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RISKREPORTER
Egypt
CountryRiskAssessment
Egypt
24/11/16
ExportTransactions
PoliticalRisk (1to7)
Riskdriversandoutlook
ShortTerm
1
7
SincePresidental-Sisitookoffice2yearsagothecountryhasenjoyedamoresecurepolitical
order,althoughthishasnottranslatedintoimprovedeconomicfundamentals.Onthecontrary,
hisrepression,terroristattacksandweakmacroeconomicpoliciesarehavingadramatic
impactontourism–akeysourceofforeignexchangeearnings–andsevereconsequences
forforeignexchangereserves,thecurrentaccountbalance,economicgrowthand
unemployment.Inaddition,lavishmegaprojectshavebeendrivingupthefiscaldeficitand
publicdebt,puttingpublicfinancesinadirestate.AlthoughtheGulfstatescametotherescue
withaid,whenoilpricesfellGulfaiddriedupwhiletheeconomyfurtherdeteriorated,as
illustratedbyshortagesofhardcurrenciesandbasiccommodities.Imminentreformsappeared
necessary.Thesebodewellfortheeconomyinthelongtermbutarepainfulintheshortterm,
possiblytriggeringwidespreaddiscontent.However,thewaningeconomyalsofuelledunrest.
Egyptseemedtobestuckbetweenarockandahardplace.Multilateralorganisationscame
onthescene.TosecurealoanfromtheIMF,though,decisionshadtobemade:theexchange
rateoftheEgyptianpoundwasfloated,representinga50%devaluation,andfuelsubsidies
werecut,leadingtoa47%priceincrease.Inthisdifficultcontext,therecentlysecuredIMFloan
willsupportliquidityandrecentandanticipatedreformswillhelptheeconomytorecover.
Nevertheless,politicalriskloomsinacountrywheretwopresidentshavebeenoustedinthe
last5years.Forthesereasonsandasshort-termandMLTexternaldebtisontherise,Egypt’s
politicalriskclassificationsareincategory5and6respectivelyforshort-termandlong-term
politicalriskonascalefrom1(best)to7(worst).
Commercialriskremainshighgivenadifficultbusinessenvironmentcharacterisedbyred
tape,weakcreditsupply,poorinfrastructure,increasinglendingratesandadepreciating
currencyanddouble-digitinflation.Asaconsequence,CredendoGroup’scategoryforthe
commercialriskassessmentisC(theworst).
Facts&figures
Medium/LongTerm
1
7
SpecialTransactions
1
7
CommercialRisk(AtoC)
B
A
C
Directinvestments(1
to7)
WarRisk
1
7
Riskofexpropriationand
1 governmentaction
7
Transferrisk
1
7
Pro's
Relativelylowdebtserviceleveldespiterisingexternaldebt
Rathergoodrelationswithexternaldonors
Improvedmacroeconomicpolicies(albeitfromaweaklevel)
Floatingexchangerate
Cons
Poorexternalliquidity
Difficultbusinessenvironment
Direfiscalfinances
Heightenedriskofsocialunrest
HeadofState
PresidentAbdelFattahal-Sisi(since8June2014)
Headofgovernment
PrimeMinisterSherifIsmail(since12September2015)
Descriptionofelectoralsystem
Presidential:4-yearterm;lastelection:May2014
Legislative(forHouseofRepresentatives):5-yearterm;lastelection:16December
2015
Population
91.5m
PercapitaIncome(USD)
3.340(2013)
Incomegroup
Lowermiddleincome
Mainexportproducts
Privatetransfers(36.4%ofcurrentaccountreceipts),tourism(13.5%),SuezCanal
receipts(10.7%),oil(16.7%)
Countryriskassessment
Politicsasusual
Duringthepast5years,Egypthasbeengoingthroughaperiodofdramaticchange.In2011
Egyptianprotestseruptedwhichweremotivatedbydomesticdiscontentandtheeventsin
TunisiawherePresidentZineal-AbidineBenAliwasremoved.Following18daysofdeadly
unrest,theauthoritarianPresidentMubarakhandedoverpowertothemilitaryafter30yearsin
office.Thoughmassdemonstrationsstopped,significantprotestsagainstthenewmilitary
rulerscontinued.Nonetheless,anewpoliticallandscapeemergedastheIslamistMuslim
Brotherhoodformedapoliticalparty,theFreedomandJusticeParty,andin2012their
candidate,MohammedMorsi,waselectedinthefirstpresidentialelectionsinhalfadecade.
