Emerging

Continued improvement in fiscal performance

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Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
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9
EGYPT  
CONTINUED IMPROVEMENT IN FISCAL PERFORMANCE  
The Egyptian economy proved to be resilient last year. Economic growth remained positive thanks to fiscal support,  
and the main macroeconomic metrics did not deteriorate significantly thanks notably to international support. The  
good fiscal performance was noteworthy, and will help maintain the attractiveness of Egyptian debt. This said, it  
would be wise to remain cautious. On the one hand, the rate of vaccination is slow and the pandemic is still active;  
on the other hand, the external accounts remain vulnerable, and the improvement in the external energy balance  
seen in 2020 may not continue in the short term.  
ECONOMIC ACTIVITY PROVES RESILIENT  
FORECASTS  
Over the past year, the economic consequences of the pandemic have  
been contained and restrictive measures have been relatively limited.  
2
019  
2020e  
2021e  
2022e  
According to official data, the Covid-19 mortality rate has been fairly  
low compared to the rest of the region, but the country is currently  
seeing a second wave of cases, which is lasting longer than the first  
wave and proving harder to curb. For the time being, the vaccination  
campaignhasbeenlimited. Sometwomilliondosesofvaccinehavebeen  
received (some given by China and some from the Covax programme)  
and a total of 8 million is expected by the end of May. This remains  
low given a total population of 100 million, roughly half of whom are  
aged over 24. Egypt should be in a position to manufacture vaccines  
domestically within the next few months. Given these conditions, the  
health situation remains a significant source of uncertainty that could  
continue to weigh on the Egyptian economy.  
Real GDP growth (%)  
5.6  
13.4  
-8.0  
84  
3.8  
5.6  
-8.0  
90  
3.1  
4.7  
-7.2  
94  
5.3  
6.8  
-7.0  
93  
Inflation (CPI, year average, %)  
Central. Gov. balance / GDP (%)  
Central. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
-3.6  
36  
-3.1  
34  
-3.9  
34  
-2.9  
33  
Forex reserves (USD bn)  
45  
38  
42  
43  
Forex reserves, in months of imports  
8.0  
6.1  
6.9  
7.5  
(
1): Fiscal years from July 1st of year n to June 30th of year n+1  
e: ESTIMATES & FORECASTS  
Over the first three quarters of 2020, real GDP growth was positive, at  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
1
.3% y/y on average, thanks mainly to domestic consumption, which  
benefited from public spending support. From a sector point of view,  
the main areas that drove growth were, unsurprisingly, construction,  
real estate and retail. These sectors benefited firstly from the  
continuation of major infrastructure and urban development projects  
and secondly from the government redistribution of purchasing power  
to households. These same elements should help growth remain  
positive throughout the fiscal year 2020/21, at 3.1%, although this will  
be lower than the 3.8% reported for 2019/20, due mainly to the fall in  
tourist frequentation.  
GOVERNMENT BUDGET BALANCE (% OF GDP)  
4
2
0
2
Budget balance  
Primary budget balance  
Debt service (in % of total budget revenues, RHS)  
60  
5
0
-
40  
Although uncertainty remains high, we expect a significant rebound  
in growth, to 5.3%, in 2021/22. In addition to the traditional driving  
forces of the construction sector and consumer spending, three factors  
are likely to support this scenario: 1/ a draft budget that will boost  
domestic demand, whilst placing the emphasis on structural spending;  
-4  
3
0
-
-
6
8
20  
-
10  
-12  
14  
1
0
0
2
/ an upturn in gas production thanks to renewed growth in Asia, which  
is likely to underpin liquefied natural gas (LNG) prices; and 3/ a very  
gradual recovery in tourism.  
-
THE GRADUAL IMPROVEMENT OF PUBLIC FINANCES  
LOOKS SET TO CONTINUE  
CHART 1  
SOURCE: MINISTRY OF FINANCE, BNP PARIBAS  
in interest rates that began in 2018-19. After a peak of 11.4% in 2019,  
the apparent interest rate on total central government debt was 10.9%  
in 2019-20.  
In general terms, the increase in receipts will allow a continued  
improvement in the public finances in 2020/21, despite the cost  
of measures to support the economy. Over the first half of 2020/21,  
the fiscal performance improved, with receipts up more than 16%  
The situation of public finance should continue to improve even if debt  
service remains a strong constraint. Despite a challenging economic  
environment, the budget deficit was more or less stable in 2019/20, at  
8
% of GDP. Over the past year, fiscal policy has focused on supporting  
consumer purchasing power, particularly for civil servants and the  
poorest groups in society, and increasing health spending. Moreover  
debt service saw a slight dip as a consequence of the downward cycle  
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Eco Emerging // 2 quarter 2021  
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on the same period in the previous year (thanks in particular to an  
exceptional tax on the highest incomes), whilst spending increased  
by only 9.6%. This trend continued during Q3 2020/21 according to  
the ministry of finance. As a result, the government is again likely to  
generate a primary surplus (equivalent to around 1.6% of GDP) and  
the budget deficit will be reduced to 7.2% of GDP. However, while debt  
servicing costs are falling in value terms, they remain very high as  
a percentage of government revenue (48% in 2019/20), limiting fiscal  
flexibility. Although this ratio will also continue to fall (42% forecast for  
CENTRAL BANK FOREIGN EXCHANGE RESERVES (USD BN)  
6
5
4
3
2
1
0
0
0
0
0
0
0
9
8
7
6
5
4
3
2
1
0
Official reserves  
Tier 2 reserves  
Official reserves in months of  
imports of goods and services (RHS)  
2
021/22), it will remain high over the medium term. The pace of falls in  
interest rates is likely to slow, whilst the IMF’s concessional financing  
will make up a smaller share of the total from 2021/22 onwards.  
