a two-year freeze on the implementation of a tax on agricultural land. The plan also includes tax extensions for businesses and support for the tourism and aviation industries.
All this leaves Egypt in strong fettle to emerge from the crisis as it went into it — as the region’s best-placed emerging market.