However,inthefollowingmonthsMorsiprovokedcontroversyandmanyEgyptiansbeganto
believethattheyhadexchangedoneauthoritarianrulerforanother.Inaddition,thelackof
securityandthedeteriorationoftheeconomyfuelledunrest.Thedismayboiledoverintoa
newwaveofprotests.OnlyafewdaysafteroverwhelmingdemonstrationsagainstMorsi’sfirst
yearinoffice,hewasoustedbyEgypt’sarmy.AnewconstitutionwasadoptedinJanuary
2014,abolishingtheupperhouseofparliament.Instead,Egypt’slegislaturenowconsistsofa
singleHouseofRepresentativeswhichwaselectedin2015fora5-yearterm.Inaddition,Mr
al-Sisi,aformerleaderofthearmedforces,wonthepresidentialelectionsinJune2014with
97%ofthevote.
Sinceal-Sisicametopower,Egypthasenjoyedamoresecurepoliticalorder,althoughthe
countryhasslippedbackintoauthoritarianmilitaryrule.Indeed,themilitaryandsecurityforces
retaintightcontroloverpolicymakingwhilestillcontrollingkeyareasoftheeconomy.
Furthermore,sinceMorsi’soustingtherehasbeenacrackdownontheMuslimBrotherhood.
TheMuslimBrotherhoodleadershipwasdetainedalongwiththousandsofitsmembers,a
courtbannedallMuslimBrotherhoodinstitutionsandmorethan100presumedMuslim
Brotherhoodsympathisers,includingformerPresidentMorsi,weregiventhedeathsentence.
Anti-governmentprotestnumbershaveconsequentlydwindled,butatthesametime,terrorism
incidentshaverisensharplygiventhelackofotherchannelsforpoliticalexpressionfor
Islamistsincombinationwithspillovereffectsfromregionalsectarianconflicts.Terrorism
incidentsarehavingadramaticimpactonthetourismsectorasillustratedbythedowningof
theRussianaeroplaneinNovember2015byalocalgroupthatclaimedallegiancetoIslamic
State,afterwhichtourismrevenuesplummeted.Inaddition,supportforthepopularal-Sisiis
waningduetohisinabilitytorespondtotheongoingeconomiccrisis,inparticularpersisting
unemploymentandhighinflation,aswellastodeterioratingpublicservices,increasingpolice
brutality,rampantcorruption,andenergy,foodandwatershortages.Nevertheless,unrest
seemslimitedfornowbuteconomicrecoverywillbecriticalforpoliticalstabilityinthecoming
years.
Complicatedfriendships
EgypthastraditionallybeenanimportantallyintheArabworldasitiscrucialforregional
stabilityandhometotheSuezCanal,animportantwaterwayforworldtrade.Egypthas
benefitedfromastrongimprovementinrelationswiththeGulfcountries(notablySaudiArabia,
theUnitedArabEmiratesandKuwait)sincePresidentMorsiwasremoved.Thisisexplained
bytheiraversiontotheMuslimBrotherhood,whichisseenasanideologicalcompetitor
(particularlybytheregimeinRiyadh).TheGulfstatesalsoprovidedthecountrywithfinancial
aid,butaidhasbeendecliningandhasbeengivenintheformofsoftloanssince2016,which
isattributedtothepersistentlowoilprices,disagreementaboutregionalpolitics(e.g.Syria)
andfrustrationaboutthelackofimprovementinEgypt’seconomy.Inparticularrelationswith
SaudiArabialookbumpyasillustratedbythehaltinsupplying700,000tonnesofpetroleum
productspermonthongenerouscreditterms.Nevertheless,SaudiArabiaandotherGulf
countrieslookcommittedtosupportingthecountryastheyrecentlycamethroughwith
deposits,estimatedatUSD3billion.
RelationswiththeIMFhavebeenimprovingbutalsoremaincomplex.InJanuary2015theIMF
publisheditsfirstArticleIVin5years,whileduringthesummerEgyptstruckapreliminarydeal
foraUSD12billionIMFloanprogramme,whichwillbedisbursedover3years.Ittookseveral
monthsbeforetheloanwasapprovedbytheIMFboard.Afirstconditionforapprovalwas
securingUSD5-6billioninbilateralfinancingforthefirstyear,whichrequiredseveralallies.
Cutsinfuelsubsidiesandafurthercurrencydevaluationwerealsoessentialbeforeadeal
wasstruckbutittookuntilthebeginningofNovembertofloatthecurrencyandcutthese
subsidies.Thoughittooksometimetosecuretheloan,itisthefirsttimeEgyptreachedan
agreement.TwopreviousagreementswiththeIMFindeedcollapsedinthepastfiveyearsdue
toalackofpoliticalwilltoimplementreformsandfearofrisingsocialtensions.
