Previous Quarterly Editions
Expropriation Risk: 45 44 43 45 Political Violence Risk: 51 48 50 47 Terrorism Risk: 64 65 63 61 Exchange Transfer and Trade Sanction Risk: 56 54 52 55 Sovereign Default Risk: 49 49 48 52
TREND ▲ OUTLOOK ▲
With a population of over 100 million, many in overcrowded cities, and lacking adequate health facilities especially in rural areas, Egypt faces a serious risk from COVID-19. Moreover, the central pillars of its economy, which include remittances, tourism and revenue from the Suez Canal, are all vulnerable to virus-related disruption and the global economic slowdown now underway. Foreign direct investment (FDI) flows are drying up, and while lower oil prices will save money on imports, they will also reduce Egyptian earnings from oil-indexed gas exports. The government of President Abdul el-Sisi acted decisively to prevent the spread of the virus by closing schools and universities and implementing social distancing regulations and has made clear its readiness to impose harsher measures as needed. To mitigate the impact, it moved quickly to cut interest rates and fuel prices, increase food subsidies, raise wages in the public sector, and provide compensation for job losses in the manufacturing sector. A second wave of measures in early April 2020 included three months of payments to unregistered workers in the informal economy that amounts to roughly equivalent to 25% of the average factory worker’s wage, and new help for the tourism sector, which may account for as much as 15% of the economy. The cost is being financed by greater borrowing to support a six-billion USD relief fund. However, Cairo has only limited ability to support the country’s informal sector, which provides two out of every three jobs, and more Egyptians will fall below the poverty line. President el-Sisi is aware that the demonstrations that broke out in late 2019, ostensibly around corruption within the army, showed that the underlying causes of the Arab Spring of 2011 remain. These have been exacerbated by the failure of the improved economic performance that has followed compliance with the terms of an IMF support package to have had any appreciable impact on the daily lives of most Egyptians. In response, Cairo has increased its crackdown on both the domestic media and international reporting from the country. Meanwhile, the president has been preparing for parliamentary elections due in November 2020 with changes to the leadership of the Future of the Homeland party that mobilises his political support. To maintain spending levels, he will want to ensure that financial backing from Saudi Arabia and the UAE continues, although the extent of their support may be affected by the fall in oil prices and the impact of COVID-19 on their economies. The three countries are all involved in supporting General Haftar in Libya as tensions rise with Turkey over its backing of the internationally recognised government in Tripoli. Negotiations brokered by Washington between Egypt and Ethiopia over the Renaissance Dam project experienced a setback in March 2020 following Ethiopian accusations that US mediators are biased towards Egypt. However, an eventual compromise is still likely under which the dam will be filled more slowly than planned and Addis Ababa does more to meet Egyptian demands over the quantity of water to be released. Before the COVID-19 crisis, el-Sisi appeared interested in pursuing a more active regional and international role, but the virus will force him to focus primarily on domestic challenges again.
TREND ▲ OUTLOOK ►
Despite what Cairo hopes will be short-term concerns about low oil prices pulling down gas prices, Egypt’s gas sector should deliver significant revenues over the next three years as new offshore gas fields come on stream and Israeli gas flows through Egypt to foreign buyers. FDI in the gas sector should rebound quickly from any virus-related drop, which is important given Egyptian hopes that major investment in the sector will allow it to meet domestic demand while still increasing the volumes available for export.
TREND ▼ OUTLOOK ▲
The relentless crackdown on the Muslim Brotherhood continues even as support for the organisation has weakened. The regime fears the Brotherhood’s organisational capacity, which has been evident among the thousands of its members in prison. The importance of Salafism is on the rise but Salafis lack the organisation skills of the Brotherhood and are inclined to back the regime whilst criticising some of its policies. Egypt is concerned about Turkey’s regional ambitions, particularly its role in Libya but also its interest in east Mediterranean gas as well as its support of Qatar and the Muslim Brotherhood. Cairo held large scale military exercises shortly after Turkish troops were sent to Libya. Although the media in both Egypt and Ethiopia have recently speculated about the possibility of a military clash if there is no resolution to the Renaissance Dam dispute, the two governments know that the risks are too great to contemplate this and will work with the US to seek a negotiated solution.
TREND ▼ OUTLOOK ►
The military campaign in Sinai continues and only one terrorist attack, which targeted the gas pipeline linking Egypt and Israel, was recorded during the first quarter of 2020. No attacks were reported in Egypt proper where the security forces seem able to prevent ISIS or Al Qaida building sustainable terrorist infrastructure in Cairo and other cities, although occasional incidents remain a possibility.
The Egyptian economy was in comparatively good shape before the onset of the COVID-19 crisis. Total debt was on track to fall to a lower-than-expected 83% of GDP by the end of the current fiscal year, as against a target of 89%. Inflation ended 2019 at less than 5%, although it had reached 9% by the end of March 2020. But the central bank spent 5.4 billion USD from its foreign exchange reserves during March 2020 to cover part of the divestments by foreign holders of Egyptian securities, as well as extra import requirements and foreign debt servicing. Egyptian banks have also been buying shares on the Stock Exchange to help compensate for the withdrawal of foreign funds. The government has exempted immediate stock transactions from any stamp tax and foreign investors from the capital gains tax until January 2022.
Egypt began the year with foreign reserves of 40 billion USD, giving it a relatively comfortable cushion if the crisis is sharp but short. After a successful 2-billion-dollar bond placement in November 2019, the government did not expect to return to the markets before the current fiscal year ends in June 2020. However, it took the opportunity for a further placement worth 4 billion USD in February 2020 and now expects at least one more issue before June 2020. However, it will need to offer higher yields as the balance of payments and the budget deficits increase. The government expects the budget deficit to be close to 7% in the coming fiscal year but it will inevitably be much greater given the need to counter the economic impact of the virus.
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