Pharos Research forecasts serious economic downturn in Egypt

Pharos Research has forecast a significant downturn of as much as $6bn across the Egyptian economy in the coming fiscal year (FY) 2020/21 due to the ongoing coronavirus (COVID-19) outbreak. The research group noted that across the board revenues will be affected, namely in tourism, Suez Canal transit revenues, oil, and trade.

Pharos said the potential footprint left on the Egyptian economy by coronavirus will leave an impact through a plunge in oil prices and reduced Suez Canal revenues. A weakening in global economies, lower trade volumes, a trade deficit, and lower remittances coming into Egypt, are all likely to affect the national economy.

Figures released by Pharos Research in light of the coronavirus’ global impacts forecast a downturn from $12.6bn for FY2018/19 to $6-8bn in FY2019/20. The group added that this would be due to global lockdowns and travel bans, particularly Egypt’s decision to ban international flights to the country for a period of time.

Pharos Research also noted that Suez Canal revenues are likely to see a significant decrease due to the global economic slowdown, lower trade volumes as a result, and decreasing oil prices. The group noted that Suez Canal revenues are likely to fall from EGP 101.1bn in FY2018/19 to approximately EGP 98.6bn in FY 2019/20.

The research group added that remittances coming into Egypt from the GCC are likely to see a downturn from $22bn in the previous FY to $17-18bn in FY2019/20. They noted that this may be due to weaker GCC economies, falling oil prices, and an interruption in supply chains amongst other factors.

As a result of coronavirus, balance of payments net, lower tourism, remittances, and Suez Canal revenues, with a narrower trade deficit, will cause depreciation in exchange rate, higher inflation, and monetary policy responses.

Pharos Research also said that there will be an impact on the real economy through the fiscal sector. This will include falling expenses and revenues, alongside rising treasury yields and a reduced debt service. In the Real Sector, the group predicted a lower GDP performance, lower Purchasing Managers’ Index (PMI), and a weaker employment sector.

Indicator	Direction	Range	Reason
Tourism	Decrease	From $12.6bn forecasted for FY2018/19 to $6-8bn in FY2019/20	– Global lockdowns
			– Travel bans
			– Containment measures
Suez Canal	Decrease	From EGP 101.1bn in FY2018/19 to EGP 98.6bn in FY2019/20	– Low oil prices
			– Global economic slowdown
			– Lower trade volumes, slowing international trade
			– Interruption of supply chains and production
FPIs	Decrease	From $4.5bn forecasted for FY2019/20 to $3.0bn	– Global retraction of funds, especially EMs
			– Fear of recession and high uncertainty
			– Stock markets crashing
			– Higher risks of sovereign and corporate default
FDIs	Decrease	From $6.5bn forecasted for FY2019/20 to $4.5bn	– Fear of global recession
			– Weak global demand and investments
			– Sustained unattractiveness of Egypt as a long term investment destination
Remittances	Decrease	From $22bn to $17-18bn	– Weaker GCC economies
			– Falling oil prices
			– Interruptions of supply chains and production
			– Containment measures halting services sector
Petroleum trade balance	Narrower deficit	Lower imports and lower exports	– Weak GCC economies
			– Falling oil price
			– Abundant oil supply
			– Weak global oil demand
Non-oil trade balance	Narrower Deficit	Lower imports and lower exports	– Weak global demand
			– Weak economies of GCC and EU (major export destinations)
			– Weak Chinese and European economies from which Egypt imports the most.
			– Interruption of supply chains.
			– Key imported inputs in Egyptian exported products.
Balance of Payments net	Decrease	Further deficit	Key accounts decreasing
Fiscal deficit	Stable to Narrower	Lower Revenues>Lower Expenses	– Fiscal stimulus increases expenditures
			– Tax breaks reduce Revenues
			– Lower interest rates reduce interest bill
			– Lower oil prices reduce subsidy bill
			– EGP depreciation increases deficit
Inflation	Higher, but lagging	5-6% at 2020 end	– Lower oil prices to reduce transportation cost
			– Potential lower supply of goods to raise prices
			– Lower global demand could divert exports into local consumption, increase supply, reduce price
			– Higher prices if exchange rate depreciates further
Monetary Policy	100-150 bps cut in 2020	From 9.25% to 8.25-7.75%	– Fear of recession
			– Boost to private sector
			– Injection of liquidity
			– Yields widening
			– Further stimulus might be required
Exchange rate	Depreciate	To EGP 16.00 – 17.00/US dollar	– Lower USD sources
			– Weaker trade
Debt	Stable to Lower	Lower debt service	– Stable to narrower deficit; financed through debt
			– Yields stable to lower
			– Lower interest paid
GDP growth	Decrease	From 5.6% to 4.5-5.0%	– Private sector could fail to offset losses made
			– No promise of a strong driving demand
			– Interrupted supply chains
			– Sectors will gain and other loose from lower oil prices and FX movement
PMI	Decrease	From 49 to 45-46	– Unlikely increase after fiscal stimulus, and interest rate cuts, but at least smoother fall
			– Low global demand, lower local production, recession fears, and interruption of supply chains