Conjoncture

Egypt: persistent vulnerabilities

ECO CONJONCTURE  
N°8  
November 2021  
EGYPT: PERSISTENT VULNERABILITIES  
Pascal Devaux  
So far, Egypt’s economy has weathered the Covid-19 crisis without any significant worsening of  
its main macroeconomic indicators. GDP growth has remained positive, and the country’s budget  
and external balances are relatively stable. The macroeconomic stabilisation achieved in previous  
years and external financial support are the main reasons behind these positive performances. In  
the short term, the outlook is mixed. The rebound in inflation, if it were to persist, could trigger a  
cycle of monetary tightening, with negative consequences for public finances. In addition, Egypt’s  
external vulnerability remains significant given structural current account deficits and dependence  
on portfolio investment flows. More fundamentally, the pace of growth is not sufficient to absorb  
the growing labour force, fuelling the informal economy. The main solution to these challenges  
lies in increasing private sector (non-hydrocarbon) investment and productivity, which are two  
recurrent weaknesses of the Egyptian economy.  
2
SUSTAINED ECONOMIC GROWTH,  
BUT ON FRAGILE FOUNDATIONS  
3
5 6  
MODERATE REBOUND IN A SOMEWHAT RESTRICTIVE  
INFLATION MONETARY POLICY  
THE CHALLENGES OF GROWTH  
IN EGYPT  
PUBLIC FINANCES: SUCCESSFULLY  
STABILISED, BUT NOT YET FIXED  
8
10  
EXTERNAL ACCOUNTS: THE NEW BANKS EXPOSED TO SOVEREIGN  
ACHILLES HEEL?  
RISK  
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EGYPT: PERSISTENT VULNERABILITIES  
So far, Egypt’s economy has weathered the Covid-19 crisis without any significant worsening of its main macroeconomic  
indicators. GDP growth has remained positive, and the country’s budget and external balances are relatively stable. The  
macroeconomic stabilisation achieved in previous years and external financial support are the main reasons behind  
these positive performances. In the short term, the outlook is mixed. The rebound in inflation, if it were to persist, could  
trigger a cycle of monetary tightening, with negative consequences for public finances. In addition, Egypt’s external  
vulnerability remains significant given structural current account deficits and dependence on portfolio investment  
flows. More fundamentally, the pace of growth is not sufficient to absorb the growing labour force, fuelling the informal  
economy. The main solution to these challenges lies in increasing private sector (non-hydrocarbon) investment and  
productivity, which are two recurrent weaknesses of the Egyptian economy.  
and FY 2020/21 respectively) and the growth in household credit led  
Sustained economic growth, but on fragile foundations  
to total GDP growth of 3.6% in FY2019/20 and 3.3% in FY2020/21.  
On the other hand, investment was the component of growth most  
Consumption as a driving force  
affected by the crisis. It contracted by around 26% cumulatively over  
Since the implementation of macroeconomic reforms in 2017,  
the period 2020-2021. One major cause of this contraction was the  
economic growth has averaged 4.4% per year. In a context of fiscal  
8
0% drop in investment in the hydrocarbon sector (around 18% of  
total investment) against a backdrop of a sharp drop in oil prices in  
020. The contribution of foreign trade to growth was positive in 2020  
consolidation and low export competitiveness, Egyptian household  
consumption and investment have been the main drivers. However,  
household consumption – which contributes more than 85% of GDP  
2
and then negative in 2021, and it is difficult to identify a clear trend.  
Revenue from tourism decreased by more than 60% cumulatively over  
was constrained in 2018 and 2019 by strong inflationary pressures  
(
at annual average rates of 22% and 13% respectively), which reduced  
2
020-2021. The sharp increase in gas production since 2018, with the  
purchasing power. During this period, investment took over thanks  
to the accelerated transformation of the energy sector with the  
construction of new hydrocarbon production and electricity generation  
capacities.  
start of production from the Zohr gas field, has reduced energy imports  
and allowed some of the surplus to be exported. Outside the energy  
sector, exports are structurally not very dynamic and it is imports,  
linked to changes in consumption and investment, which determine  
Economic growth has remained strong since the start of the Covid-19 the net external contribution of non-hydrocarbon sectors.  
pandemic in 2020 due to moderate restrictions on economic activity,  
Short-term acceleration expected  
support from public spending and, above all, the recovery in household  
consumption. Real GDP growth reached 3.6% and 3.3% respectively In the short term, we expect activity to pick up. Leading economic  
1
during fiscal years (FY) 2019/20 and 2020/21 . Egypt is the only country indicators (electricity consumption, mobility indicator and industrial  
in the North Africa/Middle East region that has not experienced a production index) have bounced back since the second quarter of  
recession during this period. Domestic consumption (public and private) 2021. The tourism sector is expected to grow with the decrease in  
has not recorded a single negative quarter in the last two years. Beyond pressure linked to the pandemic and the lifting of the ban on tourists  
the structural demographics that traditionally support consumption, from Russia travelling to Egypt. Nevertheless, this increase in visitor  
the significant fall in inflation (5.6% and 4.5% on average in FY2019/20 numbers will remain gradual given the continuing global threat of the  
epidemic. Real estate and construction continue to benefit from the  
implementation of numerous urban and public infrastructure projects.  
