Egypt: New IMF deal secured

The IMF announced on October 27 that it had reached staff-level agreement with Egypt around the terms of a new extended fund facility (EFF) arrangement. This followed an out-of-schedule announcement from the Central Bank of Egypt’s MPC several hours earlier that it had hiked its benchmark interest rates by 200bps, taking the overnight deposit rate to 13.25% – the bank had held rates steady at its previous three meetings. The bank’s communique also reiterated the commitment made in recent weeks and months to a ‘more durably flexible exchange rate regime’ and plans to set up a derivatives market to further deepen liquidity. The EGP subsequently depreciated by around 15% against the USD.

EGP/USD

Source: Bloomberg, Emirates NBD Research

Real rates still negative

Source: Haver Analytics, Emirates NBD Research

In common with many emerging markets, Egypt’s external position has come under concerted pressure since the Russian invasion of Ukraine which prompted a rise in the price of key commodity imports, precipitated portfolio outflows, and held back growth in the tourism sector. Despite significant support from the GCC states already, net international reserves fell by some USD 8bn over the year to June 2022. While they have stabilised in recent months, the external environment remains challenging as financial conditions continue to tighten, underlining the importance of this new agreement with the IMF. Although the USD 3bn pledged by the IMF itself is towards the lower end of expectations, the programme should serve as an effective policy anchor to encourage inflows of capital from other sources also. 

Current account deficit narrowed in FY 21/22

Egypt’s balance of payments data shows that the current account deficit narrowed as a proportion of GDP in the fiscal year 2021/22 (to June), coming in at -4.0% compared to -5.0% the previous fiscal year. This was achieved despite the significant global challenges facing emerging markets in particular during the period and was driven through both the above expectations (preliminary) 6.6% real GDP growth noted by the Central Bank of Egypt in its recent MPC communique, and by a 10% drop in the nominal current account deficit, from -USD 18.4bn to -USD 16.6bn. Next year we forecast it will come down to -USD 13.9bn, or -3.2% of GDP.

The drop in the current account shortfall in FY 2022 was achieved in large part through the second-quarter figures. Despite the shock to global commodity prices following the Russian invasion of Ukraine in February, Egypt’s goods imports in the final quarter (April-June) were up only 8.7% y/y. Petroleum imports were up 61.8% y/y, but by contrast other imports were actually down -0.3% y/y. Consumer durables fell by -57% y/y as import controls were tightened, reducing the availability of US dollars. While this helped to reduce the current account deficit, it has arguably contributed to inflation and weighed on growth – issues around sourcing parts and materials have been repeatedly cited as a negative factor by respondents to the S&P Global PMI survey for Egypt. Positively, the CBE’s recent communique also said that the mandated use of letters of credit for import finance will be gradually repealed over the next several months to year-end, which will potentially allow for easier access to dollars. This could provide a boost to private sector activity in the country, with the CBE noting that ‘this will serve as a catalyst for the rejuvenation of economic activity in the medium term.’

Current account deficit narrowing

Source: Haver Analytics, Emirates NBD Research

Looking at goods exports, the gas sector continues to be a boon to Egypt’s external finances since 2018 and ‘petroleum’ exports were up 109% in FY 21/22 compared to the previous year and 84% y/y over April-June. Gas exports by volume this year to July are up by nearly half and there have been efforts to conserve energy usage at home – through rationing electricity usage for lights and air conditioning at businesses, and lighting on the street and in government institutions, aiming at reducing the usage by 15% which should free volumes up for export to gas-hungry Europe. On the other hand, non-petroluem exports have not expanded as rapidly as might have been hoped given the depreciation of the pound in March and since, likely reflecting the challenging external environment; other exports were up 20% y/y in the April-May quarter. With the latest PMI report showing the steepest fall in new export orders in the series, this will likely come under greater pressure as the global economy slows.

On the services side, the tourism sector has held up well given that Ukraine and Russia are among the two largest source markets for Egypt. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt welcomed 4.9mn visitors over January-June, up 84.5% y/y. That helped boost travel receipts by 121.1% y/y in 21/22, and while they remained slightly down compared to pre-pandemic 2019 they were nevertheless at the second highest level since 09/10 in nominal terms. While the conflict in Europe and a slowing global economy will likely weigh on tourism in the coming quarters, the upcoming COP27 event and ongoing investment in new tourism draws will help support the sector.

Looking at transfers, remittances were up 1.6% in 21/22, a slower pace of growth than seen through the pandemic when they retained robust double-digit levels of growth. Nevertheless, given the strong outlook for GCC economies and their dollar peg over the current fiscal year – especially when compared to much of the rest of the world – we expect remittances to hold up as the global backdrop deteriorates.

The financial account also recorded a deficit last fiscal year

Portfolio investment in Egypt was down -USD 21bn in the fiscal year to June, a shock to the balance of payments as compared to the previous year when international investor appetite for Egyptian treasury bills had seen it rise by USD 18.7bn. As of end-July, foreign ownership of Egyptian treasury bills had fallen to USD 7.5bn, from USD 21.3bn in January as global risk-off sentiment and aggressive tightening by developed market central banks, which has not been matched by the CBE, has weighed on appetite. This has driven the proportion of t-bills owned by foreigners down from 22.8% to just 9.5%.

Foreign ownership of local tbills, USDbn

Source: Haver Analytics, Emirates NBD Research

Finance minister Mohamed Maait has explicitly said that the government is looking to move away from a reliance on carry trade inflows towards greater exports and FDI, which was up 71% y/y at USD 9bn in FY 21/22, from USD 5.2bn the previous year. The expectation is that privatisations and the sale of government assets will help maintain stickier investment inflows going forward. One source of this will likely be the GCC states which have pledged significant sums in FDI to Egypt since its finances started coming under pressure in March, in addition to deposits made at the central bank.

External debt is mostly long-term

CBE figures show that external debt stood at USD 158bn at the end of June, having risen by USD 19.9bn over the year. The bulk of this (USD 131.4bn) was long term at issuance, and of that figure more than half (USD 67bn) was owed to multilateral institutions including the IMF (USD 52bn) and the GCC states through their long-term deposits at the CBE (USD 15bn). Of this, the UAE has USD 5.7bn and Kuwait has USD 3bn, while KSA added USD 3bn and rolled over an existing USD 2.3bn in October 2021, suggesting that further rollovers are likely.

External debt by original maturity, USD 158bn

Source: CBE, Emirates NBD Research

Short-term debt stood at USD 26.4bn in June, making up a far smaller proportion of the total external debt load than long-term. However, there was a sharp pick-up in short-term external debt in the January-March quarter which saw the ratio to net international reserves rise to 71.3%, from 31.4% previously. This was driven by the deposit of significant support funds from the GCC at the central bank. According to the CBE, USD 13bn in short-term deposits was deposited by the GCC states in Q1, with USD 5bn from KSA and UAE and USD 3bn from Qatar. The assumption is that this support will continue and according to reports at the time, the KSA deposit has a maturity of one year and could be rolled over – the KSA has precedent in rolling over its deposits at the CBE so this is a fair assumption, especially given the oil windfall the kingdom has enjoyed this year.