Emerging

Positive short-term prospects

th  
Eco Emerging // 4 Quarter 2021  
economic-research.bnpparibas.com  
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EGYPT  
POSITIVE SHORT-TERM PROSPECTS  
Economic growth remained rather strong in FY 2020/21 thanks mainly to the dynamic momentum of household  
consumption and the moderate support of public spending. This bolstered the retail and construction sectors. Through  
cautious management of public finances, the government reported a slightly smaller fiscal deficit in FY 2020/21, and  
it should continue to report an improvement this year despite possible upward pressures on current expenditures.  
The main obstacle to a more ambitious fiscal policy lies in the government’s debt service, which despite better  
financing conditions, will only narrow very gradually. As to the external accounts, there is not only the question of  
the attractiveness of Egyptian debt at a time when the US is expected to begin tightening monetary policy, but also  
the vulnerability of the current account deficit, which is subjected to the rigidity of imports, higher commodity prices  
and an uncertain recovery in tourism.  
BUOYANT HOUSEHOLD CONSUMPTION  
FORECASTS  
Real GDP growth maintained a rather rapid pace in fiscal year 2020/21  
(
+3.3%), thanks to the support of household consumption. This is a  
2
019  
2020  
2021e  
2022e  
notable performance compared to other emerging countries, especially  
considering the troubles the tourism sector is having in the midst of  
the pandemic.  
Real GDP growth (%)  
5.6  
13.4  
-8.0  
84  
3.5  
5.6  
-8.0  
90  
3.3  
4.5  
-7.4  
94  
5.6  
5.9  
-6.9  
94  
Inflation (CPI, year average, %)  
Central. Gov. balance / GDP (%)  
Central. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
Private consumption has not contracted for a single quarter since  
early 2020. Lockdown restrictions due to the Covid-19 pandemic were  
very short-lived and had only a limited impact on activity. Household  
lending (excluding real estate loans) remains very strong. It has in-  
creased at an average rate of more than 30% year-on-year since the  
end of 2019, to about 8.5% of GDP in June 2021 (vs. 6.7% at year-end  
-3.6  
36  
-3.1  
34  
-4.2  
36  
-2.8  
37  
Forex reserves (USD bn)  
45  
38  
41  
42  
Forex reserves, in months of imports  
8.0  
6.1  
6.2  
6.9  
2
019). In real terms, lending has grown significantly since mid-2019  
(
1): FISCAL YEARS FROM JULY 1ST OF YEAR N TO JUNE 30TH OF YEAR N+1  
e: ESTIMATES & FORECASTS  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
(
over 20% y/y) as inflation has eased. At the same time, remittances  
TABLE 1  
from Egyptian expatriates (mainly in the Gulf countries) were very high  
in FY 2020/21, despite the tough economic situation in the Gulf in 2020  
and the acceleration in labour market nationalisation policies. Remit-  
tances increased 13% in FY 2020/21 to a total of USD 31.4 bn, or about  
REAL GDP GROWTH (CONTRIBUTIONS, %)  
4
0% of current account revenue. This growth seems to be linked to as-  
Net exports  
Investment  
Public consumption  
set sales by expats leaving the Gulf region, and financial transfers that  
had to pass through official channels due to travel restrictions between  
countries. Moreover, although fiscal policy support is still moderate,  
targeted government subsidies helped boost the revenue of low-inco-  
me categories of the population.  
Private consumption  
Total GDP (RHS)  
10  
8
6
5
4
3
2
1
0
6
4
In contrast, investment trends continue to weigh on economic activity  
(
down 50% y/y in the first three quarters of 2020/21), after a 20% de-  
2
cline in FY 2019/20. This is mainly due to an 80% decline in investment  
in the hydrocarbon sector (about 18% of total investment).  
0
-
2
From a sector perspective, buoyant household consumption benefited  
the retail sector. Unsurprisingly, construction (+6.8% in 2020/21) and  
the real estate sector (17% of GDP altogether) also fuelled growth,  
bolstered by major urban and infrastructure projects. In contrast, the  
manufacturing sector (16% of GDP) contracted 5.8% over the course of  
FY 2020/21.  
-4  
-
6
2015  
2016  
2017  
2018  
2019  
2020  
2021e  
CHART 1  
SOURCE: MINISTRY OF PLANNING, BNPPARIBAS  
In the short term, we expect growth to accelerate to 5.6% in FY 2021/22.  
Leading economic indicators have rebounded since June 2021. The in-  
dustrial output index has accelerated rapidly since the end of Q1 2021,  
while mobility indicators have shifted into recovery territory since June.  
Moreover, the FY 2021/22 budget calls for an increase in public-sector  
wages and pensions. As to tourism, tourist frequentation should in-  
crease very gradually as some existing travel bans are lifted and as the  
global pandemic possibly begins to ebb.  
