Q&A: Egypt’s FY2020/2021 economic resilience under COVID-19, budget deficit expected to reach 8 percent - Dcode Managing Director Aly El Sherei

Doaa A.Moneim , Tuesday 21 Jul 2020

Aly El Sherei
Aly El Sherei

With the coronavirus pandemic continuing to take a toll worldwide, the Egyptian economy is expected to continue to experience more risk.

In an exclusive interview, Aly El Sherei, the managing director of Dcode, an economic and financial consulting firm, shared with Ahram Online Dcode’s latest economic outlook report for Egypt.

The company expects the budget deficit to reach at least 8 percent in the current 2020/2021 fiscal year, which began on 1 July. It also predicts an inflation rate to up to 8.3 percent, while the current account is projected to see a moderate increase thanks to lower import demand.

Ahram Online: Do you think that the policy that Egypt’s FY2020/2021 budget adopts, including the public investment allocations increase, financial resources diversity and government spending rationalisation will lead to a better economic performance for Egypt amid the ongoing crisis?

Aly El Sherei: Actually, Egypt has adopted a balanced fiscal policy since the implementation of the economic reform programme in 2016, which helped improve overall macroeconomic performance.

It managed to curb the budget deficit successfully and put it on a downward trajectory, while achieving economic growth that exceeded 5 percent.

I think the current fiscal policy is largely on the right track. However, we should expect weaker performance, especially on the revenue side, on the back of the slowdown in economic activity due to the COVID-19 crisis.

AO: What are Dcode’s expectations for the Egyptian economy in the current FY2020/2021 in light of the pressure the COVID-19 crisis puts in place?

AS: We project the budget deficit to exceed 8 percent owing to the expected pressure that will affect the revenues negatively.

In our baseline scenario, we expect recovery to start gradually in the first quarter of FY2020/2021.

Assuming no second wave of the pandemic, we project Egypt’s annual GDP growth rate (supply side) to see a slide to 1.8 percent during FY2020/2021, mainly due to the slack in economic activity in the first half of the year relative to the same period last year.

The unemployment rate increased from 7.7 percent in March 2020 to 9.2 percent in April as a result of the COVID-19 pandemic and containment measures thereof. It is expected to further increase above 11-12 percent.

AO: Which sectors will represent potential winners in the long term and which sectors will hardly recover in light of the ongoing crisis’ implications?

AS: The expected potential winners include e-commerce, information and communication technology (ICT), agriculture, personal and health care, food processing and retail, medical supply and services.

On the other hand, there are sectors that will suffer to recover and survive, including tourism and leisure, aviation and maritime, automotive, construction and real estate, manufacturing, financial services, and education.

AO: During FY2019/2020, Egypt’s government predicted several scenarios to deal with the crisis; one of them expected the pandemic to disappear by June, but that has not happened. What is the expected pressure that Egypt’s economy will face based on that?

AS: If the crisis is prolonged or a second wave emerges, its repercussions on the economy will escalate more rapidly and the risks it is expected to witness will be significant, including eroded savings of the household sector and a collapse in consumer confidence, a shortage in final and intermediate imported goods, which would bear heavier on the retail and the manufacturing sectors, and a potential currency depreciation, which would raise prices and erode consumer purchasing power.

That’s in addition to a greater need for spending in the health sector, which would undermine the government’s capacity to spend on investments or provide support packages without threatening fiscal sustainability.

AO: What about your expectations for other indicators under the baseline scenario?

AS: The indicators will be dominated by a downward trend for FY2020/2021, in general, amid the crisis. Thus, we expect that total consumption growth to inch down to 0.9 percent, from 1.1 percent in FY2019/2020, investments to decline by -1.6 percent, and exports and imports to see a drop by -8 percent and -12.2 percent respectively.

The fiscal deficit will be over 8 percent in FY2020/2021.

AO: What is your expectation for the inflation rate during FY2020/2021, especially as it has witnessed a decline, even amid the crisis?

AS: We project the annual inflation rate to increase to 8.3 percent, up from 6 percent in FY2019/2020, but the good news is that the rate is still in the single-digit zone.

In addition, owing to its successful economic reform programme, Egypt has managed to curb the inflation rate and to attain this single digit for the rate, starting from FY2019/2020, instead of double digits in previous fiscal years. For example, Egypt recorded an annual inflation rate of 13.9 percent in FY2018/2019, and 21.6 percent in FY2017/2018.

AO: The Egyptian pound’s performance against the US dollar is witnessing ups and downs coinciding with the COVID-19 crisis. What are your expectations for the US dollar prices in the Egyptian market? How do you see its repercussions?

AS: US dollar prices against the Egyptian pound are expected to reach EGP 16.5 by end of 2020 and to increase to EGP 16.8 over the FY2020/2021.

AO: Can you illustrate that more?

AS: The Egyptian market has witnessed a significant outflow in the portfolio investments, recording between EGP 17-18 billion since the onset of the crisis. This has placed pressure on the exchange rate, which was cushioned by the use of reserves and external borrowing.

AO: Starting from March, Egypt has witnessed a significant drop in its net international reserves (NIR) because of the crisis. What is your view on that, and how can it be managed?

AS: The drop came as a result of the decline in the portfolio investments and the disorder of the current account balance due to the crisis.

The key components of the current account balance, which include tourism revenues, Egyptian expats’ remittances, Suez Canal revenues, and exports, were hit harshly because of the ongoing crisis. According to our estimates, this situation resulted in current account deficit increase to reach $3.3 billion in the quarter to May, while it used to be at the level of $2.2 billion (quarterly).

However, Egypt’s issuance of Eurobonds (which recorded $5 billion in May), offering $7 billion by the Central Bank of Egypt (CBE) and another $3.5 billion from the banks to provide the cash liquidity for the domestic market, the new loans obtained from the International Monetary Fund (IMF) and the decrease in imports amid the crisis have contributed to backing the NIR, which are expected to be at the level of $36.2 billion in FY2020/2021.

AO: What are your expectations for the interest rates ahead of the next monthly meeting of the Monetary Policy Committee (MPC) at the CBE, scheduled to be held on 13 August, to review the prices?

AS: The MPC is projected to at least maintain the current interest rates, driven by the annual inflation rate level that is still in the CBE’s 9 percent set level.

AO: By August, the duration of the facilities that the CBE has offered (for six months) will be at an end. Do you think that the domestic market is in need to extend their duration, especially as the crisis still exists?

AS: I think it is important to extend the duration to the end of 2020, with reconsideration of the procedures that have been taken, in order to eliminate ones that were not effective or ones that will not achieve a progress if still applied.

The private sector, especially small and medium-sized enterprises (SMEs) and micro firms, which are already suffering from a lack of finances, are still in need of more facilities.



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