Egypt: Economic Wish List For 2019

The new year brought with it not just greetings but also jokes about how broke many people have become and how little their monthly salaries can last.

After two years of economic reforms, a stretched budget is something most Egyptians have got used to and can even accept. “Thankfully, prices stabilised in 2018, and we stopped seeing drastic fluctuations,” Rania Galal, a university professor, said.

She is hopeful that projects being undertaken to boost food production such as the 1.5 million feddans land-reclamation project or the new extensive fish farms will increase food supplies and keep prices on a leash.

However, she is also apprehensive about another expected cut in fuel subsidies. The government is expected to implement another round of cuts to fuel subsidies this year as part of their phasing out by the end of the International Monetary Fund (IMF) agreement.

Egypt has had a three-year $12 billion Extended Fund Facility (EFF) agreement with the IMF since November 2016.

In its letter of intent to the IMF as part of the IMF’s third review of Egypt’s EFF facility, the government said it had raised pre-tax price-to-cost ratios to about 73 per cent for petrol, diesel, kerosene and fuel oil (excluding fuel oil used for electricity generation and bakeries).

“We will make additional increases to achieve our objective of 100 per cent cost recovery by June 15, 2019 (excluding liquefied natural gas and fuel oil used for electricity generation and bakeries),” the letter dated June 20, 2018 said.

The government has also committed itself to implementing an automatic fuel price indexation mechanism. Approved in June 2018, the mechanism is “intended to maintain the cost-recovery ratios for fuel products and safeguard the budget from unexpected changes in the exchange rate and global oil prices,” the letter said.

Although the government said in the letter that it intended to implement the new mechanism by the end of December, that did not happen. Instead, the US financial news agency Bloomberg reported that the government would implement the mechanism on unsubsidised gasoline 95 fuel in March 2019. Bloomberg said the government planned to announce the mechanism for other types of fuel in June, with a target to implement it in September.

Having to pay international prices for fuel would be a calamity for Galal. “If that happens, I will either sell my car or park it for good,” she said. “Already filling up the car with petrol consumes much of our income. If it costs more, it will become unaffordable,” she said.

An October 2018 Bloomberg report that compared petrol prices in different counties to the average national pay cheque found that Egypt was one of 10 countries where petrol was the least affordable. With an average daily income of $9.41, it takes 28.30 per cent of a day’s wages to afford a gallon of petrol, the report showed.

Galal said that if she had to park her car permanently, she wanted to see suitable public transportation. Several private companies, including ride-hailing apps, have started offering improved bus services, but she said more lines were needed and there needed to be broader services.

As for the impact of the fuel subsidy cuts on inflation, Khaled Hamza, head of investment banking at Sigma Capital investment bank, said at the current oil price levels it would not impact inflation by more than two to three percentage points, assuming the absence of market anomalies. However, he said that if oil prices exceeded $75 per barrel, that would have a larger impact on inflation.

Egypt’s annual headline inflation rate recorded 15.7 per cent in November. It reached highs of 33 per cent in the summer of 2017.

Investment bank Beltone Financial made a similar forecast, expecting overall inflation to average 17.8 per cent in the 2018/2019 fiscal year. That being the case, Beltone does not expect any reduction of interest rates before the fourth quarter of 2019.

“Although this will affect the improvement in private spending, we expect investment spending to continue to support large-scale GDP growth projects to reach 5.5 per cent in fiscal year 2018/2019,” it said.

Beltone also expects the value of the pound to stabilise in 2018/2019 because of “strong foreign cash flows and sufficient net foreign assets at the Central Bank of Egypt [CBE].” It expects improved revenues from tourism to reach $11.1 billion and is also seeing Egypt paying less for fuel imports due to the end of natural gas imports.

Egypt’s petroleum minister earlier said that halting liquefied natural gas (LNG) imports could save the government $3 billion annually.

Hamza agreed that the output from the mammoth Zohr and other gas fields will not only cut the import bill of LNG but also revive exports of natural gas, turning Egypt into the gas hub of the East Mediterranean region. Moreover, the output from these fields should encourage rising exports of gas derivatives such as nitrogen-based fertilisers and make gas supplies to industries more competitive.

He is optimistic that 2019 will see the restarting of the government’s privatisation programme that was stalled in 2018. The government had said it would sell stakes in five state-owned companies in 2018, but it did not deliver on its promise due to unfavourable conditions in global markets that it feared would keep investors away.

The programme is part of a larger plan to sell stakes in 23 state-owned companies to bring in revenues to help reduce the budget deficit. The government is targeting an 8.4 per cent budget deficit during the current fiscal year.

Hamza is also looking forward to the CBE cutting interest rates towards the end of 2019, hopefully on the back of receding inflationary pressures and more stability in global financial markets. The emerging markets crisis towards the second half of 2018 coupled with the US Federal Reserve’s higher interest rates on dollar deposits had prompted foreign investors in Egyptian treasury bills to quit the market in large numbers.

To encourage them to stay on, the CBE was reluctant to cut interest rates. After a two per cent reduction earlier in the year to stand at 16.75 per cent for deposits and 17.75 per cent for loans, the CBE kept rates steady throughout 2018.

However, Hamza worries that the continued exit of foreign portfolio investments out of treasury bills and bonds could potentially strain the value of the pound, thus impacting already depleted real incomes.

But Beltone said the economy has gone through the worst stages of the exit of foreign inflows from investments in fixed-income instruments. It said it expected the cancellation of the mechanism to divert investors’ profits abroad to support foreign-exchange inflows and reduce the rapid depletion of net foreign assets in the banking sector.

“We do not consider the decline in net assets to be a cause for concern as the CBE’s net foreign assets remain at a high level of $16 billion,” Beltone said. It said it was also satisfied with the foreign-exchange reserves that now cover about eight months of imports. Egypt’s net international reserves stood at $44.5 billion at the end of November 2018. Beltone also expects lower import bills to ease any pressure on the local currency.

Externally, the escalating trade wars between the US and its major trading partners such as China that could impact global growth, trade flows and subsequently Suez Canal revenues, could pose a challenge, Hamza said, as well as any escalation in geopolitical tensions in the Middle East region.

Nonetheless, he remained cautiously optimistic because “Egypt’s macro indicators are still showing positive signs.”

Egypt’s gross domestic product (GDP) grew by 5.3 per cent in the first nine months of the 2017-18 fiscal year compared to 3.9 per cent during the same period the year before. The Finance Ministry sees the economy growing at 6.5 per cent in the 2019-20 fiscal year.

To maintain those targets, Hamza believes the government should avoid policy mistakes or a derailing of the economic reforms. He also warned against the crowding out of private investments and wanted to see the further spread of social welfare and monetary compensation programmes to needier segments of the population to help ease the impact of the reforms on them.