Egypt’s economy will grow by 2.5% in the current fiscal year and 5% in the next fiscal year
There is still a lot of work to be done on the policy side
Addressing the foreign liquidity shortage has built long-term confidence in the pound
Foreigners hold less than 20% of the domestic debt and there is room for more flows
The large trade deficit and weak saving and investment are the main weaknesses in the economy
A report by HSBC said that although there is still a lot of work to be done in terms of policies, Egypt remains one of the most compelling economic stories in CEEA.
He added that this is partly reflected in the speed of recovery of the economy and its recovery from the negative consequences it faced during the past year. He also indicates that the improvement in growth rates and the adoption of cautious fiscal and monetary policies will lead to the continued reduction of the gaps.
He said that the likelihood of stability has been further enhanced through access to external financing and the re-strengthening of foreign currency assets in the banking system in general and in central bank reserves in particular.
He added, “The strong support that Egypt received from bilateral and multilateral sources and the speed of agreement to provide more support during the Corona pandemic crisis reinforces our confidence that the Egyptian economy is in a good position to face the new challenges that it may face in the future, as well as the actual and nominal revenues that Remains high, providing a buffer against the more immediate global market sentiment. ”
HSBC analysts believe that their positive stance on the Egyptian economy comes with caveats, “as we see that there are many great risks and challenges that have to be overcome.” Some of them are short-term, and we still have concerns about the large budget deficit and debt securities in Egypt, the fragility of its external account due to the large trade deficit, as well as our doubts about remittance flows, and the weak prospects for the tourism sector and foreign direct investment. ”
“These pressures add to our underlying concerns about the currency’s value,” the report said. We also have concerns that the economic recovery may be delayed due to the cancellation of the subsidy policy, and the direction of the economy towards Europe, which is one of the regions experiencing slower levels of economic recovery compared to the rest of the world.
In addition to these recurring concerns, HSBC believes that there is a host of structural obstacles that must be overcome if Egypt’s long-term potential is to be realized.
These impediments are varied, he said, but they are rooted in low levels of national savings, government dominance, and weak capital structures.
He noted that despite a host of legislation that has been introduced since late 2016, investment levels are still among the lowest anywhere in Central and Eastern Europe, the Middle East and Africa. The still low global business environment assessments underscore the challenges to productive growth. High levels of poverty and weak real wage earnings also contribute to further policy challenges.
He said that Egypt’s positive future vision is based immediately on its relative success in dealing with the health consequences of COVID-19.
He added that while the discrepancy in infection detection protocols made it difficult to compare infection rates between countries, Egypt’s data indicate much lower infection rates than peers since the beginning of the outbreak.
Although there was a second wave of the epidemic, the infection rates did not exceed the rates prevailing in the first wave. He considered that this was surprising in light of the difficulty of imposing the rules of social distancing and measures to contain the spread of the virus, but it was explained by the high percentage of young Prime Time Zone out of the total population, as only 3% of the population are Those over the age of seventy.
The bank said that this also means that Egypt is in a better position to deal with any delay in vaccinating the population, and the Minister of Health and Population announced that Egypt had secured in early February about 40 million vaccine doses, and it is expected that vaccination will start before the end of the month.
Apart from the reasons, the low infection rates enabled Egypt to ease the closure restrictions faster than any other country, and to avoid imposing a second wave of highly stringent measures, and as a result, they contracted and expanded activity levels, but were not subject to a repeat of the sudden stop that led to the disruption of activity in other markets that was Infection rates are difficult to control.
Positive growth gains momentum in the second half
The bank expected the Egyptian economy to grow 2.5% during the current fiscal year, compared to 3.6% last fiscal year, which is close to the average growth rates over the past five years.
He explained that his estimates for the growth of the Egyptian economy were lower than most expectations, and are subject to rise, but even if they are fulfilled, they will remain one of the few economies that succeeded in avoiding deflation during the entire fiscal year.
He expected growth to rise to 5% during the next fiscal year with the gradual return of activity, the expansion of the recovery and the gaining of external demand momentum.
He said: “Our expectations indicate that the relative success in managing the Corona epidemic has paved the way for a solid base from which growth is gaining its momentum, as Egypt has strong primary growth engines, led by consumption resulting from rapid demographic growth.
He pointed out that the GDP data in Egypt are late and subject to revisions, but that what is available highlights the strength of domestic demand, as household spending increased by 12% during the second quarter of the year that coincided with the first wave of Covid-19.
Preliminary data indicate that the economy returned to its positive annual growth in the third quarter of the last fiscal year, which was the least season in which the global economy contracted during Covid-19.
He expected that domestic demand will continue to support growth during 2021, partly financed by remittances from Egyptians abroad, which rose more than expected and reached record rates during the third quarter of last year, and is expected to remain strong during the fourth quarter.
Other parts of the economy lost their momentum last year, such as tourism and related matters, which were most evident, as most hotels were forced to close with tourist arrivals declining by 90% during the second and third quarters.
The low base year guarantees room for growth during the remainder of the year through 2022, as travel patterns begin to return to normal, however.
While rates will need time to return to pre-pandemic levels, the speed with which the sector overcame previous crises underscores the sector’s strong appeal.
