Egypt’s real GDP will reach 6.4% in fiscal year (FY) 2021/22, and 2.8% by the end of the current FY, the International Monetary Fund (IMF) announced in its latest staff country report.
The downgraded expectation is slightly down from the 6.5% in (FY) 2021/22 that the IMF projected in August. It is, however, slightly up from the fund’s August projection of 2% in FY 2020/21.
Meanwhile, the fund maintained its forecasts for Egypt’s real GDP in both FY 2022/23 and FY 2023/24 at 5.3%, as forecasted in August.
The IMF explained that the growth is projected to sharply slow during FY 2019/20 and 2020/21 as the result of a halt in tourism, reduced remittances, and a slowdown in domestic activity.
“A flexible exchange rate and adequate reserves provide a significant cushion to counter the shock, but the shock has nevertheless created an estimated external financing gap of $14bn during FY 2019/20 and FY 2020/21,” the fund said.
Ahmed Shams El-Din, Head of Research at EFG Hermes, told Daily News Egypt that the gap was mostly covered by debt.
The fund upgraded its expectations for Egypt’s financing needs in FY 2020/21 to reach $42bn, compared to a pre-COVID-19 forecast of $35.8bn.
Egypt’s current account deficit is expected to reach $16.2bn in FY 2020/21, compared to previous pre-COVID-19 expectations of $10.6bn during the same period.
Meanwhile, the fund forecast the maturing short-term debt to reach $19.2bn in FY 2020/21, up from $16.9bn in the pre-COVID-19 forecast for the same period.
Shams noted that, should Egypt need to issue new bills or bonds or take on new loans to cover the gap in its maturing short-term debt, the country should be refinanced by both bills and bonds.
“That shouldn’t be an issue given that Egypt has one of the highest real rates globally, and it is definitely an attractive market for some income funds,” Shams said, “If we can get subsidised loans from IFIs why not, even better. But I think they will borrow from the market.”
The IMF said that the amortisation of medium- and long-term debt reached $6.5bn in FY 2020/21, compared to the pre-COVID-19 forecast of $8.2bn for the same period.
It also downgraded its expectations for Egypt’s net foreign direct investments (FDIs) in FY 2020/21 to $7.1bn, down from a pre-COVID-19 expectation of $10.8bn in FY 2020/21.
The IMF also expected that net FDIs will reach $7.8bn by the end of June 2020, compared to pre-COVID-19 expectations of $9.6bn during the same period.
“The external balance is expected to deteriorate from portfolio outflows, weaker FDI, the shock to tourism, and weaker remittances,” the IMF said. “The external financing gap is estimated at roughly $9.2bn in FY 2019/20, and $4.5bn in FY 2020/21.”
“Our staff assesses that the balance of payments need is immediate, with Egypt having already lost more than $5bn in reserves in March, and a further rapid reduction could undermine confidence and generate unwarranted economic instability,” the IMF said.
It said that the impact of the crisis on the near-term macroeconomic outlook is expected to be significant.
At the same time, the impact from both supply and demand shocks is likely to be severe. A significant economic contraction projected in the fourth quarter (Q4) of FY 2019/2020 and Q1 of FY 2020/2021, resulting in a downward revision in real GDP growth to 2% in FY 2019/20 and 2.8% in FY 2020/21.
The IMF also noted that Egypt’s unemployment levels are also likely to rise, particularly given the sharp slowdown in tourism. A strong rebound is currently projected in FY 2021/22, assuming that domestic activity starts to normalise.
A full recovery in tourism to pre-COVID-19 levels may take longer, as health concerns may continue to weigh on international travel.
The fund explained that, with budget discussions ongoing and specific measures still being quantified, preliminary indications are that the primary surplus could decline. This will see a downturn from the budgeted 2% of GDP to 1.4 % in FY 2019/20 and 1% in FY 2020/21, reflecting higher spending to contain the impact of the shock.
As a result, the IMF projected public debt to rise from 84% of GDP in FY 2018/2019 to 91.5 % in FY 2020/21, compared with a pre-COVID-19 projection of 79% for FY 2020/2021. Debt is expected to resume its downward trajectory from FY 2021/22, as the crisis abates.
“The financial sector remains stable, but the crisis poses risks, and as in other countries, the economic slowdown could adversely impact banks’ loan portfolios, possibly resulting in higher provisioning charges, lower earnings, and tighter liquidity conditions,” the IMF said. “However, the banking system is relatively well positioned to handle stress, with most recent data showing that, at an aggregate level, the banking system is liquid and well capitalised, with strong profitability and asset quality.”
The IMF concluded by noting that Egypt’s level of public debt is high and gross financing needs are large. While the impact on economic activity from the pandemic has increased risks, several factors help mitigate the risks.
These include the high share of domestic currency debt issued locally and held by domestic financial institutions, and the retention of credit ratings by major ratings agencies with a stable outlook since the crisis started. Egypt also had sizeable buffers coming into the global crisis.
The IMF praised the Egyptian authorities’ response measures to the COVID-19 crisis, and stated that the measures have been comprehensive. The international institution also noted that the Egyptian government had introduced a wide-ranging package to contain the health crisis, and maintain macroeconomic stability.
The fund stressed that support measures must be timely, targeted, transparent, and temporary, focusing on the immediate health spending needs and protecting the most vulnerable