Meanwhile, growth in revenue is likely to remain modest over the  
medium term. According to the IMF, revenue will reach 22% of GDP in  
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024/25, from 19% in 2018/19. Overall, therefore, debt servicing costs  
will still represent around one-third of revenue over the medium term.  
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011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
The budget for 2021/22 is currently in its discussion and approval  
phase. The government’s budget target (a deficit equal to 6.6% of GDP)  
is tightly linked to an economic recovery, and is currently suffering from  
the lack of any clearly identified new sources of revenue. Two factors  
could get in the way of the planned deficit reduction: the increase in  
the overall wage bill and the end of the exceptional tax on income. We  
expect a deficit of 7% of GDP in 2021/22.  
CHART 2  
SOURCE: CBE, BNP PARIBAS  
Government debt will remain high over the medium term, given the  
persistent budget deficit and real interest rates that have moved back  
THE IMPROVEMENT IN THE ENERGY BALANCE MAY PROVE  
into positive territory since 2020. We expect it to peak at 94% of GDP by TEMPORARY  
the end of the current fiscal year, before gradually falling back to 89%  
The energy balance improved significantly in 2020, under the combined  
of GDP by 2023/24.  
effect of a fall in domestic demand and an increase in demand from  
Asia at the end of the year. In the short term, the trend in the energy  
balance remains fairly uncertain and the surplus seen in 2020 might  
not be repeated. In the domestic market, demand for oil products (both  
crude and refined) has been falling steadily over the past five years,  
due particularly to cuts in subsidies. In 2020, demand fell by around  
CONTINUED EXTERNAL VULNERABILITY  
Although the public finances have continued to improve despite  
difficult economic circumstances, external accounts remain a source  
of vulnerability. In 2020, the collapse in tourism and the increased  
short-term volatility of international capital markets hit the country’s  
foreign currency liquidity. The country’s external liquidity was stable  
thanks to international financial support, the high levels of remittances  
from Egyptians abroad and a fall in imports. The central bank’s foreign  
currency reserves stood at USD 40.3 billion in March 2021 (from  
USD 45 billion a year earlier), to which we can add USD 8.6 billion in  
Tier II currency reserves, whilst the net external position of commercial  
banks had returned to its pre-crisis level of USD7 billion. State-owned  
banks, which make up half of total bank assets, play an active role in  
the monetary authorities’ exchange rate policy. The current account  
deficit is likely to grow, reaching 3.9% of GDP in 2020/21, due mainly  
to the fall in tourist income (expected to be around 40%). The high  
level of portfolio investment flows and disbursement from the IMF will  
ensure a satisfactory level of foreign currency liquidity over the short  
term. The outlook is less certain for 2021/22. We expect a slight fall  
in the current account deficit in value terms (to USD 14.7 billion) but  
much higher principal repayments of external debt than in 2020/21.  
According to the IMF, these are likely to total USD 17.5 billion (from  
USD 14.2 billion in 2020/21). Meanwhile, trends in international capital  
flows could be less favourable to emerging economies, given the rise  
seen in US long yields. Even so, the expected slowing in the downward  
cycle of Egyptian interest rates, the limited currency risk and the good  
fiscal performance should help protect the attractiveness of Egyptian  
sovereign debt.  
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3% due to the economic slowdown. On the supply side, crude oil  
production continued to decline, dropping 6% in 2020, due particularly  
to a lack of investment in new production capacity. At the same time,  
the production and export of refined oil products continued to grow,  
thanks to the expansion of production capacity. In volume terms, the  
external balance on refined products was positive for the first time  
ever in 2020 (17,000 barrels/day), but the overall balance of trade in  
oil (including crude) remained significantly negative (-101,000 barrels/  
day). In value terms, the data available suggests that there was a  
small nominal surplus, of USD 54 million, in Q3 2020. Meanwhile, LNG  
exports picked up towards the end of 2020 driven by rising demand and  
prices in Asia. Over the 2020/21 fiscal year, these exports are likely to  
total USD 1-2 billion. The prospects for LNG exports remain uncertain  
for the short term. LNG is sold on the spot market where prices see  
considerable volatility, and may drop below the Egyptian breakeven  
price, thus limiting exports.  
Completed on 9 April 2021  
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