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Pushing Through Turbulent Times
Egypt has ramped up efforts to fight inflation including devaluing the pound as part of the authorities’ broader strategies to hedge the economy from the spillover effects of the war in Ukraine
Egypt is among emerging economies that remain vulnerable to the shocks that ripped through commodities markets following the start of the war in Ukraine on 24 February 2022. The redhot inflation and market upheavals that followed the war are contributing to the country’s worst foreign-exchange crunch since a dollar shortage five years ago that prompted the devaluation of the pound and eventually led to a $12 billion International Monetary Fund (IMF) loan.
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Though the impact of the war in Ukraine on the Egyptian stock market and the prolonged pandemic threatens to derail the most populous Arab nation’s growth prospects, the IMF projected in July that the economy will expand by 5.9% in 2022.
However, the fund urged the government to take further steps to foster private-sector development, improve governance and reduce the role of the state as the authorities seek a new loan to bolster an economy battered by fallout from the war in Ukraine.
“Decisive progress on deeper fiscal and structural reforms is needed to boost the economy’s competitiveness, improve governance and strengthen its resilience against shocks,” the IMF executive board said in July.
Since 2016, the government’s fiscal reform measures were critical in stabilising the economy and kept the pound largely stable until the Central Bank of Egypt (CBE) allowed it to weaken sharply in March to combat inflationary waves that were triggered by high oil prices.
Fitch Ratings does not expect the currency devaluation to affect banks’ capital ratios significantly and sees Egypt’s current account deficit declining to 3.5% of GDP in the fiscal year 2022/23 from 4.6% in fiscal 2021/22.
Egypt has ramped up efforts to fight inflation, including devaluing the pound amid investment inflows from the country’s GCC allies as the authorities seek to hedge the economy against the worst of the problems. The cabinet also approved the pre-listing procedures for two military companies as the country moves to boost wider private sector participation in state-owned assets.
Very useful friends
Oil-rich Gulf states have lined up to offer Egypt billions of dollars in cash deposits
and investments since the beginning of the year. The Arab world’s most populous nation has secured pledges of more than $22 billion from Saudi Arabia, the UAE and Qatar to shore up its finances as it seeks a new loan from the IMF.
Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), launched a company in August to invest in promising sectors throughout Egypt. The wealth fund said the Saudi Egyptian Investment Company (SEIC) will invest in the country’s “promising sectors” from infrastructure and real estate to pharmaceuticals.
The launch of the investment firm by the PIF comes nearly a month after Saudi Arabia and Egypt signed 14 investment pacts valued at $7.7 billion. Saudi Arabia also deposited $5 billion in the Egyptian central bank in the first quarter of this year.
The UAE also unveiled a package of investments worth some $2 billion in March and since then several Emirati companies have snapped up stakes in key Egyptian companies. Abu Dhabi wealth fund ADQ acquired stakes in five publicly traded companies including Commercial International Bank, the country’s biggest private bank, electronic payments provider Fawry and Misr Fertilizers Production Company through a $20 billion joint investment platform with the Sovereign Fund of Egypt.
Other Abu Dhabi-based companies including property developer Aldar Properties, fuel and retail distributor ADNOC Distribution and First Abu Dhabi Bank (FAB) have poured billions of dollars into swathes of Egypt’s economy. Meanwhile, Qatar said in March that it had allotted $5 billion to invest in Egypt and such funding is welcome for the country, where the economy is being put under increasing pressure from the shockwaves of the war in Ukraine.
Egypt’s wealth fund, which was founded in 2018, is part of the country’s broader structural reforms that are aimed at bolstering private investment. The fund is modelled after those in the GCC region and is aimed at generating additional wealth from under-utilised state assets.
PwC said the fund is aimed at helping Egypt better utilise its assets and to attract foreign investments that have, so far, been overshadowed by an infusion of overseas cash into the local debt market. With around $12 billion in 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. It 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.
Egypt’s cabinet approved the pre-listing procedures for two military companies, petrol station operator Wataniya Petroleum and water company National Company for Producing and Bottling Water (Safi) in July, as the government seeks to offload minority stakes in at least 20 state-owned enterprises on the local bourse. Last year, the Egyptian authorities offloaded a 51% stake in Arab Investment Bank (aiBANK) in a deal valued at $163 million (EGP 2.55 billion).