Wobblyeconomy
TheEgyptianeconomyhasbeenflounderingsince2011.AnnualgrowthsincetheArab
Springhasbeen2.7%onaveragein2011-2016,comparedtoanannualgrowthof5%in
2000-2010.Egypthasbeensufferingeconomicallyfromyearsofpoliticalturbulence,falling
tourismrevenues–akeysectorandsourceofforeignexchangeearnings–andinvestments
andforeignexchangerationing.Inaddition,growthhasbeenimpededbytheratherdifficult
businessenvironment(Egyptranks122ndoutof190countriesintheWorldBank’sEaseof
DoingBusiness2017ranking).Furthermore,slowgrowthhasresultedinhighunemployment,
runningat14.5%in2015/2016,withyouthunemploymentestimatedatthreetimesthatrate.
Inthelongertermthepicturelooksbrighter.Inlate2015a‘supergiant’gasfieldwas
discovered,estimatedtobelargerthanOman’sreservesaccordingtoEIA.Egyptisthelargest
non-OPECoilproducerandthesecondlargestdrynaturalgasproducerinAfricabutitisalso
thecontinent’slargestoilandgasconsumer.Thatiswhyitisanetfuelimporterasof2012.If
energycompanyEni’sestimatesareaccurate,thefieldwillincreaseEgypt’sgasreservesof
65.2trillioncubicfeetbyalmosthalf.ThegascanprovideforEgypt’sownenergyneedsand
renewtheexporttrade.Inaddition,reformsrequestedbytheIMFcanalsoturnthingsaround
inthelongtermasreformsarelikelytofostergrowthandcreatejobs.
Stemmingunrestwithanovervaluedexchangerate
Egypt’sliquiditysituationhasdeteriorateddrasticallysince2011.Theforeignexchangerate
waskeptatanovervaluedratetokeepimportpriceslowasEgyptisahugeimporterofbasic
goodssuchaswheat.Lowpricesofbasicgoodscouldstemunrestasinthepastbasicgoods
appearedtobeanimportanttriggerfordiscontent.Inaddition,sourcesofforeignexchange
revenueswereunderpressure(seebelow).Consequentially,foreignexchangereservesmore
thanhalvedfrom5.8monthsofimportcoverintheJuly2009/June2010fiscalyearto2.3
monthsofimportcoverinJune2016.TheGulfcountriescametotherescueinApril2015with
USD6billionindeposits,andagaininthesummerof2016withUSD3billionindeposits.The
EgyptiangovernmentalsoconcludedanumberofloanswiththeWorldBank,theAfrican
DevelopmentBankandalsoSaudiArabiaandChinatosupporttheEgyptianeconomyand
increasethecountry’sliquidity.Nevertheless,theloansanddepositscouldonlytemporarilylift
thereservesanddevaluationwasstillnecessaryasforeignexchangereservescontinuedto
fall.Thedevaluationofthepoundby13%inMarch2016broughtnosolaceastheexchange
ratewasstillovervalued.Indeed,therewasstillahugedifferencebetweentheofficialrate,
whichstoodat8.88poundstothedollar,andtheblackmarketrate,whichstoodat18.25
poundstothedollaratitspeak.Theovervaluedexchangerateincombinationwithlowforeign
exchangereservesledtowidespreadshortagesofimported(basic)goodssuchassugar,
babymilkandrice.Asprotestsescalated,theEgyptianauthoritiesevenconfiscatedstocksof
sugaratcompaniesmakingsoftdrinksandsweetstoselltheminoutletsretailingsubsidised
food.Paymentdelaysinhardcurrencieswerealsobeingreportedasthesewererationed.
Indeed,thepolicyofkeepingtheexchangerateovervaluedhadtheoppositeeffectofthat
intendedbythegovernment.Asthepressureontheexchangeratewasmounting,atthe
beginningofNovembertheCentralBankofEgyptannouncedafreefloatingofthepound,
representingadevaluationofabout50%.Theflotationliftspressureonforeignexchange
reserves.However,inflationisalsolikelytoincreaseasimportpriceswillincrease.Inflation
wasalreadyatahigh15.5%yearonyearinAugust2016,thehighestlevelsince2009,dueto
thedevaluationinMarchthisyear.TheflotationoftheEgyptianpoundislikelytofurther
increaseinflation,whichexplainsthepasthesitationoftheCentralBanktofloatthecurrency.
Inaddition,anticipatedsubsidycutsandtaxincreaseswillkeepinflationelevatedintheshort
term.TheIMFexpectsayearlyinflationof16.5%inJuly2016/June2017,thoughitwouldnot
beunrealisticforthesenumberstoprovehigher.
