Egypt’s stable economic outlook is a good sign, but should be treated with caution

Photo: REUTERS/Mike Segar

Earlier last month, major global credit rating agencies like Moody’s and Standard & Poor’s kept Egypt’s rating stable at B despite the economic challenges imposed by the COVID-19 pandemic. How far can Egypt’s economy remain shielded from the shock, though?

Revisiting assumptions

“It is good to have positive ratings announced, giving confidence to the economy in this difficult time,” says Abla Abdel Latif, PhD, Executive Director of the Economic Center for Economic Studies (ECES), “but we should be aware that they are based on certain assumptions.”

Abdel Latif believes that some assumptions on which the ratings are based are not confirmed. For example, there are $11 billion deposits by the Gulf countries that have reached maturity and are going to be withdrawn, and it is assumed that they will be redeposited, however, this is not guaranteed.

The effect of the virus has been to alter the forward assumptions of many economies. Some economies whose outlooks were positive became negative and vice versa, Professor of Practice at the American University in Cairo’s (AUC) School of Business Angus Blair, states to Business Forward.

Facing the negative external variables

Egypt (as the rest of the world) could not escape the negative external variables that interrupted its steady progress on macroeconomic indicators in recent years. “One of these variables is the drop in remittances, and there is a strong correlation between oil prices and remittance levels,” explains Blair.

The drop in oil prices exacerbated the expected fall in Gross Domestic Production (GDP) of the Gulf Cooperation Council (GCC) countries, which in turn means that for some time this is likely to implicate a fall in remittances. Moreover, the losses in the tourism sector – which had been recovering very well before the public health emergency – are likely to continue until at least the fourth quarter of 2020 when very little tourist arrivals might start to be seen, predicts Blair.

Shielded by some points of strength

However, according to Blair, Egypt has a number of other variables that place it in a particularly positive comparative advantage. “One is its large informal sector that acts as a kind of bulwark in the face of all disruptions. The agriculture sector also remains positive. Adding to that, some food processing and manufacturing, the retailing and construction that are being allowed to continue, you find that economic activity is flowing well over 30 percent of GDP.”

Blair also believes in one other major positive advantage for Egypt. “In the Western world,” he states, “there is a heavily indebted private sector and household sector. This implies that in a global recession, there will be a high reliance on governments because people do not have a backup in cash or via an informal economy, and for a long time there will be very little spending of disposable income beyond basics, and hence the repercussions will be more severe.” So, Egypt having a low level of household and corporate debt, is better positioned in terms of liquidity. “There are still problems, of course, but the general availability of liquidity is an enormous strength.”

A potential opportunity in natural gas

With a drop in global consumption of energy and the drop in oil and gas prices, Egypt being a net importer of oil might be enjoying a marginal benefit. It is unfavorable that global prices have hugely dropped as Egypt was gearing up to increase exports of natural gas. “However, there is still a significant market – especially in Europe – for gas in winter,” says Blair, “and so there is going to be potentially a strong demand for natural gas especially for household heating.”

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