Previous Quarterly Editions
Expropriation Risk: 52 52 53 52 ► Political Violence Risk: 58 59 59 59 ► Terrorism Risk: 61 59 57 59 ▲ Exchange Transfer and Trade Sanction Risk: 64 55 55 64 ▲ Sovereign Default Risk: 75 75 75 74 ►
TREND ►
Egypt has maintained its macroeconomic stability throughout the COVID-19 crisis. The country avoided a (technical) recession last year and has not seen the inflationary spikes and currency instability that other large emerging markets have experienced due to the pandemic. The latest available data show that Egypt’s economy grew 3% year-on-year in January-March 2021, reflecting a recovery in private sector activity and the government’s ‘lockdown-lite’ approach to COVID-19. Less positively, government-led investment, which has been the engine of growth in recent years, contracted 11.3% year-on-year, reflecting excess capacity and ongoing pandemic uncertainty in some industries.
Egypt continues to depend heavily on portfolio investments in Egyptian Treasury bills and bonds as a source of foreign currency. As a matter of policy, the Central Bank of Egypt is averse to steep cuts to the benchmark interest rate (at 8.25%, it is one of the highest in the world), to sustain strong investor interest in domestic Egyptian debt. Egypt is vulnerable to ‘rate shocks’, or portfolio outflows triggered by the normalisation of monetary policy by the world’s leading central banks, imperilling the country’s foreign exchange position.
The continued weakness of other current account receipts, particularly from the travel and tourism sector, remains worrisome. The industry, which employs many thousands of Egyptians, was battered by COVID-19’s effects but received a major recent boost from the return of Russian tourists, one of Egypt’s largest sources of tourism arrivals. Since a 2015 terrorist attack on a Russian airliner above northern Sinai, Russia had barred its citizens from visiting Egypt. A major blow to the sector came in June when the United Kingdom designated Egypt a ‘red list’ country over COVID-19, a move that will potentially deprive Egypt of EGP1bn (USD63.7mn) in revenue every month. Pre-pandemic, the United Kingdom was the third largest source market for Egypt, behind Germany and Saudi Arabia.
Egypt’s slow vaccine drive clouds the prospect of recovery in the tourism sector. Official statistics under-report COVID-19 infection rates. As of late August, the country had administered enough doses fully to vaccinate just 3% of the population. However, vaccine shipments from the COVAX facility and bilateral partners such as China and Russia are easing vaccine supply problems. In June, Egypt also began receiving ingredients from China to manufacture the Sinovac vaccine locally. The government is attempting to pre-empt a fourth wave of COVID-19 infections and has set a target of vaccinating 40% of the 100 million population by the end of 2021.
The government has sought to broaden its domestic revenue base by focusing on enhanced tax collection (through the rollout of an e-filing system) and continued subsidy reform. In early August, the president, Abdel Fattah el-Sisi, called for a review of subsidised bread prices. Sisi signalled an urgency to slash the cost of the bread subsidy programme, which currently amounts to USD3.1bn per year. Bread prices are politically sensitive in Egypt, with food inflation contributing to the 2011 uprising that toppled the government.
Politically, the president, with the support of the military, maintains a tight grip on power and the security services continue to target suspected Muslim Brotherhood sympathisers. A case in point was the detainment in mid-July of one of Egypt’s most successful businessmen, the chief executive of the country’s largest dairy producer (Juhayna), on accusations of supporting the Brotherhood. The incident has hurt investor confidence as it underscored the government’s willingness to interfere with markets to quash perceived political opponents.
The president’s most trusted adviser on sensitive files, domestic and foreign, is Abbas Kamel, Egypt’s intelligence chief and a former army general. Kamel has been a key Egyptian interlocutor on the Libyan political transition, the dispute with Ethiopia over Egypt’s water security and the Israeli-Palestinian conflict. Earlier in August, Kamel met in Jerusalem with Israeli Prime minister Naftali Bennett and invited Bennett to visit Egypt. In deepening its ties with Israel, Cairo hopes to be viewed by Washington as instrumental to the stability of the region. US President Joe Biden had avoided calling his Egyptian counterpart since beginning his term until Cairo’s intervention in May’s eleven-day war between Israel and Hamas -- a sign that Egypt’s human rights record will come under greater scrutiny in the Biden era.
Elsewhere, Egypt-Ethiopia tensions over the Grand Ethiopian Renaissance Dam are rising. Ethiopia commenced the second filling of the dam in July, prompting Egypt to take the issue to the UN Security Council. Egypt is seeking a binding legal agreement on the filling and operation of the dam, which Ethiopia rejects on sovereignty grounds. The dispute will drag on but the risks of armed conflict -- despite rhetoric from both sides -- remain remote.
Risks of expropriation are largely idiosyncratic, due to corruption or state weakness (Egypt ranks at roughly 140th on the Worldwide Governance Indicators government effectiveness rating). As a matter of policy, Egypt’s current government is welcoming to foreign investors. Amid fiscal constraints, Egypt is seeking investment in sectors ranging from power and water to mining and hydrocarbons. The Sovereign Wealth Fund of Egypt is seeking partners to invest in 17 renewable energy-powered desalination plants, highlighting the government’s desire to open the economy. The oil and gas and real estate sectors remain the main foreign direct investment (FDI) plays but there is a focus on promoting manufacturing in the Suez Canal Economic Corridor project to boost job creation. In the second quarter of fiscal year 2020-21, FDI inflows fell 33% year-on-year, reflecting COVID-19’s impact.
President Sisi has consolidated loyalists in Egypt’s intelligence and military services and enjoys full parliamentary support. 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 stable 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 mid-August, Islamic State claimed responsibility for a roadside bomb that killed eight members of Egypt’s security forces in the restive northern part of the Sinai Peninsula. The attack demonstrates that Egypt -- especially the less developed North Sinai -- remains vulnerable to the ambitions of extremist militants. The Taliban takeover of Afghanistan after the international coalition’s departure in August may embolden regional Jihadist groups.
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 if there is another emerging market sell-off. Unemployment has moderated since COVID-19 struck, falling to 7.3% by the second quarter of 2021. However, labour force participation remains subdued.
A recent pickup in inflation -- which rose to 4.8% year-on-year in May (the fastest acceleration since December) on rising global commodity prices -- means that the central bank will likely keep interest rates steady through at least October.
Rating agencies have not revised their Egypt ratings, a sign of confidence, even though Egypt’s debt-to-GDP (gross domestic product) 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 to 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 International Monetary Fund support.
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