Hitbymultipleshocks
Since2008,Egypthashadstructuralcurrentaccountdeficitswhichhavebeenwideningto
elevatedlevelsovertheyears.Thoughthelowfoodandoilpricesofrecentyearsshouldhave
benefitedEgyptasitisanimporter,thecountry’sexportrevenueshavewanedinrecentyears.
Indeed,pressureonthekeysourcesofforeignexchangeearningshasledtoincreasing
structuralcurrentaccountdeficits.Firstly,tourismhitadecadelowthisyear.Thesectorwas
alreadysufferingfromtheupheavalsof2011and2013,buthastakenanotherhitdueto
securityconcernsfollowingtheterroristattackstargetingtourisminthepast2years.Secondly,
remittances–themostimportantsourceofcurrentaccountreceipts–arefallingsharplydueto
weakerGDPgrowthintheGulfcountrieswhichdependheavilyonoil.Thirdly,therevenuesof
theSuezCanal,whichwasrecentlyexpanded,havedecreasedasglobaltradeslowsonthe
heelsoftheworldwidedownturn.Asaresult,thecurrentaccountdeficitisexpectedtoreacha
highlevelofmorethan50%ofcurrentaccountreceiptsinJuly2016/June2017,anarrowing
comparedtothehugedeficitofmorethan70%postedlastyear.Ontopofthat,officialtransfers
areindecline,reflectingthedryingupofgrantsfromtheGulfstates.Onthepositiveside,the
currentaccountbalanceisexpectedtonarrowinthecomingyearsastheflotationofthe
overvaluedEgyptianpoundwillstrengthencompetitivenessandhencebolsterexports.
Tourismrevenuesarealsoexpectedtoincreaseastheeffectoftheterroristattackswanes,but
onlyifpoliticalstabilityremains.Inaddition,remittancesarelikelytorecoverinthecoming
yearsinlinewiththeexpectedmodestrecoveryofoilprices.Moreover,astheIMFprogramme
isapproved,itwillbecomeeasierforEgypttofinanceitscurrentaccountdeficit.
Egyptfacessubstantialexternaldebtrepaymentsasshort-termexternaldebthasincreased
substantiallyinthepastyeartomorethan25%ofcurrentaccountreceiptsin2015/16.The
totalexternaldebthasalsobeenincreasing,especiallyinthelast2years,duetobilateraland
multilateralloans.InthecomingyearsdebtislikelytoincreasefurtherasrecentlyanIMFloan
wasconcludedwhileadditionalbilateralfinancinghasbeensecured.Ontopofthat,Egyptis
alsointheprocessoffinalisingitsUSD3-5billionsaleofEurobonds.Asaresult,Egypt’stotal
nominalexternaldebtisexpectedtoincreaserapidlyby32%in2016/2017toahighofmore
than180%ofcurrentaccountreceiptsandtoleveloffatlessthan200%ofcurrentaccount
receiptsin2018/19.
Weakpublicfinances
Publicfinancesareinadirestate.Egypthashadstructuraldeficitsfordecadesandthoughthe
fiscaldeficithasbeendecreasingsinceitspeakof13.4%ofGDPinJuly2012/June2013,the
expectedfiscaldeficitofJuly2016/June2017remainshighat9.7%ofGDP.Egyptisspending
alargepartofitsbudgetmaintainingcostlyfoodsubsidiesandabloatedcivilservice,and
interestpaymentsareveryhighwhiletaxrevenuesarelow.Inaddition,thegovernmentis
investinginhugeconstructionprojectssuchasthenewSuezCanalandanewcitynearCairo.
TheflotationoftheEgyptianpoundislikelytoworsenthefiscalbalanceintheshorttermas
thestateisthemainimporteroffoodandfuel.Inaddition,thefiscaldeficitshavebeen
financedbyaccumulatingdebtwhichisexpectedtostandatmorethan90%ofGDPinJune
2016/July2017.Sofar,Egypt’spublicdebthaslargelybeenfinancedbythedomestic
financialsystem,whichhasimpededthecapacityofthebankingsectortofinancetheprivate
sector,andrecentlybybudgetfinancingwiththesupportoftheGulfcountries.However,
EgyptianbanksarealreadyhighlyexposedtothepublicsectorandthewillingnessoftheGulf
countriestocontinuetheirsupportiswaning.Therefore,fiscalreformstocutthefiscaldeficit
willbeofcriticalimportance.Egypthasalreadyhikedelectricitypricesby20-40%andfuel
pricesby47%andapprovedaVATof13%asofSeptember.Nevertheless,morereformsare
necessary.Fiscalconsolidationislikelytobepainfulwithfurthersubsidycutsonthecards,
whichcouldexacerbatepopulardiscontent.
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