CONTRIBUTIONS TO GDP GROWTH  
On the demand side, the announced increase in public sector wages  
and pensions should continue to support household consumption. The  
rise in energy prices since the beginning of the year and the relatively  
favourable outlook for producers should stimulate investment spending  
in the oil sector. Against this backdrop of a recovery in consumption  
and, to a lesser extent, investment, the rise in imports is expected to  
dampen the external contribution to GDP growth. Overall, we expect  
that GDP will grow by 5.5% during FY2021/22. The two main risks to  
this scenario are an acceleration in inflation, which would weigh on  
household consumption, and a resurgence of the epidemic, which  
would jeopardise the recovery of the tourism industry.  
Net exports  
Investment  
%
Public consumption  
Total GDP (RHS)  
Private consumption  
%
1
0
8
6
4
2
0
2
4
6
6
5
4
3
2
1
0
-
-
-
Lack of growth drivers in the medium term  
In the medium term, the economic outlook is rather favourable, but  
some weaknesses remain. Household consumption will remain the  
main driver of growth, although resurgent inflation could slow its  
progress. The gradual recovery of tourism should directly support  
employment, while the pace of household lending, which represents  
only 9% of GDP, should increase with the arrival of non-banking  
players on this market. The direct contribution of the public sector to  
2015  
2016  
2017  
2018  
2019  
2020  
2021e  
CHART 1  
SOURCE: MINISTRY OF PLANNING, BNP PARIBAS  
1
Fiscal year n is from July n-1 to June n  
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regard to foreign direct investment (FDI), this was concentrated in the  
energy sector until 2019 (over 60% of total FDI).  
REALISED INVESTMENTS, % OF TOTAL  
3
3
2
2
1
1
5
0
5
0
5
0
5
0
Oil & Gas  
Manufacturing  
The challenges of growth in Egypt  
Infrastructure  
Construction and Real Estate  
Transport & Communication  
It is insufficient to meet the demographic challenge  
The job intensity of economic growth is too low to meet the evolving  
needs of the Egyptian labour market. While the working-age population  
(
aged 15-64) is growing by more than one million people each year,  
the labour market participation rate (proportion of the working-age  
population in work) is heading downwards, from 42.8% between 2011  
and 2015 to 40.4% on average over the past five years. A growing  
proportion of the working-age population has either withdrawn from  
the labour market or (a more likely scenario) is employed in the informal  
sector. This expansion of the informal sector is confirmed by World  
2
010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
2
Bank data based on social insurance and work contract enrolment  
CHART 2  
SOURCE: MINISTRY OF PLANNING, BNP PARIBAS  
rates, which show an increase in the proportion of workers employed  
in the informal sector between 2016 and 2019. This development is  
likely to have accelerated in 2020 (a year in which the labour market  
participation rate fell to 38.5%) and 2021, with the reduction in job  
opportunities caused by the pandemic. Tourism employs at least 10%  
of the population, and the drop in visitor numbers certainly amplified  
this trend towards informal work.  
INVESTMENT AS % OF GDP  
%
of GDP  
Public  
Private  
1
1
1
1
1
8
6
4
2
0
8
6
4
2
0
Structural weaknesses in the private sector  
The difficulties the Egyptian economy faces in order to generate  
sustained and sufficiently inclusive growth are linked to low levels of  
investment (particularly in the private sector) and productivity. This  
is not new, but these deficiencies have worsened in recent years. The  
total investment rate has averaged 15% of GDP in real terms over the  
last ten years, compared to 19% in the previous decade. Not only has  
this figure been falling over a long period, but it is considerably lower  
than in equivalent emerging countries, where it has averaged between  
0
4
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21  
2
5% and 30% of GDP over the last decade (e.g. 28% and 34% in Turkey  
SOURCE: MINISTRY OF PLANNING AND ECONOMIC  
DEVELOPMENT, BNP PARIBAS  
CHART 3  
and Morocco respectively). Private investment is extremely low, and  
was equivalent to 5% of GDP during FY2019/20 (of which 17% was  
in the energy sector alone). A number of factors linked to the public  
sector as a whole may explain this situation: actual interest rates held  
at a high level to preserve the attractiveness of government debt to  
international investors, the use of private sector savings to cover the  
government’s significant financing needs, as well as distortions to  
competition caused by the growing role in the economy of the public  
sector in the broad sense of the term.  
growth could increase with the introduction of more structural policies  
health and education). An ongoing policy of major public works should  
continue to support the construction and real estate sectors, which  
contribute to around 17% of total GDP, and have continued to grow at a  
sustained pace during the health crisis.  
(
Nevertheless, the dependence of growth on household consumption  
is a factor of fragility. Household consumption constituted 87% of GDP  
in FY2020/21, compared to an average of 73% from 2000-2010. The  
employment situation remains poor in a context of fiscal consolidation,  
and job creation in the private sector remains concentrated in the least  
productive, and therefore least remunerative, sectors. Furthermore,  
the outlook for investment remains dependent on the energy sector.  
Hydrocarbon production and power generation have accounted  
for almost 30% of total investment over the past decade. Although  
investment in this sector is expected to remain strong in the medium  
term, particularly with the development of renewable energies and the  
maintenance of existing production capacities, the level of investment  
could decline compared to the decade from 2010. The prospects for  
investment outside the hydrocarbon sector remain very uncertain.  
Indeed, private sector investment (in nominal terms) as a percentage  
of GDP has been falling steadily since 2010. From an average of more  
than 10% of GDP between 2006 and 2010, it has fallen to an average  
of 6.3% of GDP over the last five years (3.2% during FY2020/21). With  
Other more structural factors may also play a significant role.  
