In the aftermath of reforms: How vulnerable is Egypt to external shocks?


The government’s economic reform program is coming to a close – what is left now is ensuring growth sustainability and social justice. While Minister of Finance Mohamed Maait emphasized his optimism about Egypt’s future prospects and place in the global economy at the Euromoney Egypt Conference 2019 earlier this month, a number of external factors may affect Egypt as the new fiscal year gets in full swing. The US-China trade war, a global slowdown of trade and growth, tensions rising between Iran and Saudi Arabia and interest rate cuts by central banks of some of the world’s key economic players all seem very likely to affect emerging markets, and Egypt in particular.

But to what extent is Egypt vulnerable to those shocks and how can it mitigate impact?

How can current external shocks be classified?
During a panel discussion at the Euromoney Egypt Conference 2019, managing director and head of emerging economies at CitiBank David Lubin divided the external environment into two categories: the trade environment and the external demand environment.

“I think the external environment that Egypt faces at the moment is terribly bad,” he explained. “The structure of the Chinese economy is changing, undergoing a permanent slowdown that has all sorts of implications on the Egyptian economy. The stability of global trade rules is under assault, increasing the willingness of global firms to postpone investments.”

In Lubin’s opinion, the major weakness in the external environment is global demand. However, the capital markets environment is very strong as very low interest rates in the developed world helps push capital towards Egypt.

“The very weak external demand environment and the strong capital markets environment create a deceptive sense that everything is ok,” he suggested.

Investors are not keen on buying Egyptian assets merely because “the country is doing well,” but rather because of two things: the “push factor” that’s pushing capital towards Egypt, and the “pull factor” which is the country’s macroeconomic story itself.

“It is important that the Egyptian government maintains the strength of the ‘pull factor’, because when the ‘push factor’ dominates, you set yourself up for problems,” Lubin recommends.

How can Egypt mitigate these shocks and absorb them?
Senior economist at the World Bank Hoda Youssef stated during the conference that Egypt has always been vulnerable to external shocks due to the nature of many things, such as its location, openness to global markets, oil prices, Egyptian labor abroad, the importance of remittances for the Egyptian economy etc.

According to her, the government has implemented many reforms in the past three years that would alleviate the burden of such shocks, like the liberalization of the exchange rate and fiscal consolidation reforms. These steps were considered taboos in economic policy making for a long time.

“For Egypt, the question has always been whether it is going to fall back again into the cyclical pattern of undertaking bold, important reforms followed by maybe policy reversal, or even complacency on important things that need to be done to preserve the gains,” Youssef warned.

In order to solidify gains, sustainable domestic policies are key.

“The more you leave yourself to unsustainable policies, the more the likelihood that the adjustments will be abrupt and large, which can affect the economy very adversely,” she added.

Are Egypt’s future plans aligned with what is going to happen internationally?
Youssef explained that a shock does not necessarily have to be sudden – it merely has to be negative and adversely affects the economy, requiring a high magnitude of adjustment in order to respond to that change.

In addition to capital markets, there are two very important channels through which Egypt is expected to be affected – namely export competitiveness and foreign direct investment (FDI).

“These are really the fundamentals of any economy. You can welcome investors’ interest in Egyptian debt instruments which provides quick foreign currency liquidity,” she concludes. “But if you want to ensure sustainability, you have to look at more fundamental factors, which are exports and FDI – both of which are very vulnerable to what happens at the global level.”

The way the global economy will function over the coming 30 years may be very different than how it is functioning today. Relying and expanding on key performance indicators such as FDI and trade growth may not be enough with the fourth wave of the industrial revolution speedily approaching and the environmental challenges arising. While this is not necessarily a shock – as it has been in the making for years now – it is important that the country maintains a futuristic vision to be able to keep up with the “new world”.

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