Previous Quarterly Editions
Expropriation Risk: 52 52 52 53 Political Violence Risk: 58 58 59 59 Terrorism Risk: 61 61 59 57 Exchange Transfer and Trade Sanction Risk: 64 64 55 55 Sovereign Default Risk: 75 75 75 75
TREND ►
The government has been effective in containing the COVID-19-related economic fallout; Egypt avoided economic contraction in 2020, mainly due to continuing government spending on infrastructure. However, the public health toll is costly; confirmed cases as of May 2021 were nearly 238,000, with 13,904 fatalities among a population of more than 100 million. However, with limited COVID-19 testing and higher excess deaths, the true death toll is likely considerably higher.
Egypt is planning to ‘coexist’ with COVID-19, so most social restrictions have now been lifted, though compliance was in general lax anyhow. Egypt began vaccine rollout in February 2021 but has encountered logistics difficulties. There has been some disquiet over the government’s decision to charge for vaccination, though the government says those covered by social welfare programmes will be vaccinated for free. The government aims to vaccinate 65% of adults under 30 years old and 40 million people over 30 years by end-2021, but this target will likely be missed.
COVID-19-related economic damage is substantial as tourism- 14% of Egypt’s GDP and a major employer- has suffered heavily. Remittances from Egyptians overseas, a key hard currency source, remained resilient (reaching a record USD29bn in 2020, compared with USD26.8bn in 2019). However, Suez Canal revenues, another critical foreign currency source, fell by almost 3% in 2020 to USD5.6bn compared to 2019.
Foreign direct investment flows have dried up but portfolio inflows, driven by high interest rates, have been recovering since June 2020, following the pandemic-related sell off in March-April 2020. Egypt has obtained loans totalling USD8bn from the International Monetary Fund (IMF) and raised another USD5bn in Eurobonds, to meet the estimated USD10bn needed to cover a shortfall created by increased spending on education and infrastructure, and now COVID-19. Egypt should therefore still grow in 2020-21, but unemployment is likely to rise sharply, with the risk of social unrest.
One bright economic spot is the energy sector. Rising gas production from the Zohr field and the reopening of the Damietta gas-processing terminal have increased Egypt’s liquefied natural gas (LNG) exports; based on current trends, Egypt’s LNG exports during the first quarter of 2021 will exceed the whole of 2020. This will relieve current account pressures as record-high natural gas prices in February 2021 and the current oil price rally will boost export values.
On the political front, the government is seen as having handled COVID-19 well, but it has maintained constraints on the domestic media and international media reporting. Parliamentary elections in December 2020 returned mostly pro-military parties and lists. Official turnout was just 20-30%, which is extremely low even by Egyptian standards. This reflects on public disengagement with an uncompetitive electoral process and its impact on parliamentary checks on government conduct. Legislative amendments in July 2020 strengthened the military’s role in government, with all governorates now required to have a ‘military adviser’ team.
Regarding foreign policy, tensions over Egypt’s involvement in the long-running Libyan political transition crisis have subsided, with Egypt backing the intra-Libyan reconciliation process and Government of National Unity. Egypt’s policy reversal stems from Cairo’s pragmatic recognition that Turkey’s political and military presence in Libya will be long-lasting. Egypt’s pivot is intended to counterbalance Turkey’s influence in Libya and to help facilitate a role for Egyptian firms in Libya’s post-war reconstruction.
This pivot has also dialled down Egypt-Turkey tensions, although differences between the two over political Islam will limit the thaw. In May 2020, Cairo hosted the first official diplomatic engagement between the two countries since a breakdown in ties in 2013; talks were held at the level of deputy foreign ministers with plans for a meeting between foreign ministers later this year (2021). However, Egypt and Turkey’s ambitions for developing gas fields in the eastern Mediterranean will be a bone of contention, as will Turkey’s support for the Muslim Brotherhood.
Elsewhere, Egypt-Ethiopia tensions over the Grand Ethiopian Renaissance Dam (GERD) are rising. Three-way talks hosted between representatives of Egypt, Sudan and Ethiopia in April 2021 by the Democratic Republic of the Congo, as current African Union (AU) chair, broke down without agreement on a way forward, prompting Sudan and Egypt to seek recourse to the UN Security Council- though efforts to seek a UN resolution are unlikely to lead anywhere. Egypt is campaigning at the United Nations, the AU and Arab League to persuade Ethiopia to make concessions before it starts filling the dam later this year in 2021. Some form of military operation deterring Ethiopia from filling the GERD is possible, though highly unlikely. A recent USD5bn deal to purchase 30 French-manufactured Rafale fighter jets is intended to add weight to its threats to Ethiopia.
More broadly, COVID-19 will force Egypt to focus on the virus’s domestic impact and retaining good relations with key bilateral creditors; the United Arab Emirates (UAE), China and Saudi Arabia. In line with broader Arab-Israeli normalisation, Egypt is warming ties with Israel including sending high-level officials. However, Egypt will watch for any Israeli move to annex part of the West Bank and the potential repercussions within Egypt.
With energy prices recovering on vaccine optimism, Egypt’s gas sector can deliver positive and significant revenues in coming years, as new offshore fields come on-stream and Israeli gas flows through Egypt to foreign buyers. Foreign investment into Egyptian gas will also rebound post-COVID-19. In the short term, domestic demand from the power sector, which has been spurred by a government price reduction in April 2020, could also help offset the fall in global gas demand.
President Abdel Fattah el-Sisi has consolidated loyalists in Egypt’s intelligence and military services and enjoys full parliamentary support. Despite the state’s zero-tolerance policy for dissent, mid- and late-2020 protests occurred across Egypt. Although the protests were partially motivated by the anniversary of the September 2019 anti-corruption protests, they also incorporated ongoing demonstrations against government destruction of allegedly illegal informal housing across Egypt since March 2020.
A combination of rising food inflation and unemployment would indicate a rapidly rising risk of mass economically motivated protests, though this remains unlikely given Egypt’s access to foreign finance and improving macroeconomic performance. Meanwhile, the domestic crackdown on the Muslim Brotherhood is likely to intensify, including expropriating its members’ assets, as Cairo continues to see the Brotherhood as a regime stability threat.
TREND ▼
In May 2020, Egyptian security forces killed 21 suspected militants in North Sinai, part of two groups that the interior ministry said were planning attacks over Eid. Occasional terrorist attacks in the capital remain likely. There have been further but relatively minor attacks on security forces in Sinai, where the campaign to isolate the militants from the tribal population in conjunction with greater investment in north Sinai appears to have reduced support for the terrorists and the frequency and scale of their attacks.
Egyptian economic growth should remain positive for 2020-21 at around 2.5%, although still lower due to COVID-19. Egypt’s pound has been broadly stable but would be undermined if COVID-19 resurges or there is another emerging markets sell-off. Unemployment has moderated since COVID-19 struck, falling to 7.3% by September 2020. However, labour force participation remains subdued.
In March 2021, annual inflation rose to 4.8%, still lower than the central bank’s 7% target (plus or minus two percentage points) on average until end-2022. Persistently low inflation partly reflects pandemic-related subdued demand.
Rating agencies have not revised their Egypt ratings, a sign of confidence, even though Egypt’s debt-to-GDP had risen to around 84% before COVID-19 hit, given heavy government infrastructure spending. Cairo has succeeded in lengthening the maturity structure of its debt burden, which will help contain sovereign default risks. International reserves have also risen in recent months, though not yet to pre-COVID-19 levels, reflecting the recovery in portfolio investments and access to emergency IMF support.
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