A faster-than-expected recovery in the European Union and Britain’s economies creates incentives for external demand for exports from markets that are essential to Egypt.
Hard-earned financial flexibility
The bank said that, in conjunction with the outlook for rapid growth, it also encourages wide-ranging policies that regained weight, reduced the risks facing the economy and strengthened its ability to absorb new shocks, and made Egypt’s public finances in a better financial position when the epidemic hit it.
Although the budget deficit exceeded the government’s targets, as a percentage of GDP, the increase was modest, around 0.6% of GDP, and the savings opened the way for improving the quality of spending.
The data revealed that the largest rates of social spending targeted the poorest, as the beneficiaries of Takaful and Dignity reached 3.6 million families by the end of 2020.
The government has also expanded capital spending, as the government has set its sights on accelerating the modernization of Egypt’s infrastructure.
The bank analysts expressed their surprise at the low level of financial facilitation to face the repercussions of Corona, and the report said that revenues may achieve a surprise and rise, and despite the pressures of weak growth, the Minister of Finance continued to direct towards increasing tax revenues as a percentage of the domestic product, as he tightened his grip on financiers to pay taxes.
He pointed out that measures to confront the repercussions of Corona will have long-term effects, as temporary support for small and medium-sized companies requires companies to register, which means their transformation into the formal sector.
He stated that debt rates are high, but they are 15% less than 2017 levels, and although the repercussions of Corona are likely to raise debt rates, but it is still less than the deterioration in emerging and developed markets alike.
Tight monetary policy and reset inflation expectations
The report said that the central bank’s cautious monetary easing policy, in addition to open market operations, succeeded in reducing inflation to 5% at the beginning of this year, compared to a peak of 30% in July 2017.
He explained that this policy confirmed the central bank’s commitment to maintaining price stability, a trend that was confirmed by setting a range for inflation targets in 2017, and reducing the midpoint by 2%, so that the targets since the beginning of the year are between 5 and 9%.
The central bank continued its fiscal year caution, despite the decline in inflation, but it reduced the interest rate by only 4%, to keep the real interest in the positive range.
The bank expected that the central bank would maintain current interest rates during the current year, especially with global market fluctuations, although inflation is less than the midpoint of the target range.
Policy credibility and financing mix
In addition to addressing economic imbalances, sound policies and a commitment to stability have lent credibility to Egypt’s policy, which has allowed for an improved financing mix.
Although the government has long targeted increasing the debt term as part of managing its owed liabilities, it has struggled to achieve this, and with well targeting inflation expectations and building financial credibility, the government has succeeded in offering securities with longer maturities.
The gains came significantly last year, with the share of short-term securities in the financing mix declining to less than 20% in the last fiscal year compared to 50% for the year 2017/2020.
This shift led to an addition of one year to the average maturity of public debt, thus reducing the risk of debt rollover faced by the Ministry of Finance.
External financing also played an increasing role in the financing mix of Egypt, as it raised $ 25 billion from selling Eurobonds on global markets, including the introduction of the first green bonds last year.
Egypt approved a framework for issuing sukuk to further diversify financing instruments.
Although the demand for Egyptian debt is supported by a strong global risk appetite, it is unimaginable to obtain financing in such a large scale without reforms.
The report said that foreign ownership rates are close to the historical level in nominal terms, but they are equivalent to about 20% of the public debt stocks, which are less than the ratios in other markets, which suggests greater growth opportunities for flows.
As a percentage of GDP, foreigners hold less than half of the domestic debt in South Africa, and less than 2% in Hungary and Kazakhstan.
The government’s expectations of joining the GBMorgan emerging market index and linking via Euroclear during the second half of the year support additional inflows.
In addition, the speed with which Egypt obtained additional support from the IMF amounting to $ 8 billion last year, reflects the reforms that the state has built within the extended facilitation program.
He noted that Egypt has received extensive support from other institutions amounting to about $ 65 billion over the past four years.
He said that policymakers in Egypt have proven highly effective in managing reserves over the past year, to ensure that the foreign exchange market works smoothly, with the pound facing less fluctuations than peer currencies from emerging markets.
The most important thing is that there is no longer a shortage of foreign liquidity, which is a necessity for economic activity, and its absence undermined investor confidence before 2016, a success that contributed to building confidence in the currency system for a longer period.
Where do the risks lie?
The report said that there are more labor policies that need to be accomplished, and that there are weaknesses that must be managed.
He added that some of these risks originated from the external accounts of Egypt, as the current account deficit is expected to rise by more than 4% of the gross domestic product during the current fiscal year, and it is at least 1% higher than the last fiscal year.
This trend reflects the current account structure, which witnesses Egypt’s recording a large trade deficit equivalent to 10% of GDP, which is always offset by the service sector surplus.
During the current year, it is expected that import demand will contribute to an increase in the trade deficit, without recovering tourism revenues.
He also expected a decrease in remittances from workers abroad, in light of the pressures on the labor market in the Gulf, in which a large number of Egyptians work, and fears that the strong increase last year reflects the remittances of Egyptians to their savings to support their families who have been negatively affected by the repercussions of Corona, or the end of service reward that reflects job loss. .
The article HSBC: Egypt is one of the region’s most compelling economic stories written for Al Borsa newspaper.