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Coronavirus: Implications for the Egyptian economy

Egypt’s economy can overcome the fallout from the spread of the coronavirus, but how

Dahlia El-Hawary, Wednesday 4 Mar 2020
Coronavirus: Implications for the Egyptian economy
The tourism industry could suffer on the back of the coronavirus scare ( photo: AFP )
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The world has undoubtedly become a small village, sharing many global opportunities as well as threats, and the coronavirus outbreak in China has been a case in point. Its spillover effects have entailed potentially huge economic and financial costs worldwide.

These costs are estimated by the World Bank at around $3 trillion, wiping about four per cent off annual global output and triggering fears that the world economy may slip into recession. Halting production and exports from the world’s largest manufacturer, China, could cripple the world economy by disrupting global manufacturing, trade, supply and distribution chains linking many sectors worldwide.

China, the world’s second-largest economy, accounts for 20 per cent of global growth, and the negative repercussions of the coronavirus are expected to cut global growth forecasts for 2020, further worsening the already weakening world economic outlook for the year. This had already been negatively affected by slowing global trade and investment as a result of escalating trade tensions between China and the United States, continued policy uncertainty, limited fiscal space, financial volatility, and rising debt worldwide.

The airline, energy and automotive sectors have been the hardest hit thus far. According to the UN International Civil Aviation Organisation (ICAO), global airline revenues are expected to fall by around $4-5 billion during the first quarter of 2020 as a result of flight cancellations hitting both the travel and tourism industries worldwide. China’s major trading partners are also suffering production delays due to shortages of inputs, as has been the case with auto manufacturers Hyundai and Nissan.

China also provides over 30 per cent of the parts needed for manufacturing electronic goods in Japan, India, South Korea, France and Canada. Major oil exporters have also suffered, as the price of Brent crude has decreased from $68 a barrel in January to less than $50 as a result of China’s reduced consumption by around three million barrels a day and the ensuing weaker oil demand globally.

If it is not contained soon, the spread of the coronavirus could jeopardise the global economic landscape. To soothe investors, United States Federal Reserve Chairman Jerome Powell recently reaffirmed the strength of the US economy, yet he also acknowledged that the virus poses evolving risks to economic activity. Indeed, financial markets worldwide have already shown the worst decline since the 2008 global financial crisis, with major indices falling by 10 per cent or more over the past week.

This has been the case with the US Dow Jones, which has fallen by 12 per cent, the S&P by 11.5 per cent, Britain’s FTSE 100 by 11 per cent, and Japan’s Nikkei 225 by 10 per cent. Such falls reflect signs of underlying fears of anticipated illiquidity, distress selling, and the market’s inability to provide future funding, as explained by financial experts.

Policymakers worldwide are closely monitoring developments in the spread of the coronavirus and examining alternative policy tools to swiftly intervene whenever possible to support their economies. While some central banks have already responded by cutting interest rates, as has been the case in many Asian economies such as Malaysia, Thailand, the Philippines, Sri Lanka and China, others like the US Federal Reserve have not yet taken such measures, but they may need to do so in order to maintain macroeconomic stability.

However, the effectiveness of the central banks further cutting rates worldwide may be limited in delivering better economic outcomes because there is a need to address the underlying fundamentals and to affirm hopes of finding a vaccine for the virus soon. These have become necessary to reduce uncertainties and to reverse the marked deterioration in investor sentiments, as noted by Mohamed El-Erian, European insurance company Allianz’s chief economic advisor, in a recent interview with the US financial news service Bloomberg.

The Egyptian economy is by no means isolated from the ongoing turmoil, as the recent spread of the coronavirus in the Middle East and North Africa (MENA) region has affected markets. The Egyptian EGX 30 index this week saw its sharpest single-day decline since 2012, closing down more than six per cent, as a result of investors selling off equities on the back of plummeting oil prices. Trade and supply chains have also been disrupted, with Egypt’s pharmaceutical industries suffering from shortages and delays as 40 per cent of domestically produced medicine depends on imported raw materials from China.

Weaker global demand is undoubtedly expected to slow down Egypt’s economic growth, previously forecast at around six per cent for 2020, by reducing sources of hard-currency revenues, namely exports, Suez Canal revenues, workers’ remittances, especially from the Gulf countries, and obviously also from tourism as this industry has been seriously hit worldwide. 

Fortunately, Egypt’s economic growth has almost always relied on strong domestic demand supported by both private and public consumption. however, further strengthening domestic demand may become necessary in order to avoid a potentially recessionary downward trend.

In doing so, policymakers may need to slow down ongoing fiscal-consolidation reforms aiming at reducing the country’s budget deficit. They may instead temporarily adopt an expansionary fiscal policy, using stimulus packages to promote domestic demand which has recently shown signs of slowing down. The Central Bank of Egypt (CBE) may also slow down its monetary policy loosening steps in which interest rates have been gradually reduced over the past few months. At this stage, maintaining people’s purchasing power by keeping interest rates and hence deposit rates at their current levels may be deemed more important than stimulating domestic investment.

This is because the state could also support domestic investment through fiscal and non-fiscal incentives directed towards selected sectors. These may include the textile industry, where the government has already taken excellent steps to support the sector. Attention should also be paid to the establishment of alternative supply chains by locally producing parts and products in order to reduce the country’s dependence on imported inputs to avoid disruptions resulting from global supply shocks. In this respect, the current initiatives by the CBE to support the industrial, tourism, and micro, small and medium enterprise (MSME) sectors will be instrumental in navigating such difficult times and reducing the economy’s vulnerabilities to the external shocks hitting the world economy.  

The ongoing crisis has highlighted the importance of well-diversified sources of growth as well as of maintaining the fundamentals to withstand the harmful effects of any external shocks. This is an opportune time for Egypt to focus on improving its competitiveness and to strengthen its local capacities to better prepare its domestic industries to cope with rapidly changing global events by enhancing its productivity, improving the quality of its goods, and reducing its costs of production.

 

The writer is a former economic advisor at the Ministry of Investment and is currently an independent consultant.

 

*A version of this article appears in print in the 5 March, 2020 edition of Al-Ahram Weekly

 

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