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Holding together
Published in Ahram Online on 21 - 04 - 2020

After more than a month since the implementation of measures to contain the spread of the coronavirus in Egypt, the economic fallout of the crisis is beginning to sink in.
The International Monetary Fund (IMF) in its April 2020 regional outlook forecast GDP growth of only two per cent for Egypt in fiscal year 2020 and 2.8 per cent for the following year. Even so, although this is less than half the expected 5.6 per cent GDP growth targeted for the current fiscal year, Egypt's growth will still be better than its regional peers, which according to IMF forecasts will mostly be in negative territory.
The government is forecasting a 4.5 per cent growth rate for the 2020-21 fiscal year in its pre-budget statement. The estimates are based on January 2020 calculations, a Ministry of Finance statement said, adding that these projections could change when the situation is clearer.
Despite forecasts of slower growth, international credit-rating agencies are maintaining a stable outlook on Egypt. Standard and Poor's (S&P's), which has kept a stable outlook on Egypt, said this reflected its expectation that the fall in Egypt's GDP growth would be temporary and the rise in external and fiscal imbalances would remain contained.
It projects that Egypt's external liquidity will remain adequate to withstand temporary external and economic shocks and said it was maintaining its B/B long-term and short-term ratings. The agency expects Egypt's external and government debt metrics to gradually decline from 2022.
On a similar note, ratings agency Moody's has also kept Egypt's credit rating at B2 with a stable outlook. It said that ongoing fiscal and economic reforms would support a gradual but steady improvement in Egypt's fiscal metrics and raise real GDP growth.
S&P's anticipates that Egypt's external buffers, built up since 2016, will allow it to withstand a temporary external shock resulting from the Covid-19 pandemic. It expects the country's foreign-exchange reserves, including gold, to decline to about $37 billion by the end of fiscal year 2019-20 and to remain broadly stable at about this level in 2021, covering about five-to-six months of current account payments.
The Central Bank of Egypt's (CBE) Net International Reserves (NIR) lost more than $5.5 billion in March, falling to around $40 billion compared to $45.5 billion at the end of February. According to S&P's, there were portfolio outflows of $13 billion in March, estimated at nearly 50 per cent of the total foreign investment in treasury bills and bonds and resulting in a decline in the CBE's foreign-exchange reserves and the domestic banks' foreign assets.
S&P's, like most economists, expects a substantial decline in current account receipts (CARs) during the final quarter of the 2020 fiscal year and the first half of 2021. The decrease comes on the back of a Covid-19-induced shutdown of tourism, which represents about 16 per cent of CARs, since March, as well as lower merchandise exports and Suez Canal receipts following a slowdown in global trade and a drop in remittances from expatriates abroad.
At the same time, global financial market volatility has led to large capital outflows from emerging markets, including Egypt.
The government had previously forecast one per cent growth in the fourth quarter of the current fiscal year, down from four per cent. However, even that might be optimistic, said investment bank Renaissance Capital (Rencap).
“Our numbers suggest a negative GDP in the fourth quarter,” said Ahmed Hafez, head of MENA Research at Renaissance Capital during a conference call with the press this week. “Assuming the economy was growing at between three to four per cent in the third quarter, we are looking at a drop in GDP of five to six per cent in the fourth quarter,” he explained, adding that this was hardly a surprise given that tourism, which represents 2.8 per cent of GDP, came to a standstill. Other factors affecting GDP growth are the non-essential private consumption, and a drop in remittances and Suez Canal revenues. He hopes investments should continue to be on track given the lag between awards and implementation. Moreover, he pointed out that the construction sector has continued to operate.
According to Rencap research, the hit to GDP growth in the fourth quarter could be worse than that witnessed in the third quarter of 2010-11 following the 25 January Revolution, and in the first half of 2013-14 when another curfew was imposed.
Hafez does not believe the drop in oil prices is a worrying factor. From an external balance perspective, Egypt has come a long way in achieving a neutral oil trade balance. As far as the budget is concerned, the lower oil prices are favourable on the face of it, but, he said, the calculations are not straight forward given the complexity of the production costs between the government and oil companies. He is also not concerned that oil and gas companies will stop investing; if there is no new investment, production would drop by 12 per cent on an annual basis, he pointed out, so “while we might see some delays in FDIs which have been concentrated in the oil and gas sector, we will not see a major impact on that front.”
From a GDP perspective, these companies will not stop investing; if there is no new investment, production would drop 12 per cent on an annual basis, so while we might see some delays in FDIs which have been concentrated in the oil and gas sector, we will not see a major impact on that front
According to Rencap, Egypt seems to have weathered the worst of the capital flight coming with the immediate impact of Covid-19. According to data published by the stock exchange this week, foreign investors sold some $456 million worth of stocks and bonds in the first two weeks of April, down from $2.36 billion in the last two weeks of March, an encouraging sign, it said.
Based on CBE data, there are also fewer treasury bills maturing in April, at LE120 billion as opposed to LE171 billion in March, suggesting lower outflows.
But the fallout from the crisis will still hit households hard, particularly among the poor, said a number of economists in a blog published by the International Food Policy Research Institute (IFPRE) entitled the “Economic Impact of Covid-19 on Tourism and Remittances: Insights from Egypt”.
Lower tourist spending will affect not only hotels, restaurants, taxi enterprises, and tourist guides, but also food processing and agriculture, the economists said. In a less-pessimistic scenario, household incomes are estimated to decline by LE153, or $9.7, and in a more-pessimistic scenario they are likely to fall by LE180, or $11.40, per person per month for each month the crisis continues.
The expected reduction in tourism will have the strongest effect on households, making up more than half the economic impact for all household types, the blog said.
While all households will be hurt by lower tourist expenditures, it said, poor households, especially those in rural areas, will suffer the most from lower remittances. Poor rural households are estimated to lose between 11.5 and 14.4 per cent of their average income, while poor urban households will see their incomes decline somewhat less.
On the positive side, the economists pointed out that some sectors might benefit, such as information and communications technologies, food delivery, or the health-related goods and services sectors.
“Unless governments around the world take decisive action, the case of Egypt suggests that poverty is likely to increase in countries where tourism and remittances play a large role. It is also a strong reminder of the interconnectedness of the world and the importance of global cooperation to end this crisis and to be better prepared for the future,” they said.
*A version of this article appears in print in the 23 April, 2020 edition of Al-Ahram Weekly

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