Interview: Egypt will see slower economic growth, but no recession, says EBRD official

Doaa A.Moneim , Tuesday 5 May 2020

Heike Harmgart
Managing Director of the EBRD’s southern and eastern Mediterranean (SEMED) region, Dr Heike Harmgart unveiled that EBRD approved an initial $850 million in loans to the financial sector in Egypt with a special focus on trade facilities and SMEs.

The European Bank for Reconstruction and Development (EBRD) was the first international institution to respond to Egypt’s efforts to alleviate the economic impacts of the COVID-19 outbreak. 

In an exclusive interview with Ahram Online, held virtually from Jordan, Managing Director of the EBRD’s southern and eastern Mediterranean (SEMED) region Dr Heike Harmgart revealed that the EBRD approved an initial $850 million in loans to the financial sector in Egypt with a special focus on trade facilities and SMEs.

The interview comes ahead of the of EBRD’s growth forecasts for emerging economies that are scheduled to be announced on 13 May.

Harmgart also stressed that Egypt will be witnessing a decline in economic growth but it is unlikely to enter a recession period compared to other countries in the region and across the globe.

Ahram Online: How do you think the COVID-19 outbreak will impact developing and emerging economies like Egypt?

Heike Harmgart: COVID-19 is a global crisis which really shows how we are all connected and no country is immune to its effects. Egypt will be affected as well, despite a number of early measures carried out by the Egyptian government.

The impact on Egypt’s real economy will be reflected in a decline in tourism levels and revenues, a decline in the Suez Canal revenues due to the decrease in global trade and some disruptions in global imports and exports. Growth will also be affected by the global decline in investment confidence, and a decline in remittances from Egyptians working abroad.

However, our forecast for Egypt shows that the economy is performing relatively well in comparison to many other countries in the Middle East and elsewhere.

Egypt will see slower growth but no recession, partly as a result of reforms that have been adopted over the past few years.

AO: How far can Egypt’s economic, social, and structural reforms adopted since November 2016 help it cope with the current situation?

HH: Egypt’s economic and structural reforms have allowed the country to cope with the situation comparatively well. Measures aimed at macroeconomic stabilisation, including reducing the structural imbalances and budget deficits, in addition to the monetary policy reforms and reducing fuel subsidies have made the country more resilient and are paying off in weathering the crisis.

Nevertheless, better targeting through the Takafol and Karama social protection programmes will be critical for Egypt. This will help to identify where social vulnerabilities lay and to mitigate the macroeconomic impact of the crisis on the economy and on affected groups.

AO: What expected role will these reforms play over the long term for Egypt’s macroeconomic signs?

HH: I think the reforms are important during the crisis in the short term and for Egypt’s recovery over the long term. The first phase of Egypt’s macroeconomic reforms is critical to set up Egypt’s economy also in the medium run.

The Egyptian government is committed to implementing more reforms, in particular to give the private sector more room to breathe. The reforms that have been undertaken since 2016 are essential for Egypt’s resilience and recovery out of this crisis.

AO: How do you evaluate the preventative and precautionary measures and the procedures that Egypt’s government has implemented so far to support its economy amid the pandemic?

HH: The measures adopted by the government have been extensive, decisive, and have started quite early which is very important as every day counts in such a crisis, especially the early measures in terms of testing, quarantine, preparing for new hospital cases, and importing masks.

It is important for Egypt to continue with these measures and to continue testing to ensure that the country will be in a position to know exactly where the infections are developing, to trace them and to know how to slowly start opening the economy again after the pandemic’s peak is over.

However, even when the situation improves, we really need to be patient and monitor how the cases are evolving over two weeks.

I am quite impressed with how swiftly Egypt switched to digitally enhanced modes of delivery. For instance, Egypt’s Minister of International Cooperation Rania Al-Mashat has already begun to bring all financial institutions together on zoom calls with hundreds of participants to explain Egypt’s policies. Coordination has been stepped up in the allocation of funds for hospitals and health providers and organisations are being brought together to coordinate the support that is needed for different areas of the Egyptian economy.

The EBRD is focusing on the private sector and on vital infrastructure, such us electricity, transport and water. The government worked hard to reach out electronically to donors and to the private sector.

