Emerging

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19  
EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
Egypt  
External vulnerability is limited in the short term  
Despite the turmoil that has swept the emerging markets in recent months, we are still confident in the solidity of Egypt’s external  
accounts in the short term. Last year, the current account deficit narrowed significantly, thanks to remittances, tourism and an  
improved energy account. In the short term, higher oil prices should have only a small impact on the current account. For the  
moment the central bank’s cautious policy is containing the risk of a sudden outflow of portfolio investment. In the medium term,  
however, several sources of vulnerability persist, including commodity prices, the political environment and the rising cost of debt  
in foreign currency.  
Spectacular reduction in the current account deficit  
1-Forecasts  
In fiscal year 2018, the improvement in the current account was  
much higher than analysts expected across the board. The current  
account deficit narrowed to 2% of GDP from more than 6% in the  
previous year. Although the trade deficit did not change (USD 37 bn,  
2016 2017e 2018e 2019e  
Real GDP growth (%)  
4.3  
4.2  
5.2  
5.5  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
10.2  
23.3  
21.5  
-9.6  
16.0  
-7.8  
-11.2  
-11.6  
12% of GDP), the improvement in the current account can be  
96  
103  
-6.1  
89  
88  
attributed to a significant increase in private remittances (+21%) and  
the doubling of tourism revenues. The energy deficit also declined:  
despite the ongoing need for liquefied natural gas imports and the  
upturn in oil prices (Brent crude oil rose 65% in fiscal year 2018),  
the oil & gas deficit narrowed by USD 1.7 bn to 1.2% of GDP,  
compared to 2.3% of GDP in the previous year. The country’s  
foreign-currency liquidity also improved dramatically thanks to  
significant capital inflows, including foreign direct investment (FDI) in  
the energy sector, portfolio investment attracted by high yields, and  
international financial support. The Central Bank of Egypt (CBE)  
reported foreign reserves of USD 44 bn at the end of June 2018, the  
equivalent of 7.2 months of goods and services imports.  
Current account balance / GDP (%)  
External debt / GDP (%)  
-6.0  
-2.0  
-2.4  
17  
18  
34  
31  
38  
44  
38  
44  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDEGP (year end)  
3.1  
7.4  
5.5  
8.8  
7.2  
6.7  
17.9  
18.5  
(
*) Fiscal years T-1/T (July-June)  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Breakdown of the current account  
Hydrocarbons  Non-hydrocarbons  Services  
Remittances  
 Revenue  Current account balance (rhs)  
The bout of turmoil in the emerging markets last summer spooked  
non-resident investors, who withdrew their funds from the Egyptian  
market. Their holdings of Treasury bills have dropped off by a third  
since May 2018, to USD 14 bn at the end of August. At the same  
time, non-resident investors have become net sellers on the equity  
market since late August 2018 (USD 0.35 bn). Even so, net  
Egyptian equity flows have remained positive since the beginning of  
% of GDP  
40  
0
-1  
3
2
0
0
10  
0
2018, at roughly USD 0.37 bn. The CBE’s foreign reserves did not  
-
-
-
-
10  
20  
30  
40  
-
-
-
-
2
3
4
5
decline over the summer months.  
In this environment, the Egyptian pound remained stable against the  
dollar thanks to the CBE’s specific policy, which continues to  
channel most foreign currency flows towards its balance sheet. The  
repatriation mechanism, which the CBE uses to have an influence  
on foreign exchange policy, was eased in order to funnel foreign  
currency into the interbank market. The interbank market is currently  
absorbing about a third of foreign currency flows. For the moment,  
the CBE seems to be giving priority to the stabilisation of the  
exchange rate, in order to contain inflationary pressures and to  
provide some stability for non-resident investors. One of the central  
bank’s priorities is to reduce inflation, which has fallen back rapidly  
after peaking in late 2017. However, ongoing cutbacks in energy  
subsidies, higher oil prices and the volatility of foods prices have  
prevented inflation from declining significantly.  
-6  
-7  
2
012/13 2013/14 2014/15 2015/16 2016/17 2017/18e  
Source: BNP Paribas  
Limited short-term risks  
Despite capital flight by non-resident investors and the high level of  
oil prices, Egypt’s external accounts are not expected to deteriorate  
much in the short term. For fiscal year 2019, the current account  
deficit could be limited to about 2% of GDP. Under our central  
scenario, higher oil prices should have only a mild impact on the  
external energy deficit for the year 2018-2019. First, we expect the  
increase in oil prices to be limited between H2 2018 and H1 2019.  
