Resilient economy: at least in the short term

EcoEmerging// 2nd quarter 2020  
Resilient economy: at least in the short term  
The impact of the COVID-19 pandemic on the Egyptian economy will be significant and will result in a sharp economic growth  
slowdown this year. Growth is nevertheless likely to remain positive. In the short term, the expected deterioration in public finances  
is sustainable, and the government can deal with a temporary downturn in international investors’ appetite for Egyptian debt.  
Foreign currency liquidity across the whole banking system has improved significantly in recent months, supporting the pound in  
the currency market. As a result, the financing of the current account deficit, repayment of foreign debt and the ability to cover  
massive capital outflows are all guaranteed for the short term.  
Economic support measures  
1- Forecasts  
Faced with the COVID-19 pandemic, the government has so far  
taken measures to restrict movement and activity, but no  
confinement measures as such. All flights have been suspended.  
Economic support measures have come first in monetary form, with  
a 300 basis point cut in the Egyptian Central Bank’s (CBE) policy  
rate. This took the CBE deposit rate from 12.25% to 9.25%. The  
CBE has also announced a number of measures aimed at the  
banking sector with a view to supporting economic activity, including  
the postponement of credit payments for six months for individuals  
and companies, a debt relief initiative for individuals at risk of default,  
a cut in the preferential interest rate reserved for targeted debtors,  
and the creation of a guarantee fund to back the tourist sector.  
Meanwhile, the government has introduced support measures for  
the private sector (loans at subsidised rates for industry, support for  
the hotel sector, direct support to certain households) for the  
equivalent of around 2% of GDP.  
2019 2020e 2021e  
Real GDP growth (%)  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Currentaccountbalance / GDP (%)  
(*) Fiscal years T-1/T (July-June)  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Monetary easing and yields on Tbills  
Lending rate CBE  
1 year Tbill  
Sharp economic growth slowdown is expected  
The economic growth slowdown will be substantial, but the structure  
of the Egyptian economy will help limit its extent. The sectors most  
vulnerable to the consequences of the epidemic, where the impact  
on growth will be significant, are manufacturing (16% of GDP),  
construction and real estate (16% of GDP) and tourism . This sector  
Sources : CBE, MoF  
only represents a small share of GDP (around 3% of the total), but  
its contribution to GDP growth has been significant in recent  
quarters, accounting for around 1 point out of total GDP growth of  
The economic consequences of the health crisis are likely to persist  
at least into the early months of FY2020/2021 and will affect the  
high season for tourism. At the same time, the fiscal capacity to  
support and revitalise the economy is constrained, whilst the drop in  
consumer living standards could limit the scope for recovery. Real  
GDP is expected to grow by 3.4% in FY2020/2021.  
% to 6%. The extractive industries, agriculture, communications  
and healthcare (around 25% of GDP in total) are likely to be  
relatively less affected.  
In fiscal year (FY) 2018/2019, real GDP growth was 5.6%. This  
pace was maintained in H1 2019/2020. In Q3 2019/2020, estimated  
growth was still largely positive albeit somewhat slower (we expect  
a figure of 5.0% y/y). To date, the economy has been relatively little  
affected by the international slowdown given the limited integration  
in international value chains. Restrictions on economic activity were  
introduced in March 2020 and will therefore mainly affect the final  
quarter of FY2019/2020 (-4.1% y/y). In FY2019/2020 as a whole,  
real GDP growth is likely to drop sharply but remain positive at 2.6%.  
Stable inflation  
In the short term, trends in consumer prices are likely to be  
influenced by two opposing factors: the inflationary effects of the  
possible disruption of the food supply chain (40% of the consumer  
price index), offset by the impact of lower oil prices. Prices for all oil  
products (apart from butane) are now linked to market prices, given  
the complete removal of subsidies. They are likely to be reviewed  
downwards for Q4 2019/2020. Overall, we are not making any  
significant changes to our inflation estimate, which we put at an  
annual average of 5.9% for FY2019/2020.  
According to the Ministry of International Cooperation, since the onset of the  
crisis, inbound tourism reservations have dropped by 80% in comparison to the  
same period last year.  
