Some elements of economic stability
2013-14 saw a stabilisation in the economic situation after nearly three years of high volatility and growing fiscal and external imbalances. Despite the fiscal stimulus, GDP growth has remained feeble (2.2%), particularly due to the caution of foreign investors. In the short-term, growth might pick up slowly. The latest PMI index available is in positive territory (52.4 in September) and there are signs of a return of confidence. Thus the large-scale public purchase of investment certificates linked to the development of the Suez Canal can be seen as a positive signal in terms of political cohesion.
The budget deficit has been brought down to 11.4% of GDP in 2013-14, from 14.3% in the previous year, reflecting the first effects of the reform of energy subsidies. However, the financing requirement remains high and government debt stood at 85% of GDP at end 2013/14. This is financed by local banks – who have abundant liquidity – at a high, but falling, cost. The current rate on one-year T-bills is currently around 12%, from over 14% in 2012.
The current account remains in deficit (-0.3% of GDP estimated for 2013-14), due to the deterioration of the energy balance (USD2.2bn deficit, from a surplus up until 2010-11) and the significant deterioration of tourism income. The retention of certain measures to control movements of capital provides part of the explanation for the stability of the Egyptian pound. However, pressures on the exchange rate are not negligible, as shown by the slight slip in value seen in April 2014. Only financial support from the Gulf States (primarily Saudi Arabia and the UAE) has allowed foreign currency reserves to remain at a stable level. This support has been estimated at around USD12bn in 2013-14, covering the bulk of Egypt’s external financing requirement. Despite this, the level of foreign exchange reserves held by the Egyptian Central Bank (ECB) is still alarmingly low, at USD13.6bn at end-September 2014 (excluding gold), equivalent to less than 2.2 months of imports of goods and services.
In the short term, while public finances appear to be in a sustainable position, external accounts are vulnerable.
A fragile balance of payments
Since 2010-11, we have seen a steady decline in the three main sources of income for the Egyptian economy. Export receipts from tourism, the Suez Canal and oil and gas (respectively 20%, 8% and 18% of current account receipts in 2009-10) no longer ensure a current account surplus. Tourism has been hit hard by the internal political situation. Income from the Suez Canal has been fairly stable, as it depends mainly on the state of the oil market and global economic conditions. Net oil and gas receipts have suffered from the consequences of stagnant production levels and the steady increase in domestic energy consumption.
For 2014-15, the trade deficit is likely to show a slight narrowing but will remain substantial (more than 11.5% of GDP estimated in 2013-14). The deficit on oil and gas could decrease slightly thanks to lower crude oil prices. The price of Brent crude is likely to average USD100/b in 2015, from USD106/b in 2014.
A reduction in the energy deficit is still a medium-term prospect. The reform of energy subsidies that is now taking place could reduce consumption over the medium term. On the supply side, the arrears of the national oil and gas company (EGPC) owed to international energy companies (currently estimated at around USD5bn) are at last beginning to be resolved. A loan equivalent to USD1.4bn provided by a banking consortium has enabled the repayment of part of these arrears. In all, the government expects between USD2bn and USD3bn to be repaid by the end of the year.
Cereals are another important element of imports. Egypt is the world’s biggest importer of wheat, and cereals account for some 6% of total imports. The IMF predicts that wheat prices will continue to fall over 2015 (by 18%). Taken together, the effects of lower commodity prices could help stabilise the trade deficit.
The tourist industry is facing major difficulties. Visitor numbers were down 35% y/y in 2013-14. Between July 2013 and June 2014, just under 8 million tourists visited Egypt, from more than 14 million in 2009-10. However, the latest monthly figures seem to suggest an improvement in the situation, both in terms of tourist numbers and the number of nights spent in the country. This improvement is very fragile, however, and could be threatened by growing political and security risks in the Middle East.
The reduction in the current account deficit in 2013-14 was made possible by transfers. Official transfers represented around 20% of foreign currency entries in the current account (from less than 2% in previous years). Private transfers remained at high levels (more than 20% of foreign currency inflows). These transfers are likely to remain strong in the short term due to favourable economic conditions in the Gulf.
All in all, there are few real improvements expected in the current account for 2014-15. Only the level of public transfers and more favourable terms of trade will help limit the external financing requirement. Taking a fairly conservative view on official transfers and assuming a very gradual return to growth, we expect a current account deficit of around 2.5% of GDP in 2014-15 and 2.8% in 2015-16.
External support likely to stay strong
In the short term, a number of factors will help support the country’s external liquidity. Firstly, the loan from the UAE (USD9bn over 5 years) will help finance Egyptian oil imports. This sum represents around two-thirds of Egypt’s total annual financing requirement. In the shorter term, part of the subscription for Suez Canal certificates (around USD1.5bn) was made in dollars. This figure covers 60% of the sums due to Qatar in October and November 2014.
In the medium term, the “Friends of Egypt” summit due to be held next February could generate a significant volume of FDI (sums of around USD100bn have been mentioned) to finance projects that have already been identified, although it is important to maintain caution about the commitments that will actually be made.
Meanwhile, the return of the IMF to the country with a view to opening an Article IV consultation is a positive sign, even though the introduction of an IMF support programme does not seem to be on the agenda.
Although the BoP situation has been stabilised for the time being, foreign currency liquidity remains fragile. Only a rebuilding of confidence amongst foreign investors will produce a tangible improvement. Although by no means a miracle cure, an agreement with the IMF would be a step in the right direction. For the time being, the authorities have elected to rely on a regional solution.
BY Pascal DEVAUX