For example, A. Adly3 has shown that the Egyptian private sector  
is unbalanced between, on the one hand, large, high-performing  
companies active in food/agriculture, capital goods or services, some  
of which are present on the international markets, and on the other,  
a multitude of very small companies often operating at the edge of  
the informal sector, which make very limited use of salaried staff. The  
network of small and medium-sized enterprises (SMEs), which are  
necessary for economic development, is very underdeveloped. This is  
what Adly calls “the missing middle”. In particular, the author recalls  
the subcontractor role of these SMEs, which enables the integration  
of the largest companies into international value chains (in Asia, for  
2
World Bank, November 2020: From crisis to economic transformation: unlocking Egypt’s  
productivity and job-creation potential, Egypt Economic Monitor.  
Amr Adly, 2020, Cleft Capitalism. The social origins of failed market making in Egypt,  
Stanford University Press.  
3
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example). Yet, it is these SMEs which are in a position to accelerate recent increase in market prices seems to have boosted spending in the  
job creation. According to Adly, difficulties in accessing land and credit sector, which will help slow the decline in production.  
explain this underdevelopment of the SME sector. Although these two  
Egypt temporarily became a net oil exporter in 2020 as domestic  
production factors are ostensibly in good supply (the banking system  
demand fell during the pandemic. The recent rise in market prices  
4
has a high level of liquidity and land is abundant ), the author stresses  
seems to have revived spending in the sector, but this will only slow the  
the lack of intermediary institutions which would allow very small  
decline in production. The country is expected to remain structurally  
enterprises to access them and thus to develop by integrating into the  
a net importer of crude oil. Conversely, thanks to the introduction of  
market.  
new production units, the country is currently a net exporter of refined  
petroleum products and could remain so.  
PRODUCTIVITY AND GROWTH, AVERAGE GROWTH RATE, 2004-2018  
OIL MARKET, 000’ B/D  
GDP per worker  
GDP per capita  
GDP  
%
7
6
5
4
3
2
1
0
900  
Production  
Consumption  
850  
800  
750  
700  
650  
EGY  
MYS  
PER  
MAR  
TUR  
IDN  
PHL Middle  
income  
countries  
average)  
VNM  
LKA  
600  
550  
(
500  
CHART 4  
2004  
2006  
2008  
2010  
2012  
2014  
2016  
2018  
2020  
SOURCE: WORLD BANK, BNP PARIBAS  
CHART 5  
SOURCE: BP, BNP PARIBAS  
According to the World Bank, productivity growth is one of the lowest  
among emerging countries in the same category, which limits the  
potential for job creation. The Egyptian economy tends to specialise in  
low-productivity sectors such as agriculture (24% of total employment).  
Sectors such as construction and transport, in which productivity is  
low, recorded the strongest increase in employment. In addition, the  
economy is not particularly open to international trade, with exports  
of goods and services accounting for only 15% of GDP on average since  
Increase in gas exports: for how long?  
Natural gas has been the main component of Egypt’s energy mix since  
018 and the start of production at the Zohr gas field. At present,  
2
production capacity exceeds domestic demand, which allowed for an  
increase in export volumes since the end of 2018. These exports are  
particularly dependent on market conditions. As a result, they more  
than halved in 2020 (2.7 bcm compared to 5.9 bcm in 2019) as prices  
for liquefied natural gas (LNG) dropped on the Asian market, which  
serves as a benchmark for Egyptian LNG exports. Egyptian LNG sales  
prices are determined on the spot market (as opposed to long-term  
supply contracts) and are highly volatile. With activity collapsing in  
2
016. However, the development of export industries (excluding raw  
materials) is generally associated with an increase in the productivity  
of exporting companies. In Egypt, the sectors in which employment  
growth is strongest belong to the category of non-tradable goods  
(
private sector services and retail trade in particular).  
2
020, the market price fell below the Egyptian production cost (around  
Energy sector  
An uncertain outlook for oil  
GAS MARKET, BCF/D  
Crude oil production has declined steadily since 2015. Private oil  
companies have reduced capital spending as oil prices have fallen on  
international markets. As a result, domestic crude oil and condensate  
production fell to 0.62 million barrels per day (mbd) in FY2019/20,  
down from 0.72 mbd in FY2014/15. The onshore production sector is  
dominated by relatively small companies, and Egyptian production,  
which is of heavy crude oil, trades at a significant discount compared  
to benchmark grades of oil. Most of the onshore fields are mature and  
therefore have a high depletion rate, which implies constant operating  
and capital expenditure to keep the production level stable. As the  
financial capacities of small producers are limited, the narrowing of  
the gap between market prices and the breakeven price leads to a  
decrease in expenditure and therefore a decrease in production. The  
7
Production  
Consumption  
6
5
4
3
2
2004  
2006  
2008  
2010  
2012  
2014  
2016  
2018  
2020  
CHART 6  
SOURCE: BP, BNP PARIBAS  
4
It is estimated that around 96% of the Egyptian population occupies the 5% of the coun-  
try’s territory delineated by the banks and delta of the Nile.  
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GAS IMPORTS & EXPORTS  
CONSUMER PRICE INDEX INFLATION  
LNG imports  
LNG exports  
Gas imports by pipeline  
Gas exports by pipeline  
40 y/y, %  
3
Total  
Core inflation  
m m /month  
000  
1
35  
800  
600  
400  
200  
0
30  
25  
20  
15  
10  
5
2
011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M  
0
2021  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 7  
SOURCE: JODI, BNP PARIBAS  
CHART 8  
SOURCE: CENTRAL BANK, BNP PARIBAS  
USD 5/million British thermal units (mbtu)). The spot price of LNG  
destined for Asia (over 80% of Egyptian exports) was below USD 4 mbtu  
between February and October 2020. In this context, EGAS (the state-  
owned gas market organisation), which has to pay a contractual price  
of USD 4 mbtu to exporters, has temporarily reduced LNG exports.  