– The International Monetary Fund
– PwC
The best-laid plans
Under the leadership of President Abdel Fattah Al-Sisi, Egypt is accelerating infrastructure development that includes a rapid development of the road network and an expansion of the Suez Canal.
The country is 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.
Egyptian lawmakers approved the budget for the fiscal year that commenced July 1, 2022, in June and the government projected that expenditure would surge by 15% to $108.3 billion
(EGP 2.07 trillion) in 2022/23 from $94 billion (EGP 1.79 trillion) while deficit will jump by 14.5% to $29.2 billion (EGP 558.2 billion).
Moody’s in May warned of a significant narrowing in Egypt’s foreign-exchange reserve buffer to meet upcoming external debt service payments as the ongoing war in Ukraine weighs on the country’s finances. Data from the central bank showed that Egypt’s net international reserves fell in July for the third time this year. CBE said that the figure declined to $33.4 billion at end-June from $35.5 billion a month earlier, following a dip in March and a $2 billion plunge in May.
However, the Egyptian government is negotiating with the IMF for a new loan to bolster an economy that saw as much as $20 billion in foreign outflows after investors in local debt exited what had been a favourite market.
Though the IMF applauded Egypt’s efforts to bolster confidence through a stable currency, the fund noted that “greater exchange rate variability during the Stand-By Arrangement (SBA) could have been entrenched to avoid a buildup of external imbalances and facilitate adjustment to shocks.”
The central bank, which raised its key interest rates by 200 basis points (bps) in May, kept its interest rates unchanged for a second consecutive meeting in August but acknowledged that the war in Ukraine is among the main external shocks to prices. CBE is expected to deliver another interest rates hike after the US Federal Reserve enacted its second consecutive 75 bps hike in July—the central bank’s biggest since 1994.
Egypt, a major food importer, has struggled to deal with record grain prices fuelled by the conflict in Europe. During a state visit to Germany in July President El-Sisi said he’d ask “our friends in Europe” to help convey a message to international financial institutions such as the IMF and the World Bank that “the reality in our country can’t support” the kinds of steps that might be called for while the current crisis persists. THE SIGNIFICANT NARROWING IN EGYPT’S FOREIGN-EXCHANGE RESERVE BUFFER TO MEET UPCOMING EXTERNAL DEBT SERVICE PAYMENTS AS THE ONGOING WAR IN UKRAINE WEIGHS ON THE COUNTRY’S FINANCES
– Moody’s
Banking sector
Egypt’s domestic banking sector remains very liquid, with high deposit growth off a low base of financial inclusion. “Egyptian banks’ net foreign assets should continue to recover following the devaluation of the Egyptian pound due to a boost to foreign investor confidence from a more flexible exchange-rate regime and a new IMF programme,” Fitch Ratings said in May.
There has been a wave of dealmaking in Egypt’s banking sector and the operating environment is expected to become highly competitive after investors pulled billions of dollars out of the country’s treasury markets, forcing the central bank to devalue the currency.
UAE’s FAB rebranded its Egyptian unit as ‘FABMISR’ in June following the completion of its merger with Bank Audi Egypt. FAB, the UAE’s biggest lender, completed its acquisition of 100% of the share capital of the Egyptian unit of Lebanon’s Bank Audi. Egyptian universal bank EFG Hermes completed its takeover of state-owned aiBANK in November 2021—the country’s first privatisation since 2006 when it sold a majority stake in the Bank of Alexandria.
Bahrain’s Arab Banking Corporation (ABC) also completed its acquisition of BLOM Bank Egypt last August for $425 million. The deal more than doubles Bank ABC’s branches in Egypt while diversifying the lender’s service offerings for wholesale, retail as well as SME and corporate customers. The scale achieved from these mergers is leading to improved liquidity management, enhanced profitability and reduced inefficiencies with better cost-to-income ratios.
Egypt is leaving no stone unturned in its bid to boost its coffers and lure foreign investors who fled during the 2011 uprising. The country undertook exchange rate, monetary and fiscal measures to protect the economy from adverse global developments including soaring prices and tightening financial conditions stemming from the war in Ukraine. However, fiscal and structural reforms to enhance private investment, exports and foreign investment remain crucial for the economy’s resilience and competitiveness.
– Fitch Ratings
