Emerging

Egypt: A short-term relief for external liquidity

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Eco Emerging // 2 quarter 2022  
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EGYPT  
A SHORT-TERM RELIEF FOR EXTERNAL LIQUIDITY  
Egypt’s economic prospects have worsened with the outbreak of war in Ukraine and its consequences for commo-  
dity prices. The widespread increase in prices will result in a significant drop in consumer purchasing power and  
will thus stall the main engine of economic activity. The erosion of foreign currency liquidity has accelerated over  
the last month, with massive outflows of capital and an expected widening of the current account deficit due to  
the difficulty in reducing imports, a drop in tourist frequentation and the limited effect on exports of the Egyptian  
pound’s depreciation. This highlights the continued vulnerability of the economy to external shocks and its reliance  
on external support. The support already in place from the Gulf states, and the expected package from the IMF, will  
give the country a little time, but foreign investors will remain cautious against a background of deterioration in the  
public finances.  
GROWTH PROSPECTS WORSEN  
FORECASTS  
Despite the substantial rebound in economic activity in the first half of  
the 2022 fiscal year (FY), with growth of over 8% y/y, economic growth  
2
019  
2020 2021e 2022e 2023e  
over the year as a whole is likely to be below expectations. Consumer  
spending, the main driver of economic activity, is likely to be parti-  
cularly hard hit by the consequences of the war in Ukraine. Although  
prices for certain foodstuffs (including bread, which is the staple food  
of most of the population) are likely to remain under control due to  
government subsidies, rising commodity prices on global markets  
will push all prices upwards and will thus eat into household purcha-  
sing power a bit more. Investment could also slow down as prices for  
construction materials rise.  
Real GDP growth, %  
5.6  
11.0  
-8.0  
84  
3.5  
10.2  
-8.0  
90  
3.3  
7.2  
-7.4  
95  
5.5  
8.2  
-7.9  
95  
3.9  
10.1  
-8.6  
97  
Inflation, CPI, year average, %  
Central. Gov. balance / GDP, %  
Central. Gov. debt / GDP, %  
Current account balance / GDP, %  
External debt / GDP, %  
-3.6  
36  
-3.1  
34  
-4.5  
35  
-5.1  
37  
-5.0  
40  
Forex reserves (excl. gold), USD bn  
Forex reserves, in months of imports  
42  
34  
36  
32  
30  
6.4  
5.4  
5.4  
4.2  
4.6  
The effects on international trade are less clear cut. Exports could be-  
nefit from European demand for gas and, for manufactured goods, from  
the pound’s recent depreciation. But these effects will be constrained  
by reduced additional capacity for gas exports, after the rapid recovery  
in 2021, and the limited competitiveness of non-hydrocarbon exports.  
Moreover, exports of certain food products and raw material have been  
banned for at least six months to avoid supply disruption.  
e: ESTIMATE & FORECASTS  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
TABLE 1  
EGYPT: CONSUMER PRICE INDEX, CONTRIBUTIONS TO INFLATION  
In addition, any recovery in tourism has been compromised in the short  
term, given that Russian and Ukrainian tourists account for some 30%  
of total visits. All of these factors linked to the crisis in Ukraine will  
have a particularly harsh effect on the final quarter of the current fiscal  
year.  
Even so, given the strong recovery in the first part of the year, growth  
should reach 5.5% in FY 2022. But economic growth will slow over the  
first half of the calendar year, and we are expecting only a very modest  
growth in FY 2023. Our central scenario incorporates continued high  
prices for energy and agricultural goods at least until the end of 2022.  
Household consumption will thus continue to be hampered by high  
prices during the first half of FY 2023. Meanwhile, the constraint of  
expenditure that cannot be compressed, or only to a limited degree  
Food  
Transport  
CPI  
Housing, water and energy  
Others  
%
2
1
March 2022  
9
6
3
0
3
-
(
wages, debt interest), limits the government’s scope to support eco-  
nomic activity. Even in the event of a recovery in the second half of FY  
023, GDP growth for the year is likely to be just 3.9% at best.  
0
9-19 12-19 03-20 06-20 09-20 12-20 03-21 06-21 09-21 12-21 03-22  
CHART 1  
SOURCE: CENTRAL BANK OF EGYPT, BNP PARIBAS  
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rate (EGP16 per USD) to be applied to some essential goods. The cur-  
rency effect adds to the high level of commodity prices on internatio-  
Consumer price inflation has accelerated significantly since the start nal markets, and we are expecting an acceleration to 13% y/y in April.  
of the year. It climbed from 6% y/y in December 2021 to 10.5% y/y in The month of Ramadan is traditionally associated with an inflationary  
March 2022, with core inflation (10.1% in March) following the same surge. On average, we expect inflation for FY 2022 to hit 8.2%. Assu-  
trend. The impact of the pound’s depreciation on the price of imported ming that commodity prices remain high until at least the end of 2022,  
goods will only be partly offset by the setting of a specific exchange consumer price inflation could average 10.1% over FY 2023.  
A SHARP INCREASE IN INFLATION  
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Against this background, inflation could significantly overshoot the  
average target of 7% +/-2% set by the monetary authorities for Q4 2022.  
The rate raising process initiated by the Central Bank of Egypt (CBE) in  
March is therefore likely to continue throughout 2022.  
