2 minutes with Yasmine Abdel Razek: What is happening in EMs and how it relates to Egypt

The main pillar in everything we’re seeing now is the budget deficit – and this is not just Egypt’s problem, but that of many other countries as well (Photo courtesy of ECES)

During a discussion on the effect of regional developments on Egypt’s economic outlook organized by the Egyptian Center for Economic Studies (ECES), head of strategic planning at EGBank Yasmine Abdel Razek took a look at what is happening in emerging markets (EMs) around the globe and what it has to do with Egypt’s current economic situation.

What exactly is causing crises in EMs?
The reasons, for instance, behind Turkey’s crisis are high inflation and interest rates, an excessive current account deficit and its foreign currency debt. Adding to this is the political tension with the United States and Turkey’s reliance on capital inflows to fund private-sector excess. All in all, the country’s economic policy focuses on the construction industry, state-awarded contracts and stimulus measures, while neglecting education and research and development.

Argentina’s crisis emerged from the faster-than-expected plunge of its currency due to investor concerns, as the government was unable to control inflation while hiking interest rates to levels that were unheard of. The foreign currency-denominated debt has also become more expensive for the government, forcing it to turn to the International Monetary Fund (IMF) for a very large $50 billion loan – a step the country has viciously resisted up until this point. From a structural perspective, populist governments had been printing money over the years in an effort to finance the budget deficit, while utility prices skyrocketed as the country aimed at reducing subsidies and closing the fiscal deficit – naturally keeping inflation rates high. What tops it all off is that Argentina had faced its worst drought in decades, which negatively affected its soybean and corn harvests, which are the main crops they depend on.

South Africa also relies heavily on external sustainability, but its main problem was not the drop of its currency, but rather its slow GDP growth of 1 percent for the past couple of years. The currency also dropped dramatically to pre-June 2016 levels, especially after the country announced that it would be entering a recession. The rise of the Brent crude oil price and the country’s grim outlook on the manufacturing sector, which accounts for about 13 percent of the GDP, also plague the South African economy, coupled with a 15-year record official unemployment rate of 27.2 percent – which could even be higher – and minimal investments from the private sector.

Other emerging markets that are going through similar situations are Mexico, Indonesia, India and Brazil, with different magnitudes of course.

Emerging market countries have been increasingly relying on foreign and local currency debt

What all of the above-mentioned countries have in common was summed up by IMF director Christine Lagarde: “The bottom line is that high debt burdens have left many governments more vulnerable to a sudden tightening of global financial conditions and higher interest costs. For emerging market and frontier economies, concerns about debt levels in this environment could contribute to market corrections, sharp exchange rate movements, and further weakening of capital flows.”

Emerging market countries have been increasingly relying on foreign and local currency debt. In the past decade, they have been heavily borrowing mostly in their own currencies, but also remained more exposed to foreign currency, especially during the financial crisis. Currently, these markets are at higher local government debt from domestic sources and at the same time higher foreign currency sources, which makes us worry a lot.

What does it have to do with Egypt?
All of this has very much in common with Egypt’s economic situation today. The main pillar in everything we’re seeing now is the budget deficit – and this is not just Egypt’s problem, but that of many other countries as well. Additionally, concerns about the issue of debt have become widespread.

The bold reforms that were undertaken in the past period was government spending-fueled growth, flexible exchange rate policy, subsidy reforms while focusing on safety nets and tight monetary policy to control inflationary rates, expecting interest rates to remain high. Additionally, infrastructure was enhanced through mega projects with the main aim of attracting foreign direct investments (FDIs) and some regulatory reforms to improve the investment climate.

There should be a medium-term strategy, which currently exists, but the question is how well is it going into effect?

However, there remain some concerns, mainly the lack of a clear debt strategy that is understandable to market players. Normally, there should be a medium-term strategy, which currently exists, but the question is how well is it going into effect? There is no problem in relying on short- and long-term debt for the time-being and shifting between local and foreign currency debt, but it needs to go according to a plan that the market knows so that it can prepare itself. Bond auctions are being cancelled – regardless of the circumstances, this sends signals to the market that are not so great. Increased debt levels can be seen especially on the shorter end of the curve which is rather expensive and highly vulnerable to roll-over risk. Additionally, we can see a lot of international debt offerings. In the past, Egypt used to offer for benchmark-purposes. Today, we are issuing a lot in different currencies, and with the high interest rates, the cost of debt is unlikely to be as low as we imagined. The increased reliance on foreign currency-denominated debt without comfortable levels of reserves to support it is a concern.

What is the issue with the way Egypt is handling its debt?
A lot of people are looking at debt through its relation to GDP. Very few people look at the debt service. Are we able to pay back the debt, regardless of its size? Do we have enough foreign currency receipts to pay the installments of that debt? What are our foreign currency sources? For foreign currency, we mainly rely on the Suez Canal revenues, which in turn depends on the currently troublesome global trade movement, and tourism, which has been taking hits in the region for the past years. Hence, our foreign currency revenues very much depend on exogenous factors.  

Policy makers are focusing on FDIs, which dropped globally by 16 percent last year. Yes, in emerging markets these investments are still considered steady and a main driver of growth but it should not be the only one. We need to consider the growth sources we are looking into. Despite the reforms, we did not see a clear production or industrial strategy or any other way to increase our exports. What is important is setting up a strategy and sticking to it, without changing our minds every day – if we do not do that, it is unlikely to reach any destination.

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