In 2021, increased Asian demand and the reactivation of the second  
liquefaction terminal in Damietta has led to a rebound in exports,  
which in the first seven months of the year were 2.1 times higher than  
in the whole of 2020. Egypt also exports gas by pipeline (0.19 bcm in  
CONSUMER PRICE INDEX, CONTRIBUTIONS  
Food goods  
Housing, water and energy  
Transport  
Others  
%
8
Consumer price index  
6
4
2
0
2
020), notably to Jordan. However, it should be noted that gas imports,  
particularly from Israel, by increasing the quantity of exportable gas,  
partially explain the high level of exports observed since the beginning  
of the year. Since early 2021, gas imports have been the equivalent of  
-
-
2
4
6
7% of net exports, compared to 13% for the whole of 2020.  
The sustainability of export capacity in the medium term is uncertain.  
Indeed, while domestic consumption virtually stood still in 2019 and  
2
020, it is expected to grow in the coming years with increases in the  
CHART 9  
SOURCE: CENTRAL BANK, BNP PARIBAS  
number of households connected to the national gas grid and the  
petrochemical industry’s high demand for natural gas. Moreover, there  
are no prospects for a significant increase in production capacity at  
this time.  
CORE INFLATION, CONTRIBUTIONS  
6 %  
Core food  
Retail  
Paid services  
Other services  
Moderate rebound in inflation  
Consumer price inflation has fallen significantly since 2019, averaging  
5
4
3
2
1
0
4
.5% in FY2020/21, down from 13.4% in FY2020/19. This decline can be  
explained by a number of factors: the end of a cycle of subsidy cuts,  
a lowering of household consumption in 2019 and the stabilisation  
of food prices, which are traditionally the main driver of inflation. In  
addition, although energy prices are largely liberalised, fuel prices  
remain subject to government influence in order to limit their volatility.  
Inflation of monetary origin (M2 grew by 19% on average in FY2020/21)  
appears to be limited due to the high level of cash-based transactions.  
-
1
Since the end of 2020, consumer prices have risen again, against  
an international backdrop of a spike in food and energy prices and  
disruption to the supply chains of industrial products. It is currently  
CHART 10  
SOURCE: CENTRAL BANK, BNP PARIBAS  
food, which makes up one third of the price index, which is driving core inflation. In the short term, inflation is expected to continue to rise  
up prices. Core inflation remains contained (up 5.2% year-on-year in moderately, reaching 9.0% year-on-year at the end of FY2021/22 (+7.3%  
October 2021), but has risen steadily over the past six months. It is on average over the year). High commodity prices, a moderate recovery  
mainly the core food component, and to a lesser extent education in consumption and, above all, rising production costs should support  
(
which is a very seasonal component of inflation), that is driving this  
this increase. Unchanged since March 2020, the price of natural gas  
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for the industrial sector rose by 28% last October and could continue to decline in the government’s financing need as well as the deterioration  
rise in the short term given the government’s willingness to review gas in the net international investment position of commercial banks are  
prices more frequently (currently every 6 months). In the short term, the main factors behind this slowdown. Despite this, the CBE’s open  
inflation forecasts remain contained within the target range set by the market operations have increased. They accounted for 12.5% of GDP in  
central bank (7% +/-2%), but are approaching the upper limit.  
September 2021 compared with less than 10% of M2 in 2020.  
A somewhat restrictive monetary policy  
SOVEREIGN 10-YEAR REAL INTEREST RATES  
Since the outbreak of the pandemic in 2020, the Central Bank of Egypt  
(
CBE) has prioritised support for economic activity over inflation, which  
Egypt  
Turkey  
Brazil  
South Africa  
US  
1
1
5 %  
0
officially remains its main objective. The CBE cut its main intervention  
rates by 400 basis points in 2020. This reduction in policy rates was  
fully reflected in private sector lending rates but its effectiveness on  
activity was limited given the low penetration of bank credit. The fact  
that private sector credit growth has been maintained at a high level  
since 2019 is notably due to the public policy of subsidised interest  
rates, which was put in place for certain categories of borrowers  
Russia  
5
0
-
5
(
mortgages for the middle classes, tourism, agriculture, industry  
-10  
and construction). Monetary easing ended in 2021 when inflationary  
pressures worsened.  
-
-
15  
20  
Furthermore, the CBE carries out open market operations to manage  
monetary liquidity. Growth in the M2 monetary aggregate has slowed  
slightly since March 2021, reaching 17.2% in September 2021. The  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 13  
SOURCE: NATIONAL, MACROBOND, BNP PARIBAS  
Alongside efforts to control inflation, the policy of high real rates aims  
to maintain the attractiveness of the public debt market in Egyptian  
pounds for foreign investors. For the time being, Egyptian debt remains  
attractive, given the high real rate of return compared to the level of  
sovereignrisk, whichremainslowerthanothersovereigncounterparties  
offering high yield. Nevertheless, portfolio flows are volatile by nature,  
and the recent past has shown little discrimination by investors when  
it comes to dealing with global turmoil in financial markets. The halt in  
rate cuts is justified by the threat of tighter monetary conditions in the  
US. In the short term, these two factors – an increase in inflationary  
pressures and international monetary policy tightening – could favour  
a return to the CBE’s policy of raising interest rates.  
