In its report on Egypt, S&P explained that this measure implies that the policy response of the Egyptian authorities, alongside strong external support, should prevent a deterioration in the external and fiscal positions due to rising commodity prices.
Still, the report says it could downgrade Egypt’s credit ratings over the next 12 months in case rising commodity prices have prolonged negative effects on the country’s external position, which could lead to a decline in foreign exchange reserves and a reduction in its ability to service debt and pay interest.
On the other hand, the report notes that Egypt’s credit ratings could be improved in the medium term if the country’s reform program succeeds in reducing government and external financing needs, reducing debt and to implement bold governance strategies.
“Egypt is the world’s largest wheat importer. Providing the product at affordable prices to the people is important for maintaining social stability. Among other commodities, the Russian-Ukrainian conflict has led to a sharp increase in the price of wheat. Rising commodity prices are expected to increase Egypt’s fiscal and external deficits, as well as financial pressures on the country. Funding conditions for emerging market economies were already deteriorating as global monetary conditions tightened. However, we expect the Egyptian authorities to manage the current situation by maintaining their medium-term commitment to fiscal consolidation, using exchange rate and interest rate policy to manage economic adjustments alongside external financial support from multilateral and bilateral parties,” the report says. Explain.
According to the report, the Egyptian government needs about 8.5 million metric tons of wheat per year to facilitate the supply of subsidized bread and a total of about 22 million metric tons of wheat, including private sector.
The report expected the government to revise its strategy for securing wheat, with Russia remaining its main wheat import market.
The report also indicates that the inflationary wave is having a noticeable impact on capital inflows to Egypt, with the country recording around $20 billion in capital outflows in March 2022.
“The Central Bank of Egypt (CBE) defended the Egyptian pound (EG£) by selling approximately $13 billion in foreign exchange reserves. Such a sharp decline in reserves, which totaled $39 billion in June 2021, is unsustainable and in our base case scenario we do not expect the same reaction to future shocks. However, we understand that, to some extent, buffer reserves are there to be used,” the report notes.
In this regard, the report predicts that Egypt’s international reserves will drop to around $34 billion by the end of the current fiscal year 2021/2022 (ending June 2022) amid current challenges.
Regarding the impact of rising oil prices globally, the report expects it to have only a slight impact on the country’s economy, given that it has largely reached self-sufficiency in terms of oil and gas, with the latest data suggesting a slight surplus on the external balance of hydrocarbons until the end of the third quarter of the financial year 2021/22 (January-March).
Referring to the CBE’s recent actions raising policy interest rates by one percent and devaluing the Egyptian pound by around 14 percent, the report says such a policy helps manage inflation expectations and limit capital outflows by increasing the real yields of government debt in local currency.
In this regard, the report expects the CBE to raise interest rates further at the next meeting of the Monetary Policy Committee scheduled for May 24, amid the ongoing inflationary wave.
At the same time, the report indicates that the devaluation of the Egyptian pound is unlikely to negatively affect the quality of banks’ assets, since foreign currency loans which represent less than 20% of total loans are generally granted to companies which generate income in the same currency.
“Liquidity in the banking system is strong and banks’ reliance on wholesale debt is very limited. However, credit losses could rise further as inherently riskier small and medium-sized enterprise (SME) lending expands. The CBE recently raised the threshold for SME lending to 25% of banks’ loan portfolios by December 2022, from 20% previously, and set a new minimum threshold of 10% for lending to small businesses. However, we expect pre-provision income from the banking sector to more than offset the hit from higher loan loss provisions, and therefore not detract from capital. The decision by public banks to offer certificates of deposit at 18% over one year could add pressure on system-wide profitability, although the magnitude of the effect depends on the total volume of certificates issued. , explains the report.
On debt, the report says Egypt’s debt burden will remain affected by movements in the exchange rate and monetary policy, among other factors, despite the government’s plan to achieve a primary surplus of 1. 6% of GDP in the 2022/23 financial year, with the aim of returning towards 2% after the effects of the ongoing economic crisis have faded.
“Egypt was one of the few economies to escape an economic contraction in 2020, and we expect it to weather the latest external shock,” the report said.
For the country’s real GDP growth outlook amid the current crisis, the report predicts it will slow to 5.7% through the end of the 2021/22 financial year, down from 9%. achieved in the first half of the fiscal year, with activity impacted by higher energy and borrowing costs, disruptions to value chains, higher commodity prices and lower tourist flows .
The report estimates that around 25-30% of tourist arrivals to Egypt come from Russia and Ukraine.
Over the medium term, the report anticipates a further slowdown in Egypt’s real GDP growth to 4% per year.
“This will be supported by the government’s various economic reform measures, including its National Structural Reform Plan, which aims to improve investment and exports and achieve strong private sector-led growth. The Hayah Karima program will also contribute to infrastructure development while improving living standards in rural communities,” the report explains.
The report predicts that the tourism sector, which contributed around 12% of GDP, 10% of total employment and 16% of current account receipts in 2019, will not fully recover by 2023.
The report also expected the financial support that the Gulf Cooperation Council (GCC) recently extended to Egypt to ease the pressure of the current crisis on the country’s foreign currency reserves.
For Egypt’s current account deficit, the report projected that it would remain large at around 4% of GDP in the current fiscal year 2021/22.
It also predicted that the increase in import prices would increase the overall deficit in the goods and services balance, but that this deterioration would be mitigated by an increase in remittances from Egyptians living in the GCC, who should benefit from the increase in oil price.
Until 2025, government measures to promote non-oil exports are also expected to help reduce the current account deficit to around 3% of GDP, according to the report.
“We estimate that the general government budget deficit will remain at around 7% of GDP in fiscal years 2021/22 and 2022/23. We expect high spending due to rising commodity prices to limit the positive impact of tax administration reforms and a broadening of the tax base. On the expenditure side, growth will be largely driven by capital investment, subsidies, subsidies, social benefits and wages,” the report predicts.
Regarding the Egyptian banking sector, the report states: “We expect the direct effects of the Russian-Ukrainian conflict to remain manageable for the Egyptian banking sector due to minimal exposure to Russian or Ukrainian counterparties.”