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10 November 2019

Egypt: Surviving a fiscal turbulence

The Egyptian government is leaving no stone unturned in boosting its finances and luring foreign investors who fled during the 2011 uprising.


Approximately four years ago, Egypt’s economy was teetering on the edge as investors shunned the country and entrepreneurs scoured the black market for greenback. Now Egypt is being hailed as one of the region’s fastest-growing economies, favoured by international investors seeking high yields in an increasingly uncertain global environment.

 The ouster of Hosni Mubarak nine years ago destroyed Egypt’s economy, resulting in a 3.1 per cent decline in annual growth in 2011-16, from an average of 6.2 per cent in 2005-10. While the former Egyptian president is credited for reforms that spurred economic growth to highs of eight per cent, keeping the spoils among his own sparked a costly revolution and left a financial carnage whose stains are still noticeable in Egypt’s socio-economic fabric.

The recent uprising against the government of President Abdel-Fattah El-Sisi was incited by a disgruntled building contractor who claimed—without providing evidence— that there is extensive corruption in the military and the government.

The allegations came amidst economic reforms and austerity measures that are detested by adversely affected middle-class citizens. The economic woes that followed the 2011 uprising partially ended when the Egyptian authorities secured a three-year, $12 billion Extended Fund Facility (EFF) from the International Monetary Fund (IMF).

According to EY’s Economic Report 2019, the IMF bailout programme came with stringent conditions and to secure the deal, Egypt was forced to float its currency, introduce new taxes and slash energy subsidies—all of which sent inflation galloping above 30 per cent for most of 2017, a high that had not been seen in a generation.

While the process required sacrifices in the short-term, the reforms were critical to stabilise the economy and lay the foundation for strong and sustainable growth to improve living standards for Egyptians. Similarly, the IMF stated that the economic reforms would help achieve more sustainable, inclusive and private sector-led growth which will help create jobs for youths while ensuring adequate resources are available for social protection.

Reaping the benefits

The Egyptian economy is supported by the government’s ongoing efforts to improve the business operating environment,” said S&P. Cairo is emerging from a three-year IMF programme, which provided a $12 billion loan as the country endorsed sweeping and widely unpopular economic measures.

The Washington-based fund stated that the completion of the review in July 2019 paved way for the last $2 billion instalment bringing total disbursements to $12 billion—the full amount approved in 2016 to aid the authorities’ economic reform programme. The country has since attracted tens of billions of dollars into its debt market and the central bank’s foreign reserves have surged to more than $44 billion.

Additionally, Egypt’s macroeconomic situation has improved remarkably since 2016, supported by the government’s commitment towards the reform programme as well as decisive upfront policy actions. The critical macroeconomic reforms which were introduced to unlock billions in IMF funds successfully corrected the country’s large external and domestic imbalances.

Egypt’s fiscal discipline caught the attention of the three main rating agencies—Fitch Ratings, Moody’s and S&P —who could not help but upgrade the country’s sovereign ratings as well as their outlooks, citing the country’s strong economic growth prospects following fiscal reforms.

According to the African Development Bank, the reforms achieved macroeconomic stabilisation and recovery in growth and employment as well as putting public debt on a clearly declining trajectory.

The IMF commended Egypt for achieving the 2018/19 primary surplus target of two per cent of GDP which helped to anchor a further decline in the public-debt-to-GDP ratio. The fund added that it will be important to maintain primary surpluses at this level over the medium term to keep public debt on a downward trajectory.

The success of the government’s structural reforms enabled the modernisation of the economy which includes steps to support exports and reduce non-tariff barriers. Cairo also managed to streamline as well as enhance industrial land allocation process and support SMEs and strengthen public procurement.

Despite uprisings which are being fuelled by allegations of graft and misuse of public funds, the government is making efforts to improve transparency and accountability of parastatals as well as eradicate graft. These reforms are vital to lure private investment which is essential to raise growth and make it more inclusive.

Sovereign wealth fund

As part of structural reforms, the government launched its first sovereign wealth fund that is expected to become operational in the last quarter of this year, in a bid to support private investment. Modelled after sovereign wealth funds in Saudi Arabia, Kuwait and the UAE, Egypt’s new investment arm will seek to generate additional wealth from under-utilised state assets.

According to the International Forum of Sovereign Wealth Funds (IFSWF), the Egypt Fund was created by Law No. 177/2018 and its mandate is to contribute to the sustainable economic development of Cairo by managing the country’s assets to maximise their value for future generations.

Partnering with the private sector, the fund will seek to attract domestic and foreign investment as well as build on economic reforms which began in 2016 with the flotation of the currency. The EGP 200 billion Egyptian sovereign wealth fund is the latest government measure aimed at reviving growth and investment that faltered in the wake of the 2011 uprising, said the IFSWF.

The sovereign wealth fund will start with paid-in capital of EGP 5 billion, 20 per cent of which will be injected by the Government when it is set up. The economic revival vehicle will partner with the private sector to invest in a wide range of assets, including land and buildings, as well as stakes in state-owned companies at market value.

While the Government will wholly own the sovereign fund, the private sector will be allowed to buy stakes of over 50 per cent in sub-funds and affiliated companies. Private sector investors will also be able to invest in various financial instruments, stocks, bonds as well as other securities inside and outside Egypt.