EcoEmerging// 2nd quarter 2020  
A sustainable fiscal position  
3- Banking system external liquidity  
The direct support fiscal measures announced so far remain  
relatively limited (around 2% of GDP) and will fall mainly in  
FY2020/2021. In addition, falling oil prices will reduce the subsidies  
for butane (other energy subsidies have already been removed), but  
this will have only a very marginal effect on total spending.  
CBE official FX reserves  
Commercial banks NFA  
Tier 2 CBE FX assets  
Tbill holdings by foreign investors  
USD Bn  
On the revenue side, direct and indirect tax income will fall, as will  
revenue from the Suez Canal (6% of government revenue in FY  
018/2019). Although the fall in revenue will directly affect the final  
quarter of the current fiscal year, stimulus spending will be spread  
over a longer period. Having been in surplus at 1.35% of GDP in  
FY2018/2019, the primary budget balance is likely to turn negative  
this year, at -0.3% of GDP. In FY2020/2021, the primary balance is  
likely to be in deficit by -1.8% of GDP, given the need for fiscal  
support to the economy and the fall in receipts.  
Source: CBE  
The hard-to-curb debt interest payments (47% of total revenue in  
FY2018/2019) are the main reason for significant and persistent  
budget deficits. The cut in the CBE’s interest rate should reduce  
interest payments by 0.3% of GDP over a full year (they were  
equivalent to 9.5% of GDP in FY2018/2019). The potential savings  
linked to a cut in interest rates (a 100 bp cut is equivalent to around  
EGP 8 billion to EGP 10 billion in savings) will be partially offset by  
an increase in the rates on the treasury bills market due to  
increasing risk aversion, and reduced liquidity as a result of the  
withdrawal of foreign investors. As a result, the total budget deficit is  
likely to increase this year to some 9.2% of GDP.  
In the short term, the foreign currency liquidity situation remains  
acceptable, even if confronted by capital outflows. In other words,  
the total of the current account deficit (USD 13 billion over a full  
year), amortisation on foreign debt (USD 7 bn in 2020) and those on  
T-bills held by foreign investors (around USD 20 bn in February  
2020) is more than covered by total foreign currency assets held by  
the banking system as a whole. The net foreign asset position of  
commercial banks was positive to the tune of USD 7 bn in February  
020, whilst the CBE’s foreign currency holdings currently stand at  
USD 47 bn (end-March 2020) if we add Tier 2 reserves (intended to  
cover part of portfolio flows) to official reserves.  
Whilst the budget deficit remains under control, its financing will be  
ensured, despite the increasing scarcity of external financing. The  
liquidity of the local banking system appears sufficient to cover  
financing needs. Total CBE liabilities linked to open-market  
operations were equivalent to 13% of GDP in February 2020. The  
fall in yields on these transactions could encourage banks to turn  
instead to government securities.  
However, although the external position appears solid for the short  
term, the worsening of the current account deficit and the likely  
reduction in portfolio inflows could bring to an end the pound’s  
appreciation. Yet a number of factors are likely to limit any  
depreciation: a local debt market that remains attractive to  
international investors; foreign investment in the energy sector,  
although it could suffer from the depressed state of the oil market;  
and the renewed support of the Gulf monarchies should it be  
Foreign currency liquidity is resilient  
The consequences of the oil price fall for external accounts are  
mixed. By volume, the country is a net importer of oil products (both  
crude and refined) and has returned to a position as a net exporter  
of LNG (although in limited volumes). By value, the total  
hydrocarbon balance has been slightly negative during 2019,  
reflecting a lag between value and volume, which is linked to the  
nature of the agreement between the Egyptian national oil company  
EGPC) and international oil companies. The expected collapse in  
oil prices in 2020 is likely to have a slightly positive effect on the  
trade balance. Conversely, the tourist sector is likely to be hit hard  
and we estimate that tourism revenues could fall by around 25% in  
FY2019/2020, before recovering in FY2020/2021 but without  
returning to the level of USD 12 billion achieved in FY2018/2019.  
Similarly, private transfers from expatriates are likely to be severely  
affected by the sharp economic slowdown in the Gulf, whilst Suez  
Canal receipts will suffer from the contraction of global trade and the  
fall in the oil price. The current account deficit is likely to increase to  
.1% of GDP in FY2019/2020 and then 4% in 2020/2021.  
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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