The coronavirus shock will affect Egypt’s external finances, GDP growth and fiscal performance, and will probably lead to substantial portfolio investment outflows from the local-currency debt market, says Fitch Ratings. However, high levels of international reserves and a recent record of fiscal consolidation and prudent monetary policy may help to mitigate the impact on the country’s credit position.
The broad travel and tourism sector contributes around 12% of Egypt’s GDP and 10% of employment, with gross tourism receipts estimated by Fitch at USD13 billion (almost 4% of GDP) in 2019. Such earnings will dwindle to insignificant levels so long as international tourism flows remain at a near-standstill as a result of the pandemic, and may take time to recover to pre-crisis levels even once travel restrictions start to be lifted. This will hit the country’s external position and economic growth.
Weaker international demand will also curb Egypt’s merchandise exports and earnings from traffic through the Suez Canal, which we estimate at around USD17billion and USDD5.8 billion, respectively, in 2019. Remittances, worth around USD25 billion last year, could also be hurt. Softer domestic demand will depress imports, but will not be sufficient to prevent a significant widening of the current account deficit overall. The scale of the deterioration will depend on how long the pandemic will affect external demand, which remains unclear.
Global financial market turmoil is likely to have caused portfolio outflows in March, and could lead to further outflows over the next six months. Foreign investors held USD20 billion worth of Egyptian pound-denominated T-bills at end-February, and also hold an amount - albeit much smaller - of T-bonds.
The wider current account deficit, coupled with portfolio investment outflows, will put downward pressure on international reserves and/or on the exchange rate. Egypt reported official reserves of USD45.5 billion at end-February, with the Central Bank of Egypt (CBE) also reporting USD7 billion of foreign-currency (FC) deposits not included in the official reserves. This should be sufficient to provide a buffer against short-term volatility caused by capital outflows; but reserves may be rapidly eroded if such outflows are sustained.
For example, a scenario that saw portfolio outflows of USD15 billion coupled with a USD10 billion-15 billion widening of the current account deficit - and the central bank resisting depreciation - could halve CBE’s international reserves and FC deposits. Nevertheless, a decline in the banking sector’s net foreign-asset position could cushion reserve erosion to some extent, as in the case of portfolio outflows in 2H18.
We expect the government’s fiscal consolidation efforts to falter in the near term, given weaker economic growth and revenue collection. The government has also announced an EGP100 billion (around 1.7% of GDP) fiscal stimulus. We feel its measures are modest, mostly temporary, and fairly easily reversible, but will add to pressures on the public finances.
When we affirmed Egypt’s sovereign rating at B+ in December 2019, we pointed out that a failure to keep the government debt/GDP ratio on a downward path, or the reversal of fiscal or monetary reforms, could lead to negative rating action. Nonetheless, in assessing the impact of Egypt’s supplementary fiscal measures on its sovereign rating we will take into account the country’s recent record of fiscal consolidation when analysing whether the coronavirus pandemic will affect public finances over the medium term.
We had also commented that renewed signs of external vulnerability could be a negative rating sensitivity. Egypt’s access to external financing will remain an important rating consideration. In a stress scenario, Egypt may be able to access IMF funds, following the country’s successful completion of an IMF progamme in November 2019.
