10 minute read
The merits of fiscal discipline: Egypt
Though the impact of the COVID19 pandemic on Egypt’s tourism sector and the week-long blockade of the Suez Canal by Ever Given derailed the country’s growth prospects, the World Bank projected that the economy will expand by 2.3% in 2021. Egypt partly managed to contain the economic impact of coronavirus as growth continues even as the pandemic has battered oil-rich nations across the Arab world. Tourism and the Suez Canal are the North African country’s two main sources of foreign currency.
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By mid-2016, Egypt’s economy was teetering on the edge as investors shunned the Arab world’s most populous nation but now it is being hailed by investors as one of the region’s fastest-growing economies.
“Egypt’s macroeconomic reforms of recent years helped stabilize the economy, allowing the country to enter the pandemic with a level of economic stability that somewhat cushioned the blow of the COVID-19 crisis,” said the World Bank.
An unsustainable policy mix had left Egypt facing low growth, elevated and rising public debt, and a mounting balance of payments problem with severe shortages of foreign exchange as well as an overvalued exchange rate. However, Egypt managed to reduce its debt by 20% in the past three years despite the double whammy of COVID-19 and low oil prices.
The Egyptian government’s fiscal reform measures were critical in stabilizing the economy—growth has accelerated and current account and fiscal deficits have narrowed. The country reported real GDP growth of 3.3% in the fiscal year that ended in June 2021 and is targeting 5.5% for the current year, according to the Ministry of Finance.
The North African nation’s foreign currency reserves have risen while public debt, inflation and unemployment have significantly declined. Meanwhile, the ratio of the debt-to-gross domestic product remains manageable, partly because the economy is growing relatively fast. S&P Global said that Egypt has sufficient buffers to guard against market pressures due to the country’s maintained sizable foreign exchange reserves of about $41 billion as of end-July 2021, though lower than the $45 billion it held before the outbreak of the pandemic.
Fiscally fit
Egypt’s economic reform program implemented a significant policy adjustment that was anchored by the
liberalization of the foreign exchange market and fiscal consolidation to ensure public debt sustainability. The structural reforms which were introduced were critical in unlocking billions in International Monetary Fund (IMF) funds and successfully corrected Cairo’s large external and domestic imbalances.
The country received an additional $1.6 billion, which is the final instalment of its $5.2 billion one-year stand-by arrangement, from the IMF in June 2021 as it finalized a financial package program for the North African nation. The $5.2 billion funding aid came two years after Cairo emerged from a three-year IMF program that provided a $12 billion loan to aid the authorities’ unpopular economic reform in July 2019.
The backing from the Washingtonbased fund helped draw in investors attracted by a real interest rate that’s one of the highest among more than 50 major economies, according to Bloomberg, and they pumped billions of dollars into the local debt market. However, S&P Global cautioned earlier in September that Egypt’s reliance on borrowing has left it with a crippling debt-service burden that’s one of the heaviest among all sovereigns.
“Growth is expected to reach 2.8% in 2020/21 and rebound strongly to 5.2% in 2021/22, but the outlook remains clouded by uncertainty while Egypt remains vulnerable to shocks due to its high public debt and gross financing needs,” the IMF said in June 2021.
Egyptian lawmakers in June approved a $158 billion (EGP 2.46 trillion) budget for the financial year that commenced July 1, 2021, and the government is projecting a budget deficit of 6.6% in the 2021/22 fiscal year. Egypt has been tapping international debt markets to finance the deficit. The finance ministry said in August 2021 that the country will start issuing Islamic bonds in the first
half of 2022 to plug the fiscal gap and to mobilize funds for its social and economic development projects.
Last month, Egypt’s ministry of finance launched a three-year syndicated loan with green and Islamic finance components with the aim to raise $2 billion. The government plans to use the proceeds of the green financing tranche for sustainable projects while the Islamic tranche will be used to plug the budget deficit.
Egypt’s fiscal discipline was hailed by the three main rating agencies— Fitch Ratings, Moody’s, and S&P Global —who could not help but upgrade the country’s sovereign ratings as well as their outlooks, citing its strong economic growth prospects following fiscal reforms.
Banking sector
Egypt’s domestic banking sector remains very liquid, with high deposit growth off a low base of financial inclusion. There has been a wave of deal-making in the Egyptian financial service sector as banks position themselves for improved economic conditions post-pandemic era. UAE’s First Abu Dhabi Bank said in April that it had begun the share transfer related to the acquisition of 100% of the share capital of the Egyptian unit of Lebanon’s Bank Audi.
