Emerging

Mixed trade performance

th  
17  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
Egypt  
Mixed trade performance  
Although still showing a significant deficit, the trade balance has improved substantially since 2017. It has benefited from a  
recovery in hydrocarbon exports, whilst the steep depreciation of the pound has had only limited consequences on trade in non-  
hydrocarbon goods. A substantial share of imports is incompressible, whilst structural constraints weigh on the country’s export  
potential. Moreover, the moderate appreciation of the pound over the past year has not helped price competitiveness. Measures  
have been introduced to support exports, but we remain cautious on the prospects for a significant improvement in international  
trade over the medium term.  
In 2016, the Egyptian economy found itself at a serious dead end.  
1
-Forecasts  
On top of a significant deterioration in the public finances, the  
widening of the current account deficit and the absence of capital  
inflows suffocated the economy due to a lack of available foreign  
currency. The accelerated expansion of gas production and  
renewed investor confidence as a result of the IMF-backed reform  
programme have produced a spectacular improvement in external  
balances. The current account deficit has shrunk considerably and  
foreign currency liquidity has returned to an acceptable level.  
2017  
2018 2019e 2020e  
Real GDP growth (%)  
4.2  
5.3  
5.6  
5.8  
Inflation (CPI, year average, %)  
Central. Gov. balance / GDP (%)  
Central. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
23.3  
-17  
21.5  
-9.5  
13.4  
-8.6  
10.4  
-6.7  
103  
-6.1  
93  
89  
88  
-2.4  
-2.7  
-3.0  
41  
31  
37  
44  
33  
44  
31  
43  
However, the international trade performances in 2017/18 and  
Forex reserves (USD bn)  
2
018/19 were disappointing. Despite the fact that the pound  
Forex reserves, in months of imports  
Exchange rate USDEGP (year end)  
5.5  
7.2  
6.8  
6.2  
depreciated by half following the liberalisation of the foreign  
exchange market in November 2016, the trade balance remains in  
sizeable deficit: USD 37.3 bn in 2017/18 and USD 38 bn in 2018/19.  
18.1  
17.9  
16.7  
17.4  
Fiscal years from July 1st of year n to June 30th of year n+1  
e: BNP Paribas Group Economic Research estimates and forecasts  
A lacklustre improvement  
2
- Trade balance  
USD bn  
Non hydrocarbon goods  Hydrocarbon goods  
There has been a marked improvement in the international balances  
in the hydrocarbons sector over the past two years. From a deficit of  
USD 5.4 bn in 2016/17, provisional figures for 2018/19 show a  
symbolic surplus of USD 8 million. The balance on the trade in gas  
became positive in October 2018. Exports of LNG have recovered  
thanks to the Zohr gas field coming into production and, according  
10  
0
1
to JODI , reached a monthly average of 500 million cubic metres in  
-10  
H1 2019, after a complete stop in 2014 and 2015. Meanwhile,  
imports of LNG have stopped since November 2018, having  
reached an average of 740 million cubic metres in 2017. Although  
the country remains a substantial net importer of oil products, the  
imbalance has narrowed over the past two years. Exports have  
tripled since 2016, to an average of 0.127 million barrels per day  
-20  
-
30  
40  
-
09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19e  
(
mb per day) in the first half of 2019, whilst imports fell by 9% on  
average over the same period (0.293 mb per day in H1 2019). It  
seems that the increase in oil prices over the course of the 2018/19  
fiscal year (8% for Brent crude) has had positive consequences  
given the increase in the volume of oil exports.  
Source: CBE, BNP Paribas  
2
exports in volume as calculated by the IMF , we would estimate that  
the volume of non-oil exports declined in 2018/19. Meanwhile,  
imports have continued to grow steadily since 2017. These are  
largely incompressible, both for capital goods and consumer goods.  
They increased by 9% in value in 2017/18 and 2018/19.  
For the time being, the balance sheet is much less flattering when it  
comes to the non-hydrocarbon sector. Here the deficit reached the  
record level of USD 38 bn in 2018/19, equivalent to 12.7% of GDP.  
