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Keeping a tab on numbers
Published in Ahram Online on 21 - 01 - 2020

To the delight of Egyptians travelling abroad, the Egyptian pound has lately been rallying steadily against the US dollar and other hard currencies, making it less expensive to take a foreign trip.
The rally, which began early last year, has continued steadily. The pound appreciated by more than 11 per cent against the dollar last year, making it the best performing emerging markets currency. The rally continued into the new year, and the past few weeks saw the dollar lose around 1.5 per cent to the pound, trading this week at around LE15.85 per dollar.
Capital Economics, a London-based economic research consultancy, attributed this to a marked improvement in Egypt's external position since the devaluation of the pound in 2016. The current account deficit has narrowed from a peak of 6.6 per cent of GDP prior to the devaluation to around 2.5 per cent, it said.
The rally was also attributed to a pick-up in foreign capital inflows into the bond market, it added. Last week saw hard currency inflows of more than $1.5 billion into Egypt's debt instruments.
Unlike the travelers, however, Capital Economics was not too happy about the rally. “We fear that the pound is becoming overvalued,” it warned. “The deterioration in external competitiveness has already started to weigh on Egypt's non-hydrocarbon exports.”
That being the case, it said the Central Bank of Egypt (CBE) might decide to push back against the upward pressure on the pound. It said it doubted that the pound would hold on to its gains and expected it to fall to LE17 per dollar by year-end.
The value of the pound was not the only rate observers were on the lookout for this week, as interest rates were also on their list. The CBE's Monetary Policy Committee (MPC) on 16 January decided to keep the bank's overnight deposit rate, overnight lending rate, and rate of main operations unchanged at 12.25 per cent, 13.25 per cent, and 12.75 per cent, respectively.
The discount rate was also kept unchanged at 12.75 per cent. Analysts believe this was a temporary break from the monetary easing that began last year. The CBE cut rates by a total of 450 basis points in 2019.
Allen Sandeep, director of research at Naeem Brokerage, an investment firm, was not surprised by the MPC's decision, as it had penciled in a mere 50 bps cut. Nonetheless, Sandeep told Al-Ahram Weekly that the MPC's decision reinforced its view that “the CBE continues to walk the prudent path, trying to strike a sustainable balance between containing inflation and loosening the monetary strings.”
Nonetheless, Sandeep foresees cuts of 200 basis points for the rest of 2020, 100 in the first half and a similar cut in the second half.
Annual headline inflation came in at 7.1 per cent in December 2019, compared to 3.6 per cent in November 2019. According to a CBE press release, this was in line with expectations, reflecting the “strong unfavourable base effect stemming from the reversal of transitory shocks to the prices of fresh vegetables in the previous year.”
Capital Economics doubted that the inflation would breach the CBE target of nine per cent plus or minus three per cent for inflation on a sustained basis. It said the “previous inflationary effects of fiscal policy, including subsidy cuts and large public-sector wage increases, are unlikely to return” and added that “the tight monetary policy stance in recent years will help to anchor inflation expectations and thus actual inflation.”
Monday brought the announcement of further economic figures. GDP should increase to 5.8 to 5.9 per cent by the end of the current fiscal year instead of the previously targeted 5.6 per cent, Finance Minister Mohamed Maait told a press conference.
Moreover, Egypt had registered a primary budget surplus of 0.5 per cent of GDP, amounting to around LE30 billion, during the first half of the current fiscal year, he said.
The government aims to reduce its primary deficit to two per cent of GDP for the whole of the 2019-20 fiscal year. A primary budget surplus is when revenues are greater than spending, excluding debt interest payments. This would help Egypt to lower its total debt to a lower-than-expected 83 per cent of GDP by the end of the current fiscal year in June, instead of a previous target of 89 per cent.
The improvement in the primary surplus was helped by reductions in spending on fuel subsidies. The oil ministry expects fuel-subsidy spending will fall to LE30 billion in 2019-20 compared to the LE52 billion originally forecast, Deputy Finance Minister Ahmed Kouchouk said at the press conference.
The optimistic figures were also reflected in international reports. The UN's World Economic Situation and Prospects 2020 Report said that Egypt was enjoying relatively strong growth, projected at 5.8 per cent in 2020, “owing to a robust recovery of domestic demand and easing balance-of-payments constraints.”
The UN Report said that fiscal consolidation had continued in most parts of Africa and that in 2019 the aggregate fiscal deficit was estimated to have declined moderately due to expenditure cuts, especially in the oil-importing countries.
In Egypt, Maait said that the budget deficit had risen to 3.8 per cent of GDP in the first six months of fiscal year 2019-2020 compared to 3.6 per cent a year earlier. He attributed this in part to early interest payments on debt maturing in April.
But the UN report lamented the fact that several African countries, including Egypt, have continued to issue Eurobonds. Enterprise, an online news outlet, reported that the government was putting on hold the issuance of dollar-denominated Eurobonds for the remainder of the current fiscal year and would instead rely on varied debt instruments during the coming period, including green bonds and sukuks.
Sandeep of Naeem Brokerage told the Weekly he expected the government to rely increasingly on domestic debt to cover its budget deficit. He said that contrary to Eurobond yields, local treasury yields had declined by roughly 4.5 per cent in 2019 and were expected to decline further by two percentage points in 2020.
Hence, he said, the government could “proportionally tap more domestic debt than foreign.”
According to Sandeep, the government's total funding gap for the current fiscal year is about LE445 billion (approximately $28 billion), the bulk of which originates from interest payments which total some LE569 billion (approximately $35 billion), or around 35 per cent of total government expenses.
Egypt issued $2 billion worth of dollar-denominated Eurobonds in November. The government had said in September that it planned to issue between US$3 and $7 billion worth of international bonds in the current fiscal year.

*A version of this article appears in print in the 23 January, 2020 edition of Al-Ahram Weekly.

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