Bahrain’s Arab Banking Corporation (ABC) also acquired a 100% stake of Blom Bank Egypt for $427 million. Egyptian
investment bank EFG Hermes Holding acquired a 51% stake in state-owned Arab Investment Bank (AIB) in a deal valued at $163 million (EGP 2.55 billion) in May—the country’s first privatization since 2006 when it sold a majority stake in Bank of Alexandria.
– The World Bank
Driving growth
Founded in 2018, the Sovereign Fund of Egypt is part of the North African country’s broader structural reforms that are aimed at bolstering private investment. The sovereign wealth funds, which is modelled after those in the Gulf region, is aimed at generating additional wealth from under-utilized state assets.
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By An Kelles
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Director Middle East, Africa and India
faizal.bhana@jerseyfinance.je
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With $11.96 billion assets under management, the Sovereign Fund of Egypt is partnering with the private sector to attract domestic and foreign investments as well as build on economic reforms which began in 2016 with the flotation of the currency.
The Egyptian wealth fund was appointed by the country’s ministry of defense to sell part of a portfolio of companies in what would be the country’s first spin-off of companies owned by the military. Earlier this year, the wealth fund was looking for potential buyers of the National Service Projects Organisation’s (NSPO) Wataniya Petroleum—a fuelling station chain group run by the military.
Egypt and the UAE agreed in November 2019 to set up a $20 billion joint investment platform to invest in a range of sectors and assets. The investment platform will be run through the Egyptian wealth fund and Abu Dhabi’s ADQ. Since the creation of the joint venture, ADQ has made significant investments in Egypt including Lulu International’s $1 billion expansion into the Arab world’s most populous country.
PwC said the fund is aimed at helping Egypt better utilize its assets and to attract foreign investments that have, so far, been overshadowed by an infusion of overseas cash into the local debt market.
Under the leadership of President Abdel Fattah Al-Sisi, the Egyptian government is accelerating infrastructure development drive that includes a rapid development of the road network and an expansion of the Suez Canal. Egypt signed a $4.45 billion deal for a high-speed electric rail line to link the Red Sea and Mediterranean coasts with a Siemens Mobility-led consortium earlier in September 2021. The deal came months after a $23 billion deal between the German engineering and technology group and Egypt to build a 1,000 km highspeed train network that will link the country’s eastern and northern coasts and major cities.
Egypt is also on track to gradually start the shifting of government employees to the New Administrative Capital, a new city that is being built 45 km east of Cairo, by the end of the year. The new city, whose first phase is valued at around $25 billion, is designed to eventually house 6.5 million people to ease overcrowding in central Cairo.
– International Monetary Fund
Tapping Egypt’s vast wealth
After offloading a 51% stake in AIB, the Egyptian authorities seek to raise as much as $5.7 billion ( EGP 100 billion) by selling minority stakes in at least 20 stateowned enterprises on the stock market. The country plans to offer minority stakes in companies including Alexandria Mineral Oils Company, Eastern Tobacco, Alexandria Container as well as Cargo Handling and Abu Qir Fertilisers and Heliopolis Housing.
State-controlled payments firm e-finance for Digital and Financial Investments said in September 2021 it would offer up to 14.5% of its capital in a public offering on the Egyptian Exchange in the last quarter of this year.
Egypt is leaving no stone unturned in its bid to boost its coffers and lure foreign investors who fled during the 2011 uprising. The government launched a bid round for the exploration and production of oil and natural gas in 24 blocks that are located in the Gulf of Suez, the Western Desert, and the Eastern and Western Mediterranean in February 2021.
The North African country also signed nine new agreements for oil and natural gas exploration with investments above $1 billion earlier in 2021. Under the exploration deal, American energy giants Exxon Mobil and Chevron, France’s Total, Royal Dutch Shell, and South Valley Egyptian Petroleum Holding Company, will drill 17 wells.
Economic growth accelerated to 2.8% in the fiscal year that ended in June 2021 despite the impact of the pandemic on global economic activities, with the projection that it will reach 5.2% in the current fiscal year. Debt and the budget deficit, though still hefty, have been on a downward trend. The deepening and broadening of effective reforms are critical to speed up economic recovery and address unemployment.