INTEREST RATES  
CBE lending rate  
%
Lending rate (<1 year, weighted average)  
Interbank rate (overnight)  
2
2
2
1
1
1
1
1
4
2
0
8
6
4
2
0
8
6
1
-year treasury bills  
Public finances: successfully stabilised, but not  
yet fixed  
2015  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 11  
SOURCE: CENTRAL BANK, BNP PARIBAS  
Fiscal consolidation may slow  
Public finances have been improving steadily for the past five years with  
cuts to some spending (lower subsidies and better wage control). Since  
FY2019/20, budgetary revenues have been on the rise again thanks to  
an increase in tax revenues (introduction of new taxes and a widening  
of the tax base), improved tax collection following the implementation  
of new tools by the tax authorities (especially the digitalisation of tax  
operations) and stricter enforcement of tax rules.  
MONETARY LIQUIDITY AND COUNTERPARTS (CONTRIBUTIONS)  
Other items  
Claims on private sector  
Claims on public business sector  
NFA commercial banks  
M2 y/y  
Claims on public authorities  
Net claims on government  
NFA CBE  
%
6
5
4
3
2
1
0
0
0
0
0
0
0
open market operations (% of M2)  
The pandemic has had limited consequences for the country’s public  
finances. The budgetary support plan for economic activity was modest  
and the adjustment continued during this period. The budgetary  
support package was originally around EGP 100 bn (1.6% of GDP),  
but the government has reportedly only used part of it. Spending on  
subsidies continued to decrease as electricity prices rose (equivalent to  
approximately 0.15% of GDP). At the same time, tax revenues increased  
by 13% year-on-year during FY2020/21. However, this is the period  
during which the economy was most affected by the consequences of  
-10  
-20  
2
015  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 12  
SOURCE: CENTRAL BANK, BNP PARIBAS  
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an impact on food subsidies, which account for roughly 6% of total  
subsidies. The government is considering using hedging instruments  
to limit the cost to public finances. The consequences of higher energy  
prices are more difficult to assess. Despite government statements,  
the automatic fuel price adjustment mechanism (capped at 10% per  
quarter) does not fully reflect changes in international energy prices. It  
is difficult to estimate the cost to public finances of higher oil prices, as  
the incomplete price adjustment could have been beneficial for public  
finance when global prices were lower than domestic prices during  
FY2019/20.  
SUBSIDIES AND SALARIES  
of GDP  
%
1
0
9
8
7
6
5
4
3
2
1
0
Energy subsidies  
Food subsidies  
Wages  
Debt servicing remains a strong constraint  
Despite the fall in domestic interest rates in 2020 and the expected  
reduction in the budget deficit, debt servicing will remain very high  
in the years to come. It is mainly the lengthening of maturities on the  
local market that will allow a reduction in the annual debt service.  
CHART 14  
SOURCE: MINISTRY OF FINANCES, BNP PARIBAS The potential for further decline in domestic rates is low in the short  
term, while the spreads on Eurobonds have widened by circa 150  
bps since September 2021. Moreover, international bond issues are  
GENERAL GOVERNMENT BUDGET BALANCE  
voluntarily capped in order to contain the outflow of foreign currency  
linked to external debt servicing. Diversification of external financing  
Overall balance  
Primary balance  
5
instruments through the issue of sukuk and green bonds would remain  
%
of GDP  
marginal relative to the total financing need. In the short term, the  
probability that the CBE will increase rates is fairly high. This is a threat  
to the debt service reduction process. According to our estimates, it is  
only from 2023 onwards that the interest burden will return to less  
than 50% of total budgetary revenues.  
Debt service (% of total budget sector revenue, RHS)  
4
2
0
2
4
6
8
70  
6
0
0
5
-
-
-
-
40  
30  
Public sector financing and debt: a heavy burden that  
is difficult to curb  
2
1
0
0
-
-
-
10  
12  
14  
0
Significant general government financing needs  
Even though the budget deficit is steadily declining and the debt  
dynamic is slowly improving, the government’s financing needs remain  
significant. In addition to the budget deficit, the equivalent of 45 to  
CHART 15  
SOURCE: MINISTRY OF FINANCES, BNP PARIBAS  
5
0% of GDP in short-term domestic debt matures each year. As a result  
the pandemic, with a one-off tax on wages (1%) and pensions (0.5%)  
for public sector workers due to generate the equivalent of 0.10-0.15%  
of GDP in full-year terms.  
of these considerable financing requirements and the high proportion  
of short-term debt, debt servicing is highly sensitive to changes in  
interest rates. Government debt reached 90% of GDP during FY2019/20  
The primary balance should show a surplus (+1.5% of GDP during  
FY2020/21). Interest payments on the government’s debt are expected  
to be almost stable in value, but remain very high as a percentage  
of total budgetary revenues (51% compared with 58% in the previous  
year). In total, the general government’s budget deficit is set to reach  
GENERAL GOVERNMENT DEBT  
Domestic debt (% of GDP)  
7
.4% in FY2020/21.  
120  
00  
External debt (% of GDP)  
20  
18  
16  
Apparent interest rate on domestic debt (%, RHS)  
Apparent interest rate on external debt (%, RHS)  
The budget for FY2021/22 looks to be more expansionary than previous  
ones, in order to support household purchasing power in particular.  
