When the going gets tough: External factors continue to pressure Egyptian economy

Sherine Abdel-Razek and Niveen Wahish, Thursday 4 May 2023

The situation in Sudan


“The Egyptian state has not failed, nor will it fail, to pay back its international debt,” said Prime Minister Mustafa Madbouli earlier this week.

Madbouli’s statements were made following several reports about the Egyptian economy. Over the Eid Al-Fitr holiday, Standard & Poor’s (S&P) Global Ratings downgraded its outlook for Egypt from stable to negative, citing “delays to currency and structural reforms” as putting “pressure on the Egyptian pound, increasing the risk of further sharp currency devaluations, higher inflation, and rising interest rates”.

S&P’s move was followed by a note from rating agency Moody’s which said “depreciation pressures persist, adding downside risks to Egypt’s debt affordability and debt sustainability profile.”

Since February 2022, when Egypt first reached out to the IMF for assistance as the war in Ukraine put pressure on its foreign currency resources, Egypt has devalued the pound three times. The official rate is currently around LE31, more than 50 per cent lower than its level in February 2022. However, there is a flourishing parallel market, where the greenback is currently being traded at LE37-39.

Acceleration of the pace of the privatisation programme has been a common recommendation in reports on the local economy. The sale of state-owned assets is one of the sources that the government is counting on to reverse the shortfall in foreign currency liquidity. According to Moody’s, the government had targeted asset sales of $2 billion by the end of this fiscal year (June 2023), and a further $4.6 billion in 2024.

According to Moody’s, progress had been slow mainly due to expectations of a further devaluation of the Egyptian pound. In addition, Moody’s said, “traditional investors from the Gulf Cooperation Council [GCC] have attached more onerous conditions for financial support in the future,” says Moody’s.

Ahmed Shamseddin, head of global research at leading local investment bank EFG Hermes, points out that one challenge facing the privatisation programme is the lack of centralised ownership. Assets are held by a wide number of government entities, leaving little room for a more coordinated and efficient selling process.

“The fact the valuations are depressed by challenging domestic and external market conditions is also weighing on the speed of the process,” he told Al-Ahram Weekly.

Fitch Solutions, which specialises in financial information services, attributed the slow pace of privatisation to “an unfavourable external environment for emerging markets exacerbated by the recent banking turbulence and resulting financial volatility, in addition to Egypt-specific issues such as lingering valuation and due diligence issues.”

However, last week, Madbouli stressed that the state will push ahead with its privatisation programme, with more companies being prepared to be put on the bloc. They include more than 10 military-owned entities.

Meanwhile, EFG’s Shamseddin believes the government is committed to resolving the country’s foreign exchange situation and allowing a flexible exchange rate regime. “Further weakness from current official levels is likely though its magnitude would largely depend on availing supporting liquidity,” he said.

 Amr Hussein Elalfy, head of research at Prime Holding, agrees that a further devaluation is on the cards. “The pressure from speculators and doomsayers may eventually lead to the devaluation everyone is expecting even if there is no need to devalue,” he told the Weekly.

“Egypt is being cornered to further devalue despite the fact it will not help in the absence of foreign currency inflows. And foreign currency inflows will not come unless there is trust that the Egyptian pound will not devalue again. It’s a vicious circle.”

Further devaluation will mean higher inflation. In March, year-on-year urban inflation jumped to 32.7 per cent, up from 31.9 per cent on the previous month. Inflation is now at its highest since July 2017, when it hit a record of almost 33 per cent. On an annual basis, food inflation reached a new all-time high of 63 per cent.

On 1 May, the government increased the price of subsidised items sold on ration cards. Without the increases the government would no longer be able to provide the commodities, Supply Minister Ali Moselhi said during a press conference on Saturday.

The government is trying to cushion the effect of such moves on already strained Egyptian households. In addition to upping social spending in the 2023-24 draft budget, President Abdel-Fattah Al-Sisi revealed on Monday that a fund would be established to support irregular workers — estimated to number 11.8 million according to official figures — not covered by other social protection programmes.

Government attempts to get the economy back on track are not being made easier by the situation in Sudan. The expected influx of refugees will increase demand for food products and health and education services, fuelling inflationary pressure.

Diaa Helmi, member of the Economic Committee of the Egyptian Council for Foreign Relations, points out that the influx of refugees will also increase national security concerns.

“Europe, with all its economic potential, worries about migrants, so how can Egypt not? There must be proper planning to ensure refugees have opportunities to make a living,” he said.

Trade and investment between the two countries, though meagre, will also be affected. The trade balance currently stands at around $1.5 billion, with Egypt exporting electrical appliances, chemicals and foodstuffs, and importing agricultural goods and cattle.

According to Khaled Ramzi, export director at Fresh Electric for Appliances, exports to Sudan had been booming in the last year but have now come to a halt.

“But it is just a transitional period. No market dies down completely,” he says.

Ramzi believes that when the dust settles, there will be a way for his company’s goods to re-enter the Sudanese market. He also believes that working in troubled countries, though risky, could have an upside in that it enables companies to build a name for themselves when there is not much competition.


A version of this article appears in print in the 4 May, 2023 edition of Al-Ahram Weekly

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