Exports were practically stable in value terms in 2018/19, having  
risen 10% over the previous two years. Taking account of the sharp  
increase in hydrocarbon exports in volume (10% for oil and oil  
derivatives and 240% for LNG) and the growth of 11% in total  
Multiple constraints  
The most obvious reason for the disappointing performance of non-  
oil exports relates to the increase in production costs following the  
floating of the pound. The sharp rise in import costs and widespread  
1
2
Joint Oil Data Initiative  
World Economic Outlook, October 2019  
th  
18  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
wage increases, against a background of high inflation, prevented  
exporters from benefiting from gains in price competitiveness.  
3
- Real exchange rate against USD  
Index 2007=100  
Egypt ▪▪▪ Morocco  Turkey  
More generally, even though we know that the positive effects on  
exports of significant currency depreciation are limited in time, an  
international comparison carried out by the World Bank underlined  
the limited elasticity of Egyptian exports to a sharp depreciation in  
the exchange rate. According to this study, the positioning of  
exported goods, in terms of characteristics and geographical  
destination, does not help their integration into world trade. Around  
180  
160  
140  
120  
100  
3
80  
60  
40  
20  
0
25% of goods exports go to Arab countries whose international  
trade is amongst the least dynamic. On average, the growth in  
imports to Arab countries was 1.6% between 2014 and 2018,  
compared to a global average of 3.3%. Political upheaval in North  
Africa, notably in Libya and the weak economic trends in the Gulf  
states, have affected Egyptian exporters. Conversely, the fastest  
growing region, Asia (4.2% growth), takes only 10% of Egypt’s  
exports.  
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19  
Source: BNP Paribas  
Moreover, the main exports have limited technological content. They  
are mainly unsophisticated extracted goods (hydrocarbons, minerals,  
agricultural products) or manufactured goods with little technological  
content (textiles, food). Egypt’s comparative advantages 4 are  
focused on poorly performing markets (cotton, fertilisers, tobacco  
and oil seeds). Only its exports of electrical equipment, essential oils  
and fruit and vegetables are in markets seeing growth on the global  
level. These represent only just over 15% of Egyptian exports.  
The pound’s real exchange rate has risen by 47% since the end of  
2016, whilst the Turkish lira has fallen by 12% and the Moroccan  
dirham has remained more or less stable. Given the slightly less  
favourable trend in external balances over the coming year and  
despite the central bank’s willingness to control inflation, the pound  
should slightly depreciate over the short term. Against this  
background, prospects for global trade are negative in the short  
term.  
According to the World Bank, non-tariff barriers, such as  
administrative constraints, technical and health requirements and  
the lack of infrastructure, affect the whole of Egypt’s international  
trade and are therefore also a constraint on the performance of  
exports.  
Foreign direct investment (FDI) could provide the means to tackle  
the structural constraints holding back Egyptian exports, most  
notably by allowing the country to move up international value  
chains. Indeed, a few multinationals have recently set up in the  
country. Even so, for the time being inflows of non-hydrocarbon FDI  
have been well below the levels hoped for.  
The government has recently relaunched its export support policy,  
adopting a number of measures implemented by the export  
development fund: direct financial support, tax benefits and the  
provision of services such as training and communication. In total,  
this support package could be worth as much as 10% of total  
exports, and would be linked to certain criteria in order to favour  
SMEs or exports to the rest of Africa.  
Mixed prospects  
The balance of trade in hydrocarbons will continue to improve in the  
short term, with further growth in LNG exports. However, given the  
continued rise in domestic energy demand, only the bringing on  
stream of a substantial new gas field will prevent the energy balance  
moving back into deficit within two or three years.  
Meanwhile prospects remain mixed for the trade balance in the non-  
hydrocarbons sector of the economy and we do not foresee any  
significant improvement. In the short term, the stronger pound  
coupled with the downward trend in inflation is likely to make  
Egyptian exports less competitive.  
3
Egypt Economic Monitor, July 2019  
Defined as the case where exports of a product as a share of a country’s total  
4
exports is greater than that product’s share of global trade.  
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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