We also had a call with Minister Al-Mashat and representatives of the Egyptian private sector on 26 April to discuss how the private sector is suffering, especially the energy companies, manufacturing, and agribusiness sectors. It was very helpful to hear from the private sector that the government is giving them very clear guidance, but they need more funding and this is where EBRD comes in.

We also found that the private sector is preparing very well, not just for the next six months, but also for the next 12 months to weather the crisis and get into resilience territory.

AO: In your perspective, what are the potentials Egypt has that can help its economy recuperate?

HH: Egypt has a lot of potential, especially in the agribusiness and manufacturing sectors, and what is really critical is that Egypt is going the extra mile in renewable energy with projects like Benban, which will be able to produce electricity at lower costs.

Egypt is incredibly well positioned for the bounce back of the tourism sector. The Suez Canal logistics hub will be subdued in the short term during the crisis, but of course the Suez Canal Economic Zone is also a critical engine of growth for Egypt going forward.

The telecom sector is also doing extremely well and the government’s construction programmes are also important to maintain the momentum at a time when global investments are falling.

Government investments in infrastructure are really important as far as maintaining growth momentum is concerned.

This was why the EBRD invested in Egypt’s new urban community bond to help develop new urban infrastructure. It is really important to continue fostering domestic growth during the COVID-19 crisis when global growth is falling.

AO: What kind of procedures does Egypt need to deal with the current crisis and to keep the gains of its economic reform program?

HH: Egypt really needs to look both at the short and the long term. The recovery phase is very important, but it is also equally important to look at the economic opportunities that can be tapped in the medium term.

I think while focusing on the containment of the health crisis, Egypt needs, in parallel, to continue working on reforms to make it easier to do business, especially for small and medium sized enterprises, which need to have enough access to liquidity. Increasing the breathing space for the private sector is also really important for the next phase.

AO: To what extent have these sectors taken a hit because of the COVID-19 outbreak? Is it expected that these impacts will last over the long term?

HH: The private sector is really affected across the globe because of the COVID-19 outbreak, especially the tourism sector, which is one of the most affected sectors worldwide, as well as some global value chains that depend on international logistics.

It is important to support these sectors in the short term to make sure they can retain employment and keep a minimum of operational flexibility to be able to scale up once the crisis starts receding and until these sectors can recover.

Thus, they need breathing space, as I said before, in terms of financing and working capital in particular, and the capacity to retain staff along the whole tourism value chains.

Yet, for Egypt’s tourism sector, the EBRD remains confident over the medium term and we believe that there are upsides to be witnessed ahead.

In the public sector, I think vital utilities will be affected due to a decline in revenues in services such as water, waste management and electricity. They need short term financial support to get through the crisis to be able to support all these utilities going forward and to recover after the crisis as well.

AO: In light of the latest meeting with Minister of International Cooperation Rania Al-Mashat, what kind of support will the EBRD provide for Egypt?

HH: The EBRD has approved a solidarity response and recovery package for its countries and is expected to dedicate all of its activities to fighting the economic impact of the crisis in the foreseeable future.

This package, which is expected to amount to some €21 billion through 2021, is aimed at providing short term liquidity and working capital for existing clients. We are also reaching out to new clients, increasing our support for trade finance and helping vital infrastructure providers to survive the initial impact of the crisis and to prepare for the future.

The EBRD has already approved loans of $100 million each for five Egyptian banks, as well as $350 million for trade facilitation. This funding will be channelled via the banks to the real economy and will provide much needed funding to SMEs, large enterprises and trade companies.

In one month, we have approved $850 million for Egypt, and this is not the end of it.

We are continuing to talk to companies, utilities, electricity holding companies and we expect there will be much more to come throughout this year. Egypt was really one of the first and definitely had the largest approvals in the first month, so, we see it as a sign of a good client relationship as they trust us and ask for our support.

Egypt has been for the second year running the biggest country of EBRD operations with over $1 billion investments per year. Our investments in the country since 2012 stand at $6 billion.

This year, Egypt will remain one of the EBRD’s biggest recipients of investment and the $850 million is the beginning of our support.

