Deterioration of external accounts
EGYPT: FOREIGN ASSETS OF THE BANKING SYSTEM 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 commercial 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 significant 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 nearly 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 prospects. The Ukraine crisis has demonstrated once again the vulnerability of Egypt’s balance of payments to external shocks and its reliance on substantial external support under such conditions. We expect the current account deficit to grow over 2022 and 2023. Even though import volumes are falling fast, the gains will be offset by higher commodity prices.
The country has been a net importer of crude oil since 2015, and the current account deficit on hydrocarbons is likely to hit USD1 billion in 2022 and 2023 (from an average of USD0.4 billion over the previous three years). As far as food imports are concerned, although imports can be limited for a few months thanks to levels of wheat stocks and the beginning of the country’s own harvest (meeting around 25% of demand), the difficulties of accessing Russian and Ukrainian wheat (80% of Egypt’s wheat imports) and the high prices throughout the value chain (fertilisers, energy, transport) look set to maintain upward 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 expatriate 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 repayments 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.