FISCAL CONSOLIDATION CONTINUES  
In a relatively dynamic economic environment, limited fiscal support  
measures (about 2% of GDP, only part of which was actually spent) have  
mainly targeted low-income families and the sectors with the highest  
exposure to the consequences of the pandemic. At the same time, some  
exceptional taxes have helped buffer the economic slowdown’s impact  
on government revenues. From a more structural perspective, fiscal  
The bank  
for a changing  
world  
th  
Eco Emerging // 4 Quarter 2021  
economic-research.bnpparibas.com  
2
0
revenues have also benefited from measures to improve tax collection  
since 2019, including the automation and digitalisation of some tax  
payments, and the expansion of the tax base. According to government  
sources, these measures contributed about 15-20% of the increase  
in fiscal revenues observed in the first three quarters of 2020/21.  
Altogether, revenues increased by 15% over the same period.  
CURRENT ACCOUNT (% OF GDP)  
Trade balance  
Net services  
Net transfers  
Current account balance (rhs)  
15  
2
Total expenditures rose only 11%. As a result, the primary fiscal balance  
will remain positive in FY 2020/21 (equivalent to about 1.4% of GDP),  
which will help reduce the fiscal deficit given the quasi stability of the  
interest charge (+1% in the first three quarters of 2020/21). The full-  
year deficit is estimated at 7.5% of GDP, compared to 8% in FY 2019/20.  
Debt service continues to place the biggest strain on public finances.  
Although it declined slightly, to about 54% of total fiscal revenues (from  
1
0
5
0
5
0
-
2
-4  
-
-
-
6
8
-
10  
-15  
20  
5
8% in FY 2019/20), it is still very high and sharply curtails the ma-  
noeuvring room of public policies.  
Given higher economic growth, the fiscal deficit should continue to nar-  
row in FY 2021/22 (to an estimated 6.8% of GDP), despite an increase in  
the public sector wage bill. This scenario has some downside risks, no-  
tably pricing trends for agricultural commodities and energy. Food sub-  
sidies, which account for 5% of total fiscal spending, increased by more  
than 10% in the first nine months of FY 2020/21. Egypt is the world’s  
leading importer of wheat, and prices on the global market have risen  
-
-10  
2015  
2016  
2017  
2018  
2019  
2020  
2021e  
CHART 2  
SOURCE: CENTRAL BANK OF EGYPT, BNPPARIBAS  
1
1% since end-June 2021. The impact of higher oil prices is less obvious  
In the short term, accelerated growth should favour a rise in imports,  
while tourism frequentation will gradually pick up. Higher oil prices  
should widen the deficit on the energy accounts. The sustainability of  
LNG export growth observed since mid-2020 must still be confirmed.  
In FY 2021/22, the current account deficit should reach 4.4% of GDP.  
Foreign direct investment declined 19% in Q3 2020/21, and we are  
maintaining a conservative estimate of FDI inflows in 2021/22 (equiva-  
lent to 2% of GDP). Given the mixed prospects for FDI, a key factor for  
external liquidity will be to maintain a high volume of government debt  
held by non-residents (which is volatile by nature). Lastly, the central  
bank’s determination to limit exchange rate volatility potentially could  
be costly in terms of foreign currency, as was the case in early 2020.  
This makes it difficult to estimate the acceptable level of the central  
bank’s foreign reserves.  
since subsidies on petroleum-based products were officially eliminated  
in 2019. Yet the official quarterly fuel indexation mechanism for retail  
sales prices (within a limit of 10%) may be not fully in line with the  
trend in international market prices. Given the expected 40% increase  
in oil prices in 2021/22, an insufficient adjustment of sales prices could  
generate extra costs for public finances.  
Debt service should continue to decline, albeit at a slower pace. The  
central bank is expected to end its monetary easing cycle, which should  
maintain bond yields in local currency at high levels. Longer maturities  
in the local market (there have been more net issues of T-bonds than  
T-bills since 2018/19) and the issue of medium to long-term interna-  
tional debt in foreign currency is positive for debt dynamics. According  
to the IMF, the average maturity of the debt stock was 3.38 years in  
February 2021 compared to 2.1 years in June 2016. Yet given the slope  
of the yield curve for debt issues in the local currency (230 bp yield  
spread between 1-year T-bills and 5-year T-bonds at end-September  
Completed on 6 October 2021  
2
021), debt servicing will only be reduced very gradually.  
EXTERNAL VULNERABILITY IS MANAGEABLE IN THE SHORT  
TERM  
Pascal DEVAUX  
pascal.devaux@bnpparibas.com  
Thanks to IMF support in 2020, regular Eurobond issues, and portfo-  
lio investment inflows in 2021, foreign-currency liquidity has reached  
a satisfactory level. Central bank reserves amounted to USD 40.7 bn  
at the end of August 2021 (USD 53 bn including Tier II reserves), the  
equivalent of 6.1 months of imports of goods and services. Even so,  
this figure is about USD 5 bn less than at year-end 2019. The down-  
side risks to external liquidity seem limited in the short-term given  
the attractiveness of Egyptian debt (in real terms, the yield on 10-year  
bonds is currently 9.2%). Yet the country still has significant external  
financing needs (more than USD 30 bn if we take into account public  
sector short-term debt held by non-residents, and assuming that the  
Gulf countries will renew their deposits with the central bank), and  
vulnerabilities persist. The current account deficit is high (estimated  
at 4.2% of GDP in FY 2020/2021, or more than USD 16 bn) due to the  
rigidity of imports and the slump in tourism frequentation.  
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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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