The expected 11% increase in the public sector wage bill would lead  
to a rise in total spending of around 8%. In addition, the focus is on  
the education and health sectors, indicating a shift in budget priorities  
after five years of IMF-led consolidation. Nevertheless, the continued  
pandemic risk could lead the government to postpone some investment  
spending. In terms of revenue, the economic recovery is expected to  
increase this by around 12%. In such a scenario, the total budget deficit  
would fall slightly to 6.8% of GDP.  
1
1
1
4
2
80  
60  
10  
8
6
4
2
40  
20  
0
0
In the short term, one of the main risks to spending comes from  
rising commodity prices, which would lead to an increase in subsidy  
expenditure. Thus, the current increase in wheat prices on the  
international markets (+13% since the end of June 2021) would have  
CHART 16  
SOURCE: MINISTRY OF FINANCES, BNP PARIBAS  
5
Bonds which are compliant with Islamic law  
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and is expected to peak at 95% of GDP during FY2020/21, before The government wants to accelerate the pace of privatisation, and the  
starting to decline from FY2022/23 onwards. Approximately 80% of the Egyptian sovereign wealth fund has announced the sale of some public  
total debt is domestic, made up equally of Treasury bills (mainly one assets belonging to the army in particular. The amount generated by  
year) and medium and long-term Treasury bonds. Eurobonds account these operations is limited for the time being and these disposals are  
for around 36% of the government’s external debt (25% in 2017), with not expected to change significantly the government’s medium-term  
the remainder made up of multilateral loans (particularly from the IMF solvency.  
and the World Bank), which offer more favourable lending conditions  
on average than Eurobonds.  
External accounts: the new Achilles heel?  
The share of external debt is not expected to increase significantly in  
External accounts are a major source of vulnerability for the Egyptian  
the medium term, given the limit imposed on international bond issues  
economy. The reasons for this lie in specific events, such as the  
and the gradual reduction in IMF financial support. Nevertheless, the  
consequences of the political situation on the tourism sector, or in  
government’s external debt is significant, standing at 34% of GDP if  
more structural trends such as the gradual deterioration of the energy  
measured by issue currency (mainly USD), but at 42% of GDP if debt in  
balance. Current account deficits have been recurrent since 2009 and  
local currency held by foreign investors is added.  
are the result of a drop in some traditional sources of income. Volatile  
The government’s debt profile is improving. The average maturity of (portfolio flows) or insufficient (Foreign Direct Investment, FDI) capital  
debt is increasing but remains relatively short (3.2 years). The average flows have repeatedly put the country’s foreign currency liquidity at  
maturity of negotiable debt (around half of domestic debt) is only risk, necessitating support from international creditors. Despite the  
1
.7 years. With the lengthening of maturities on the local market and apparently satisfactory levels of the CBE’s foreign currency reserves,  
international issues, the apparent interest rate6 is on the way down. the size of the import bill and the dependence on volatile capital flows  
It was around 9.4% during FY2020/21 compared to 11.9% in FY2018/19 have demonstrated that this international support remains essential.  
(
including 3.6% and 3.5% respectively for external debt) but was 6.5%  
taking into account the residency criterion, and 11.1% for domestic debt  
14.3% in 2019). These attractive yields explain the high proportion of The current account balance is consistently in deficit, given the  
Persistent current account deficits  
(
domestic debt held by foreign investors, and have thus contributed high dependence of the Egyptian economy on imports and the low  
to increasing the country’s external vulnerability. Interest payments competitiveness of its non-hydrocarbon exports. In this context, the  
on external debt (according to the residency criterion) are currently trade deficit is high (on average around 13% of GDP between 2016  
equivalent to about 10% of total current account receipts, compared and 2020). In general, the current account balance depends on the  
with about 1% in 2015.  
performance of the three main sources of export income: hydrocarbons  
increase in LNG exports, but from a low base, and a structural decline  
in crude oil exports), tourism and transfers from expatriate workers.  
(
Public sector debt and contingent debt  
Public debt which is not strictly government debt is not insignificant, LNG exports are an uncertain source of income in the medium term,  
but does not appear to be a major source of vulnerability for the public given the expected changes in consumption and price volatility on  
finances. Part of the CBE’s foreign currency liabilities is made up of the spot market. Tourism is highly dependent on external events such  
deposits by member states of the Gulf Cooperation Council (GCC), as political tensions or, more recently, a deterioration in the global  
made in order to support the country’s foreign currency liquidity. These health situation. More than tourism, private transfers form the basis of  
deposits amount to USD 15 bn (3.9% of GDP in June 2021) and are current account income (around 30% of total current account receipts)  
formally loans. The special status of this external debt (it provides and are relatively stable over time.  
political support, notably) means it is much less subject to enforced  
The current account deficit remained moderate during FY2019/20  
repayment than market debt. Indeed, the majority of this debt is rolled  
(
3.1% of GDP), a consequence of the drop in imports (-6%) and the  
over at maturity. Egypt made a repayment to Saudi Arabia in 2020,  
which then made a further deposit of USD 3 bn in October 2021 and  
extended the maturity of the existing deposit.  
increase in transfers (+10%). During FY2020/21, the deficit widened to  
Government-guaranteed debt (including public companies and  
economic authorities) is the main type of contingent debt. This was  
estimated to be 18% of GDP during FY2019/20. Public sector companies  
are active in a wide range of economic sectors. According to the IMF7, if  
we include public sector companies in the strict sense of the term and  
companies owned by the army, there are approximately 300 wholly  
public entities and 645 public-private partnerships. In addition to these  
companies, there are around 50 economic authorities, which can play  
a significant macroeconomic role in the transport, energy and housing  
sectors. Public companies make up around 16% of GDP and 6% of total  
employment. In general, their profitability is rather low, and the most  
financially sound companies and economic authorities are those where  
the government has a monopoly (Suez Canal, hydrocarbons) or has a  
strong competitive advantage (telecommunications).  
