The Egyptian Center for Economic Studies (ECES) arranged a discussion on the impact of regional developments on Egypt, during which managing director of Multiples Group Omar El Shenety took a look at what Egypt needs to do to combat regional and global changes and pressures.
How affected is Egypt by regional developments?
We are an emerging economy; hence, our ability to impact the global economy is very limited, but our propensity to be impacted is very high. Time has proven that the domestic elements we thought may protect us, will not.
Egypt is part of the region; hence, whatever happens in it impacts us. The idea of being a bright sweet-spot central to the region reminds us of the crisis of Southeast Asia in the late 1990s, when South Korea believed that it could be the region’s sweet-spot but failed at standing strong against the problems that emerged in Thailand. Consequently, any country is as good as its region is. Egypt might be a bit better or a bit worse, but in the end we are bound to what is happening around us.
We are going through massive economic changes: structural adjustments, balancing the budget deficit, liberalizing energy prices and exchange rates etc. Each of these structural changes has a major objective. I do not think people disagree with the objectives but rather with the implementation mechanisms and timelines.
What are the key factors affecting us?
There are two main points that affect us: the crisis of emerging markets (EMs) and interest rates, and oil prices. These have a direct and fundamental impact on the country’s budget and economy.
Regarding EMs, we are in the contractionary phase of the global cycle; hence, we are unfortunate as a country, government and decision maker. When the country started its economic reform program, interest rates and oil prices were very low, but a year and a half later, global interest rates hiked. Every 0.25 percent-hike in US interest rates reflects an increase of 1-3 percent in the EMs. Even the GCC countries, which enjoy more isolated economies, raised their interest rate.
At this point, it is quite normal for foreign capital to have a dwindling desire for EMs. Our foreign direct investments (FDIs) this year are lower than the previous one. I think this will persist due to different reasons, including the EMs problem and lower demand and consumption in Egypt’s local markets due to the recent economic changes, price hikes and inflation. FDIs are important for sustainable growth rates and reserves, but we need to revise our predictions of their flow.
There are two main points that affect us: the crisis of emerging markets (EMs) and interest rates, and oil prices
The critical point is once we floated the currency, we managed to attract portfolio investments of $5 billion in a few days, and by the end of 2017, it reached $15 billion. At the beginning of 2018, we were talking about $20+ billion. According to official numbers, they are $14 billion, which means that $7 billion already left the economy. This is hot money but we were significantly relying on them. Hot money will go to other places, and we are still considering if we want to fix or lower the interest rates while other economies are raising them.
Additionally, oil prices dropped in 2014, opening the path for two different perspectives. The first one is that when oil prices hike, benefits are much higher than losses. For simplicity purposes, when there is a high surplus in the GCC and the prices are high, it reflects on us in the form of donations, investments and remittances, as well as a higher budget deficit and pressuring subsidies.
When the prices are low, we save money by removing subsidies – as was the case in 2015-2016 – but donations, loans and investments from the GCC also go down.
Today, the price hike in oil prices is going to have a negative impact on us because it will have an impact on the budget. Previously, the high prices of petroleum were in Egypt’s favor because the GCC poured investments into the country. However, this may not be the case this time because the GCC has other priorities, while it is also nationalizing, causing remittances to drop as the size of the Egyptian workforce in the Gulf is expected to drop.
What does Egypt need to do to remain resilient in the face of global and regional economic developments?
The economic reform program is a classical program; it’s a good one. It was direly needed and it happened very late. But we were met with circumstances that we could not control. The question is: Are these circumstances going to be combated by our ability to reform? The government and the Central Bank of Egypt (CBE) need to do two things: be transparent, especially about hot money and how it is spent, and be flexible with policy. We floated the currency to be able to absorb shocks, but in reality it is not really floating so it cannot obtain the desired outcome.
In the financial crisis of 2008, countries reacted in two different ways. Some countries were very dogmatic and decided to stay fixed, without easing their monetary policy, leading them to a long recovery period. Other countries were more flexible; they took a big hit but recovered much faster. Hence, I think policy transparency and flexibility are two key factors that we need to see.