A pedestrian checks a mobile device near market stalls in Cairo Photo Credit Bloomberg/Sima Diab

Majority stake offerings in parastatals

Egypt also plans to raise up to EGP 100 billion ($5.7 billion) by selling minority stakes in at least 20 state-owned enterprises on the stock market. The country’s public sector has long been criticised as bloated and inefficient; officials have struggled to push the firms toward profitability.

The current programme marks a first step toward attempting to strike a balance between efficiency, profitability and raising revenue for the government. Cairo plans to offer minority stakes in Alexandria Mineral Oils Company, Eastern Tobacco, Alexandria Container as well as Cargo Handling, Abu Qir Fertilisers and Heliopolis Housing—the second phase of the listings was postponed last year due to unfavourable market conditions.

Similarly, the Governor of the central bank said that stateowned lender, Banque du Caire, will offer a stake of its shares, ranging between 30 and 40 per cent, which is expected to garner between $300 million and $400 million. The Egyptian Ministry of Finance said that the initial public offering (IPO) is focused in areas such as petroleum services, chemicals, shipping as well as maritime and real estate to help boost state finances.

In Q1 2019, the government appointed companies to manage the sale of stakes in 23 companies. In the first phase of the IPOs, the government offered investors the chance to acquire a majority stake in state-held Heliopolis Housing in July 2018. Additionally, there has been a lot of activity on the Egyptian Exchange (EGX) in the last nine months.

Cairo for Investment and Real Estate Development (CIRA) announced its intention to offer up 37.8 per cent of the company’s outstanding share capital, representing 207 million ordinary shares currently owned by Social Impact Capital.

Additionally, Egypt’s Fawry for Banking & Payment Technology Services—the first company to make its trading debut on EGX this year, raised around EGP 360 million ($22 million) in an over-subscribed private placement ahead of its IPO. Fawry’s listing in August 2019 was the first by a private owned firm since Sarwa Capital IPO in October 2018—as high-interest rates attract investors to fixed income rather than equities.

Citizenship by investment

The Egyptian government is leaving no stone unturned in boosting its finances and luring foreign investors who fled during the 2011 uprising. In July 2018, Egyptian lawmakers passed the citizenship by investment law allowing the offering of citizenship to foreigners who deposit at least EGP 7 million ($392,000) in foreign currency, then hand it over to the treasury after five years.

It is not immediately clear what economic benefits a foreigner would obtain by acquiring citizenship. Egypt places restrictions on foreign investment projects and for bids foreign ownership of agricultural land and property in the Sinai Peninsula.

Markets activity

Egypt returned to the global bond markets in 2017, lowering its borrowing costs overseas as domestic rates soared amid a far-reaching economic reform programme. The government seeks to vary its instruments and gradually move towards longer-term credit to reduce the burden for one of the Middle East’s most indebted countries.

In September 2019, the ministry of finance announced that the government will approach investment banks to advise on a planned international bond issuance to raise between $3-7 billion by June 2020. According to a Bloomberg report, Cairo is taking advantage of lower borrowing costs amid signs the world’s major central banks may cut interest rates or deliver a fresh batch of monetary stimulus to shore up

 economic growth. The announcement followed the reduction of the main interest rate by the US Federal Reserve for the second time this year—a move Federal Reserve lawmakers said was aimed at sustaining US economic expansion.

A bitter pill to swallow

In a report, the World Bank, said, “despite the authorities’ success in stabilising the macro-fiscal environment as well as strengthening confidence in the economy, the adopted measures came with adverse socioeconomic effects.” The highest impact came from the increase in inflation rates fuelled by the large currency depreciation, which triggered a sharp increase in the cost of living.

Majority middle-class Egyptians were hit hard by the 2016 currency devaluation and subsidy cuts that sent prices soaring and almost a third of the population now lives in poverty. Under the $12 billion loan IMF bailout programme, Egypt hiked fuel prices as much as 50 per cent and increased electricity rates by around 25 per cent—measures that made it even harder for the middle class to make ends meet, with another fuel price rise scheduled for next year.

PwC stated that the elimination of most fuel subsidies, which are regressive, encouraged energy efficiency, helped protect the budget from unexpected changes in oil prices and free up fiscal space for social spending. The recently closed IMF bailout programme’s economic reforms have started to pay off for Egypt’s longsuffering population.

Fitch Ratings suggested that Egypt’s economic reforms have helped strengthen growth, reduce unemployment, increase foreign exchange reserves, and put public debt on a downward path.”

S&P Global stated that the stable outlook for Egypt balances the rating firm’s expectation that current account deficits will remain as a smaller percentage of GDP and that growth prospects will remain strong, against risks of fiscal slippages and an increase in the already-large stock of relatively short-dated government debt issued at high-interest rates.

Egypt’s economy is expected to grow 5.5 per cent annually over the next three years and it will be driven by more investments in a ‘robust’ pipeline of projects as well as an increase in natural gas production and a rebound in tourism.

The government recently finalised the details of a new oil and gas contract to attract more foreign investments than the $10 billion already coming into the energy industry this year. With the completion of the IMF programme, Egyptian officials successfully averted an economic collapse and set the country on a more sustainable path. 

Economic growth accelerated to 5.6 per cent in the fiscal year that ended in June 2019, the highest level since 2010. Debt and the budget deficit, though still hefty, have been on a downward trend. The deepening and broadening of effective reforms are critical to underpin the positive outlook for growth and unemployment.




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