MAIN CURRENT ACCOUNT RECEIPTS, % OF TOTAL CURRENT RECEIPTS  
Hydrocarbon  
Suez Canal  
50  
40  
30  
20  
10  
0
Tourism  
Private transferts  
non-hydrocarbon exports  
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
01/06/2010  
6
7
Defined by interest payments divided by debt stock  
IMF, July 2021, IMF country report no. 21/163, Article IV, Arab Republic of Egypt  
CHART 17  
SOURCE: CENTRAL BANK, BNP PARIBAS  
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CURRENT ACCOUNT BALANCE  
NET CAPITAL FLOWS  
Foreign direct investments  
Portfolio investments  
Others  
USD bn  
Trade balance  
Net services  
Net transferts  
Current balance (RHS)  
%
of GDP  
20  
15  
2
0
0
0
0
1
-1  
-2  
-3  
-4  
-5  
-6  
-7  
1
0
5
0
-
-
-
-
-
10  
20  
30  
40  
50  
-5  
-
10  
2
01 10 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
2
010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
CHART 18  
SOURCE: CENTRAL BANK, BNP PARIBAS  
CHART 19  
SOURCE: CENTRAL BANK, BNP PARIBAS  
4
.5% of GDP with the sharp increase in imports (+13%) and the drop in  
revenue from tourism (-51%). It was the unexpected rise in remittances  
+14%), which prevented the current account deficit from exceeding  
% of GDP. Two explanations can be put forward for the dynamism of  
these remittances in a context of weak economic activity in the Gulf:  
/ Egyptian expatriates who have left Gulf countries (because of lower  
EXCHANGE RATE: EGP/USD  
(
5
18,0  
1
1
1
7,5  
1
growth and unfavourable employment policies for non-residents) may  
have sold their assets before returning to Egypt; 2/ the restrictions on  
movement brought about by the pandemic may have forced expatriates  
to use official channels to transfer money, allowing these to be recorded  
as flows in the balance of payments.  
7,0  
6,5  
16,0  
5,5  
15,0  
In the short term, the current account deficit is likely to remain above  
1
4
% of GDP. A recovery in tourist frequentation is expected to remain  
gradual, as the risk associated with the pandemic is expected to  
continue at least during 2022. The rebound in LNG exports will only  
have a limited effect on the energy balance, given the significant  
amount of imported gas. The same will be true for oil prices, as the  
country is a net importer of crude oil but exports refined petroleum  
products. The main risk lies in the imports, which are driven by the  
upturn in economic growth and the rise in prices of many non-energy  
commodities (particularly food). We expect the current account deficit  
to average 4.5% of GDP in FY2021/22 and FY2022/23.  
2
019  
2020  
2021  
CHART 20  
SOURCE: CENTRAL BANK, BNP PARIBAS  
CBE FOREIGN EXCHANGE RESERVES AS % OF ST DEBT  
(ST DEBT IN FOREIGN CURRENCY + TREASURY BILLS HELD FOREIGN INVESTORS)  
2
50  
Foreign currency liquidity is stronger, but vulnerabi-  
lity remains  
200  
150  
100  
Foreign currency liquidity has remained satisfactory for several years  
thanks to bi- and multilateral loans, government issues of Eurobonds  
and portfolio investment flows, despite low FDI outside the energy  
sector. The CBE’s foreign exchange reserves reached USD 40.6 bn at  
the end of FY2020/21, equivalent to 6.2 months of imports of goods and  
services. If Tier 2 reserves are added (the CBE’s foreign currency assets  
not included in the official reserves, and which serve in particular to  
manage the volatility of portfolio flows), total reserves amounted to  
USD 50.7 bn, i.e. 7.5 months of imports.  
50  
0
2016  
CHART 21  
2017  
2018  
2019  
2020  
2021  
FinancialmarkettensionsinMarch2020demonstratedthevulnerability  
of portfolio investments to market vagaries. During the second quarter  
SOURCE: CENTRAL BANK, BNP PARIBAS  
of 2020, non-residents’ holdings of local currency debt fell by around banks deteriorated significantly. In addition to the intrinsic volatility of  
USD 18 bn to USD 10 bn in June 2020. At the same time, during the portfolio investments, the CBE’s willingness to preserve the stability  
first five months of 2020, the CBE’s foreign exchange reserves fell by of the Egyptian pound contributes to the variation of foreign exchange  
USD 9 bn, while the net international investment position of commercial reserves. The coverage of short-term foreign currency debt (the sum  
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0
of short-term external debt and Treasury bills held by non-residents)  
by foreign exchange reserves is declining steadily, to 48% in June 2021  
compared to 65% at the end of 2019 and 140% at the end of 2016 when  
there were very few foreign investors in the local debt market.  
CREDIT TO PRIVATE SECTOR  
y/y, %  
Total  
Services  
Industry  
Households  
4
3
2
1
0
0
0
0
0
External financing requirements are substantial  
The external financing requirement is significant given the fairly  
high level of the current account deficit, medium and long-term debt  
repayments (but there is no «debt wall» in the medium term), and  
above all the repayment of short-term external debt which accounts  
for 60% of total repayments according to the IMF. During FY2020/21,  
total external debt repayment amounted to USD 16 bn, for a total  
financing requirement of USD 33 bn. This IMF estimate does not take  
into account deposits made by Gulf countries with the CBE, which  
are renewed every year. According to our estimates, Egypt’s financing  
requirement (including short-term external debt) will be between  
USD 25 bn and 30 bn per year until 2025 (around 7% of 2021 GDP).  