Second, even though production has declined slightly, the country  
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EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
remains a net exporter of crude oil (about USD 2 bn in 2017-2018).  
There is a big deficit for refined oil products, which contributes most  
of the hydrocarbon account deficit. Yet certain factors are expected  
to help stabilise the energy deficit. First, the increase in natural gas  
production should halt the very costly imports of liquefied natural  
gas. We are nonetheless cautious about the country’s capacity to  
become a natural gas exporter. Second, looking beyond H2 2019,  
the start-up of production at new refining units should reduce the  
energy bill. All in all, as a percentage of GDP, the energy deficit is  
expected to remain flat at 1.2% in 2019.  
3
- The CBE’s cautious policy towards portfolio investment  
Treasury bills held by non-residents  
CBE Tier 2 foreign reserves  
Bn  
2
5
20  
1
5
As to non-hydrocarbon goods, exports are likely to increase  
moderately given the less favourable outlook for world trade and the  
priority Egyptian companies are placing on the domestic market.  
Moreover, the constraints squeezing household purchasing power  
at a time of high inflation, combined with sluggish corporate  
investment, should limit the increase in non-hydrocarbon imports.  
10  
5
0
2016  
2017  
2018  
Sources: Central Bank of Egypt, BNP Paribas  
With the slowdown in the growth of private remittances and the  
ongoing increase in tourism revenues, the current account deficit is  
expected to widen slightly in 2018-2019 (2.4% of GDP vs 2% in  
the risk is mild given the moderate  but regularly increasing –  
external public debt (about 18% of GDP in 2017). The government’s  
goal is to limit foreign currency bond issues to USD 5 bn a year.  
2
017-2018). Even so, the size of the current account deficit should  
help maintain foreign currency liquidity. External debt servicing –  
due mainly by the public sector amounts to about USD 4 bn a year.  
Bolstered by the hydrocarbon sector, foreign direct investment  
should level off at about USD 7-8 bn, the equivalent of 2.5% of GDP.  
Portfolio investment trends are still the big unknown in the short  
term, but the risks posed by this volatile capital component on the  
country’s foreign currency liquidity seem to be manageable. In  
addition to its official reserves, the CBE holds so-called Tier 2  
reserves of foreign currency assets, which play a prudential role and  
are designed to face up to any capital flight by non-resident  
investors holding short-term Treasury bills. At the end of August  
Political factors in the broad sense of the term must also be taken  
into account. We have retained two key factors with potentially  
major negative consequences: a deterioration in the security  
situation that could endanger the recovery of the tourism sector  
(
13% of current revenues), and the tightening of government policy  
towards foreign workers in the Gulf countries. This would affect  
remittances to Egypt (33% of current revenues). For the moment,  
measures to expulse foreign workers have had relatively little impact  
on Egyptians given their rather high skills level. Yet about 60% of  
Egyptian expats in the Gulf countries work in Saudi Arabia, which is  
tending to tighten its already restrictive policy.  
2
018, the CBE’s Tier 2 reserves covered about 56% of these  
Treasury bills, and the uncovered share amounted to about USD 4  
bn. Under a worse-case scenario of the withdrawal of the totality of  
portfolio investment stock, and considering that FDI covers the  
current account deficit, medium and long-term debt flows should  
largely cover this capital flight. The impact on the CBE’s official  
foreign reserves would be a reduction of about USD 4.2 bn at the  
end of FY 2018-2019, which would leave a balance equivalent to  
more than six months of imports of goods and services.  
What about the medium-term risks?  
The evolution of foreign currency liquidity is less certain in the  
medium term. We have identified three categories of risk that could  
endanger the balance of payments equilibrium.  
Energy and food commodity prices are a major component of  
changes in the trade balance. It is worth keeping in mind that Egypt  
is still the world’s largest wheat importer. Given its reliance on  
natural gas imports to cover the increase in domestic demand, the  
current account’s vulnerability to commodity prices is likely to  
increase in the medium term.  
The upturn in international interest rates will also affect external debt  
servicing charges. Payment of interest and principal rose from 7% of  
current revenues in 2013 to 18% in 2017. For the moment, however,  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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