Risk survey shows Egypt is becoming a more favourable option

As in other countries, Egypt has not been able to escape the impact of the Covid-19 crisis, with more than 101,000 confirmed cases to date and nearly 5,700 deaths from the disease, putting the healthcare system and economy under strain.

The government is rightfully fearful of a second wave of the pandemic, and is already planning accordingly, notably by snapping up increased wheat supplies to ensure a strategic six months’ supply of reserves, pre-purchasing vaccines and ensuring proper safety controls for the travel sector.

The fallout is unfortunate, not least in terms of jobs lost, with reduced tourism earnings and less foreign direct investment and remittance income from Egyptians working overseas creating a financing requirement of more than $9 billion in fiscal year 2019-2020 (to end-June), and an additional $4.5 billion for 2020-2021, according to the IMF’s latest calculations.

The situation may also worsen, of course.

Yet with multilateral creditor support, and the reforms they entail, Egypt is starting to bounce back. Its total risk score improved in the second quarter of 2020, and it appears to have done so again in the third quarter, according to the provisional results from Euromoney’s quarterly risk survey of economists and other experts due to be released in early October.

Beware, though. Egypt is not an option for those without any appetite for risk. As with other emerging or frontier markets, it comes with a strong warning attached. Many key risk indicators have low scores, reflecting its institutional and policymaking inadequacies and structural failings, among other factors investors should bear in mind.

It is still after all a tier four option on Euromoney’s five tier risk scale, representing a high (though not highest) default risk that is less safe than Tunisia, Jordan and Bahrain among the various countries in the region:

That said, its global ranking has improved from a low of 136^th in 2013 to 106^th currently, having shown improvement since the first quarter of 2020 with higher scores for almost every risk factor.

Mohamed Elsherbiny, head of portfolios at NI Capital Holding, is one of the contributors who is more upbeat about Egypt’s prospects, noting the various positive features, including banking sector stability – one of five economic risk indicators in the survey, also covering political and structural risks and incorporating debt ratings and an assessment of capital access.

“The banking sector in a nutshell has been getting stronger over the years, especially in terms of the capital adequacy ratio, non-performing loans, net interest margins and profitability,” he says, while also mentioning that the new banking law issued this year puts emphasis on strong governance regulation and capitalization.

Domestic politics

Elsherbiny notes the progress made on tackling corruption and improved government stability and information access, with the government committed to transparency and accountability, publishing information on procurement plans and contracts awarded as well as full audits of government spending.

Clearly, domestic politics is far from perfect. The recent elections for the newly created Senate were poorly supported, and there is the uncertainty of parliamentary elections due in October, with concern rising over the authoritarian rule of president Abdel-Fattah al-Sisi, who has managed to amend the constitution making it easier for him to cling onto power.

The demolition of illegally built homes and the sheer scale of unemployment and rising poverty exacerbated by the coronavirus crisis do not preclude the possibility of social tensions erupting.

Even so, Egypt is beginning to excite analysts and investors in equal measure, partly due to privatization and other fiscal reforms the IMF is recommending for debt sustainability.

Egypt has a good demographic structure, with a young population and fewer workers’ protests, and has notably avoided defaulting over the past decade despite its problems.

As for the economy, it has been dealt a blow by the lengthy lockdown, and the fall in global trade and tourism, but from July 1 the country’s tourist attractions were reopened, with efforts made to revive the travel industry and welcome back foreign tourists.

Real GDP growth weakened in the fiscal year 2019-2020, but remained positive at around 2%, according to the IMF, down from 5.6% in 2018-2019. It is expected to accelerate to 2.8% in fiscal year 2020-2021 and 6.4% by 2021-2022.

Egypt is beginning to excite analysts and investors in equal measure, partly due to privatization and other fiscal reforms the IMF is recommending for debt sustainability

The government’s own forecasts are more ambitious –targeting 5.5% growth for 2020-2021 despite the challenges posed by the pandemic – backed by investments. The government has previously demonstrated an appetite for improving the roads, ports and digital infrastructure as well providing industrial zones and support for agriculture.

The contract for a new 543 kilometre high-speed railway worth $9 billion linking Ain Sokhna on the Red Sea to El-Alamein on the Mediterranean coast has just been awarded, reflecting the government’s ambition in this regard, not to mention its potential.

Elsherbiny says the economic outlook is improving due to its “diversity and scale”, while the government’s support for SME financing, encouraging entrepreneurship, is positive for the economy and employment. He also notes the fact that the free-float Egyptian pound “has passed and succeeded tests many times”.

The government’s approach to extending the debt duration and its ability to raise funds locally and internationally is another favourable factor, according to Elsherbiny.

The widening of the deficit, rising debt and weak growth are seen as temporary setbacks that Egypt has had to shoulder before, and when Egypt issued eurobonds for $4-5 billion “it was able to cover it four to five times”, says Elsherbiny, also noting the trust and willingness of the IMF and other international institutions to lend.