-10  
-
-
20  
30  
2
011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
CHART 22  
SOURCE: CENTRAL BANK, BNP PARIBAS  
Despite continued significant external support, as evidenced by  
Saudi Arabia’s recent additional deposit of USD 2 bn with the CBE,  
the country’s dependence on portfolio flows will remain high in the  
medium term. Indeed, a gradual decline in flows from international  
institutions can be expected, especially from the IMF, whose support  
will become more technical than financial. In addition, international  
sovereign bond issues are expected to remain below USD 10 bn per  
year. After a low level of 1.3% of GDP in FY2020/21, FDI is expected  
to rise slowly as foreign investment in the hydrocarbon sector levels  
off (compared to the peak of USD 10 bn or 3.3% of GDP reached in  
FY2018/19) but increase very gradually in non-hydrocarbon sectors, to  
reach a total of 2.5% of GDP in FY2022/23. At the same time, pressure  
on banks’ net foreign assets is expected to continue. According to  
this scenario, CBE reserves are expected to increase by USD 2.5 bn in  
FY2021/22 to reach USD 43.3 bn, and remain stable in FY2022/23. This  
implies a slight deterioration in foreign currency liquidity, since the  
CBE’s foreign exchange reserves would amount to less than 6 months  
of imports.  
COMMERCIAL BANKS’ BALANCE SHEET: MAIN ITEMS  
Claims on Central Government  
Claims on the private sector  
Deposits  
USD bn  
y/y, %  
6
0
8
6
4
2
0
Net foreign assets (RHS)  
50  
40  
30  
20  
10  
0
-
2
-4  
-6  
-8  
-10  
2017  
2018  
2019  
2020  
2021  
CHART 23  
SOURCE: IMF, BNP PARIBAS  
Banks exposed to sovereign risk  
The Egyptian banking sector is dominated by publicly-owned banks  
NET FOREIGN ASSETS OF THE BANKING SYSTEM AND CARRY TRADE FLOWS  
(
around half of the sector’s total assets). Lending policy is traditionally  
cautious, which favours banking liquidity, and banks’ exposure to the  
state represents around 40% of total banking assets. The Egyptian  
economy remains dominated by cash transactions, with household  
debt accounting for only 9% of GDP. In addition, the government has  
introduced a policy to encourage increased bank lending to SMEs.  
USD bn  
40  
35  
30  
25  
20  
15  
Central Bank of Egypt  
Commercial banks  
Treasury bills held by foreign investors  
The impact of the pandemic on banking activity and asset quality has  
been limited for the time being. This is due to the traditionally cautious  
lending policy, the resilience of economic activity to shocks, and to  
specific support measures directed towards the most fragile debtors  
10  
5
0
(
loans at subsidised rates, the deferral of debt service payments, etc.).  
-5  
10  
-
Private sector credit has been dynamic since the end of 2019, with  
an average increase of over 23% in 2020. Household loans (20% of  
total loans) and government loans (36% of total loans) have been the  
most dynamic segments of this market since mid-2019. However, the  
increase in the stock of total net claims on the government (loans and  
securities) has slowed down significantly over the past year or so (+5%  
in August 2021 compared with +44% a year earlier) thanks in particular  
to the improvement in public finances and the use of external financing.  
Loans to corporates remain the least dynamic segment in the absence  
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  
CHART 24  
SOURCE: CENTRAL BANK, BNP PARIBAS  
of a recovery in productive investment. Despite a deterioration in the  
economic environment, credit risk remains under control, with the  
non-performing loans ratio falling from 4.2% in 2019 to 3.5% in June  
2
021, according to CBE data.  
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Incontrast, thenetforeignasset(NFA)positionofbankshasdeteriorated  
significantly since the beginning of the year, from a surplus of USD 6.8 bn  
in February to a deficit of USD 3.8 bn in September. This situation has  
not been caused by a strain on banking liquidity, which would require  
recourse to external resources. Deposits continue to evolve in line with  
private sector loans, while traditionally the NFA position of banks tends  
to move in the opposite direction to their claims on the government.  
Similarly, this deterioration is not in line with previous developments  
that linked a high level of securities holdings by non-residents with a  
positive NFA position (the latter selling or swapping currencies with  
banks to acquire securities in local currency). This deficit is likely to  
be linked to the widening current account deficit, which reduces the  
flow of foreign exchange to banks, and could be compensated by CBE  
intervention.  
Conclusion  
Since 2016, public finance reform and significant external financial  
support have helped contain the budget deficit, stabilise public debt and  
restore foreign currency liquidity. Nevertheless, some macroeconomic  
imbalances persist, and external support remains essential to cope  
with exogenous shocks.  
The current model of economic development, based essentially on  
the public sector drive, has enabled infrastructure development  
to be accelerated and growth to be maintained despite a difficult  
environment. However, it does not seem capable of reducing certain  
weaknesses in the Egyptian economy. While sovereign risk now seems  
to be under control, external vulnerability is increasing. The ways  
in which this can be reduced are already known. They lie mainly in  
increasing domestic and foreign private investment, which remains  
at structurally low levels, and in improving the competitiveness of  
Egyptian production.  
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