EGYPT: FOREIGN ASSETS OF THE BANKING SYSTEM  
Tier2 CBE FX reserves  
Official CBE FX reserves  
Banks net foreign assets (rhs)  
USD bn  
55  
USD bn  
10  
DETERIORATION OF EXTERNAL ACCOUNTS  
March 2022  
5
4
4
3
3
0
Having begun in mid-2021, the erosion of foreign currency liquidity  
accelerated following the outbreak of the war in Ukraine. In the second  
half of 2021, a widening current account deficit and more risk aversion  
amongst international investors (risk premiums on foreign currency  
sovereign debt doubled between September and December of 2021)  
resulted in a deterioration of the balance of payments. Although the  
CBE’s currency reserves remained more or less stable over the year at  
around USD36 billion (excluding gold), the net external debt of com-  
mercial banks jumped to USD11.5 billion by the end of 2021, having  
been nil six months earlier. The vulnerability of the Egyptian economy  
to the consequences of the conflict in Ukraine has resulted in signifi-  
cant capital outflows. In March 2022, the CBE’s currency reserves fell  
by USD4.8 billion, whilst Tier 2 reserves (designed to tackle outflows of  
volatile capital) fell by USD7.4 billion.  
Against this backdrop, the CBE allowed the pound to depreciate by 15%  
relative to the US dollar, and official discussions were opened with  
the IMF. In parallel, Saudi Arabia increased its deposits with the CBE  
by USD5 billion and an Emirati sovereign wealth fund acquired near-  
ly USD2 billion of assets on the Egyptian stock market (equivalent to  
around 5% of total market capitalisation). This substantial support, in  
addition to the expected assistance from the IMF, should help limit  
downward pressure on currency reserves in the very short term.  
Even so, we remain cautious about short-term and medium-term pros- The efforts to consolidate the government’s budget, seen since 2015,  
pects. The Ukraine crisis has demonstrated once again the vulnerability will be interrupted. Due to higher food subsidies and a slower tax col-  
of Egypt’s balance of payments to external shocks and its reliance on lection process, the budget deficit is likely to reach 7.9% of GDP this  
substantial external support under such conditions. We expect the cur- year, with the primary balance remaining in surplus by 0.1% of GDP.  
rent account deficit to grow over 2022 and 2023. Even though import The deterioration in economic prospects since the start of the year has  
volumes are falling fast, the gains will be offset by higher commodity caused the government to review its 2023 budget. The measures an-  
prices. The country has been a net importer of crude oil since 2015, and nounced include a widespread increase in social security spending and  
the current account deficit on hydrocarbons is likely to hit USD1 billion increases in public sector wages and pensions, coupled with tax cuts  
in 2022 and 2023 (from an average of USD0.4 billion over the previous on financial transactions, which are likely to benefit foreign investors  
three years). As far as food imports are concerned, although imports in particular. We estimate that these measures could represent around  
can be limited for a few months thanks to levels of wheat stocks and 5% of GDP. At the same time, the combination of higher short-term in-  
the beginning of the country’s own harvest (meeting around 25% of terest rates at the CBE and persistent inflationary pressures are likely  
demand), the difficulties of accessing Russian and Ukrainian wheat to increase the government’s cost of financing across all maturities.  
5
0
5
0
5
0
25  
20  
15  
10  
5
-
-
5
10  
0
0
-15  
6-18  
12-18  
06-19  
12-19  
06-20  
12-20  
06-21  
12-21  
CHART 2  
SOURCE: CENTRAL BANK OF EGYPT, BNP PARIBAS  
payments on foreign currency debt) is likely to approach USD30 billion.  
International financing, whether multilateral (IMF) or bilateral (Gulf  
states) will cover part of this requirement. However, flows of portfolio  
investments are both more uncertain and more costly. In particular,  
risk premiums on sovereign debt have risen by 150 points over the  
past year.  
THE BUDGET DEFICIT IS GROWING AGAIN  
(
80% of Egypt’s wheat imports) and the high prices throughout the In all, we expect a primary deficit of 0.4% of GDP in FY 2023 and an  
value chain (fertilisers, energy, transport) look set to maintain upward increase in interest costs (51% of receipts in FY 2021).  
pressures on wheat prices until at least the end of 2022. For exports,  
the competitiveness improvements expected from the devaluation of  
the pound are far from guaranteed, given first that some categories  
of goods are covered by export bans, and secondly that global trade  
is expected to slow down. In all, the trade deficit could exceed USD50  
billion (11% of GDP) for the first time ever in FY 2023. Revenues from  
the Suez Canal are likely to continue to grow, thanks in particular to  
an increase in fees, but these account for only some 6% of total current  
receipts. The long-awaited recovery in tourism is likely to be delayed  
by several months. The only truly positive point, remittances from ex-  
patriate Egyptians (one third of current receipts) are likely to remain  
strong, thanks to buoyant economic conditions in the Gulf states and  
the attractive interest rates on pound certificates of deposit offered  
by the two main public sector banks (18% per year). In FY 2023, the  
total external financing requirement (current account deficit and re-  
Writing completed on 11 April 2022  
Pascal DEVAUX  
pascal.devaux@bnpparibas.com  
The bank  
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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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