AO: What kind of procedures should Egypt’s government adopt in the coming phase to make the best use of international assistance provided to the country?

HH: Countries need to make sure they assess their needs carefully and understand which institution is best placed to deliver a certain type of support. I was very impressed by Minister Al-Mashat reaching out to hundreds of stakeholders to share their demands with the government, and to ensure good coordination among different development agencies.

The EBRD is working very closely across different agencies, including the World Bank, the International Finance Corporation (IFC), the African Development Bank and others trying to identify risks and also working on projects together to make sure that every dollar goes as far as it can.

Egypt’s government can help with coordination, but the development agencies are also making sure they avoid duplication of efforts during the crisis. I have taken part in many Zoom calls with different agencies to make absolutely sure we are all using our resources wisely. The EBRD was the first institution to respond to Egypt’s request for support.

AO: What about the EBRD’s total investments and portfolio in Egypt?

HH: In 2019, we had over €1.2 billion in investments, and since we started operations in 2012 in Egypt, the EBRD has invested over €6 billion across the Egyptian economy. We have a big focus on the private sector which has received 70 percent of our total financing.

In 2019, the EBRD also provided $83 million to the first local currency bond investment in Egypt, which was the new NUCA bond that the Urban Community Authority issued at the time.

We have also provided €4.5 million to micro-finance institutions, as well as financing to a very large private sector investment for the construction of Almaza Mall.

We are really pleased with the diversity, the depth, and the extent of our investments in Egypt and we expect that Egypt will again be a critical partner for us and we hope to support many sectors in the country during the crisis.  

AO: EBRD operations are focusing on the private sector and SMEs. What challenges have these sectors faced during the COVID-19 outbreak?

HH: SMEs are the backbone of Egypt’s economy. The key challenges they are always facing are access to liquidity, access to finance from banks, which is a very critical situation, and they often do not have as much savings to survive crises. Unfortunately, the margins for small businesses are much thinner and they have less additional capital to deploy throughout the crisis.

During this crisis, many SMES globally and in Egypt are struggling more than large companies that have better access to finance and availability of more equity capital.

However, we support SMEs across financing through local banks as part of our emergency support. In addition, we are providing our advice to small businesses digitally through webinars as mobility is constrained and our experts cannot interact in person with these enterprises.

We are currently preparing the small enterprises and businesses online learning platform, through our advisory department, with better digital marketing, accounting, and management instruments that are more flexible in times of crisis such as COVID-19.

Also, the ability of these companies to have digital payment systems is really important to secure the continuity of their turnover and to be more resilient during the COVID-19 crisis.

AO: How do think the collapse of global oil prices will impact emerging markets and developing countries’ economies?

HH: The decline of oil prices is a double-edged sword. If a country is an oil importer, low prices are very good, so countries want to make sure they increase their storage capacity to make sure they benefit as much as possible from the low prices.

On the other hand, countries that depend on remittances that are transferred from their citizens who are working in the rich oil states will face a decline in those transfers. Egyptians who are working in the Gulf countries are witnessing a reduction in their incomes or are being laid off.

It is always a mixed bag, the government and private sector should benefit from this decrease in oil prices, but the remittances will be affected.

AO: Do you expect the drop in oil prices to last for a long time?

HH: I do not think it will be the new normal. Actually, oil prices are expected to increase again in the second half of 2020, although probably will not reach the pre-COVID-19 levels immediately.

AO: How can integration and cooperation between international institutions help developing and emerging markets deal with the harsh impacts of COVID-19?

HH: Our president is reaching out to other heads of MDBs, IFIs and DFIs to ensure that we use our firepower together. The key matter for emerging markets is to ensure they get support through additional funding for health, social protection, and to prepare investments for the real economy through facilities of the institutions that support the private sector.

Meanwhile, we need to guarantee each other’s exposure and to work very carefully together to make sure there is an optimal usage of all finances that are provided.

In this regard, Egypt is doing well and has an incredibly fast-track approval for the International Monetary Fund’s additional funding and is doing an excellent job in trying to reach out the international institutions and organisations to make sure to get both macro and micro support.

Short link: