Macro Analysis /

Egypt: CBE webinar key takeaways – Covid-19 implications and outlook

  • Effective recent economic reforms are behind Egypt's healthy position today as it faces Covid-19.

  • The CBE believes in timely and pre-emptive actions to minimize the effect of the shock and improve economic resilience.

  • CBE projects non-contractionary growth of 4% in FY19/20, a downward debt burden and a positive primary fiscal balance.

The CBE conducted a webinar yesterday addressing how is Egypt facing the economic shock posed by Covid-19, what their strategy is for the necessary intervention to ensure a smooth reaction and what is their outlook for the economy as it fights and recovers from Covid-19.

The effective structural reforms recently taken are the reason Egypt's stands steady against this shock

The IMF's Extended Fund Facility (EFF) taken in 2016 was used to bridge the balance of payments shortfalls accompanying necessary economic reforms such as the switch to a floating exchange rate regime. The success was a fast consolidation of fiscal balances, where primary balance went from a deficit of 3.5% of GDP to a surplus of 2% of GDP in 3 years’ time.

Net international reserves strongly recovered until it reached historically high levels of USD 45 bn by February 2020; which created an important buffer that allowed the CBE today to manage capital outflows smoothly.

The exchange rate stabilized over the past 3 years, after appreciating significantly, and becoming one of EM’s best-performing currencies; therefore, anchoring investor confidence and speculations.

Attention was given to the banking sector, enhancing its liquidity ratios and net foreign assets position, which later has given the sector room to maneuver and manage unexpected outflows with a buffer.

Pre-emptive policies and timely actions solidify outlook

  • The EGP 100 bn government support package to cushion the negative impact on vulnerable sectors, of which so far EGP 40 bn has already been used to support the most vulnerable sectors.
  • EGP 50 bn support is in place for the tourism sector, being one of the most vulnerable sectors to this economic shock while also being very labor intensive.
  • A 14% increase in pensions effective July 2020 and should support around 10 million households. As well as cash transfers to 2 million irregular workers, to be disbursed over 3 months.
  • A 300 bps interest rate cut, in light of the assessment of the shock facing the economy, to ensure sustainable growth.
  • Raising credit limits to finance working capital to ensure no disruption in payment of salaries to employees of struggling companies.
  • Adjusted interest rates for the CBE initiatives and bringing down most of the interest on these subsidized loans to 8% and 5% for the tourism sector.

Outlook and projections

  • CBE sees GDP growing at reasonably healthy numbers, not in the vicinity of 5% but around 4-4.2% in FY2019/20 and then at 3% in FY2020/21. And in the worst-case scenario where the outbreak is prolonged until the end of 2020, they see GDP growing at 2% in FY2020/21.
  • While inflation is expected to remain within the CBE’s targets of 9% (+/-3%) in 2020.
  • On the fiscal side, in spite of spending on fiscal stimulus and interventions, the primary balance is expected to remain positive, although below its current level of 2% of GDP. 
  • Debt burden should continue its downward trajectory albeit at a lower magnitude, yet still preserving previous achievements made and creating necessary buffers.
  • Outlook for the EGP offers no reason for concern as the banking sector has an elevated level of liquidity in both foreign and local currency and since the market is accustomed to this flexibility, speculations should not result in the rise of the black market.
  • Preemptive actions taken by the CBE and the ministry of finance, in addition to the IMF’s USD 2.8 bn RFI and SBA should minimize the effect of balance of payments shortfalls and help bridge this financing gap currently in place until safe ground is reached from where the economy would recover quickly.
  • Egypt is among the few countries with a credit rating that would provide easy access to international markets and would be able to generate funding at reasonable interest rates from international investors.
  • While Egypt experienced its biggest ever capital outflows of USD 17.5 bn in 2 months, enough inflows are expected and would buffer the negative effect this capital flee should have had on the economy.