Egypt’s post-COVID economic recovery is broadly on track
KUWAIT: With lockdown restrictions easing over the summer and businesses gradually reopening, economic growth has continued to recover. GDP growth accelerated to 7.7 percent y/y in 2Q21 (the final quarter of FY20/21) - albeit boosted by a base effect after weakness a year earlier - from 2.0 percent in 1Q21. This pushed growth to 3.3 percent during FY20/21 from 3.6 percent in FY19/20. However, the tourism sector (worth about 12 percent of GDP in 2019) is likely to remain under pressure due to continued international travel disruptions. We expect growth to recover to around 5.0 percent over the medium term based upon the authorities’ continued commitment to crucial economic reforms, and assuming no major slowdown in the global economic recovery including due to the emergence of more contagious coronavirus strains.
Fiscal deficit
Despite huge pandemic pressures, the government still managed to trim the fiscal deficit again last year, helped by improved spending control and slower growth in debt service costs. The deficit narrowed to 7.4 percent of GDP in FY20/21 from 8.0 percent a year before, with the rise in revenues (+12 percent y/y) outpacing growth in spending (+9 percent). The primary balance (i.e. excluding interest payments) reached a surplus of 1.4 percent of GDP. As the economy recovers and the government pursues its debt restructuring strategies (including diversifying the debt structure and extending the average debt maturity), the overall budget deficit could narrow to 7.0 percent of GDP in FY21/22 and further to about 6.0 percent by FY23/24. This will help public debt decline to about 86 percent of GDP by the end of June 2022 and further in the medium term. Given prevailing low global interest rates and previous successful debt issues, the government is likely to utilize external borrowing to finance a major part of these projected deficits.
Drop in tourism revenue
Despite the gradual recovery of Egypt’s external position, the current account is still under pressure as subdued international travel weighs on the tourism sector, the main source of foreign currency earnings. In fact, the drop in tourism revenues in FY20/21 (50.7 percent to $4.9 billion) contributed to a widening of the current account deficit to $18.4 billion (4.6 percent of GDP) from $11.2 billion (3.1 percent of GDP) in the previous fiscal year. We expect the deficit to narrow to an average of 2.5 percent in future years on a recovery in tourism and trade. On the financial side, the recent acceleration of capital inflows combined with IMF support ($5.2 billion Stand-by Arrangement, COVID emergency financial assistance of $2.7 billion and $2.8 billion from an SDR allocation) and foreign borrowing have more than offset the increase in the current account deficit. This has helped the pound remain broadly stable against the US dollar at an average of EGP15.7/$1 so far this year. Meanwhile, after dropping to a pandemic low of $36.0 billion in May 2020, net foreign reserves had recovered to $40.8 billion in September 2021, further supporting the external picture. Monetary policy on hold amid moderate inflation.
Amid rising commodity and energy prices, inflation accelerated to 6.6 percent y/y in September (4.5 percent in 1H21). Over coming months, the late-July increase in fuel prices and a potential rise in prices for subsidized bread could push up the headline rate. Still, inflation should remain under control in FY21/22, averaging about 5.8 percent compared to 4.5 percent in FY20/21, much lower than in the past, and still towards the lower end of the CBE’s target range of 7 percent ±2 percent. So far in 2021, the central bank has kept its policy rates unchanged at relatively high levels (8.259.25 percent). Although a fresh rate cut is possible in Q4 to support the economy and lower debt financing costs, the bank will be mindful of the need to avoid triggering capital outflows, especially if as expected the US Fed starts to taper its asset purchases.