Egypt Interrupted: Economic momentum disrupted by COVID

The government is keen to ensure that the project pipeline remains uninterrupted

  
Aerial View of Cairo city. Image used for illustrative purpose.

Aerial View of Cairo city. Image used for illustrative purpose.

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Egypt's economy has hit the brakes as COVID-19 disrupted business activity and sapped investor sentiment amid a lockdown and a worldwide economic downturn.

To counter the slowdown, the Egyptian government announced a $6.4 billion stimulus package in March as COVID-19 spread across the country. The fiscal measures include a new payroll tax to alleviate burden on middle income and less fortunate citizens.

The government also adopted sweeping measures to stem the spread of the virus, shutting down commercial flights from 15 March, which has left its lucrative tourism industry in the doldrums, and affected business activity.

To offer financial cover in the interim, the International Monetary Fund (IMF) said on 11 May that it was releasing emergency assistance of $2.72 billion to help the government spend on health and social protection and assist vulnerable groups.

"The COVID-19 pandemic has drastically disrupted people's lives, livelihoods, and economic conditions in Egypt. The global shock has resulted in a tourism standstill, significant capital flight, and a slowdown in remittances, resulting in an urgent balance of payments need," the IMF said.

The country's real GDP is expected to rise 2 percent this year, compared to 5.6 percent in 2019, and the 4.3 percent clocked annually during 2000-16. Egypt's economy is expected to expand 2.8 percent in 2021, according to the IMF.

Other measures include supporting small to medium enterprises, easing payments on real estate taxes on industrial and tourism entities, reducing natural gas and electricity prices for industries and allocating $1.2 billion to support the country's stock exchange.

The Ministry of Finance said in its Financial Monthly report in March that it is also preparing a pre-budget preliminary statement for the fiscal year 2020-2021, "which will shed light on more details of the government's decision-making package to confront the emerging coronavirus and the measures needed to stimulate industrial and productive activity and safeguard citizens."

As for monetary easing, the Central Bank of Egypt also cut its credit discount rate by 3 per cent to 9.75 per cent to help with liquidity. The central bank is also expected to work with other financial institutions to negotiate with 93,000 clients subjected to assets seizure to settle their due amounts.

The Institute of International Finance (IIF) estimates the economy to contract 2.5 percent in the second half of the year (which ends in June 2020), with manufacturing and tourism and services among the worst hit. The institute expects real GDP this year to grow a more modest 1.5 percent, while official reserves will fall to $33.2 billion, compared to $40.3 billion at the end of the last fiscal year.

"Demand and supply shocks related to COVID-19 - through lower global trade, tourism, remittances, and tighter global financial conditions - would severely strain the external sector," the IIF said in a note. "The sharp decline in exports, tourism, remittance inflows and Suez Canal receipts will widen the current account deficit to 4.1 percent of GDP in FY2019-20 from 3.5 percent in 2018-19."

The sharp decline in exports, tourism, remittance inflows, and Suez Canal receipts will also widen the current account deficit to 4.1 percent of GDP in FY2019-20 from 3.5 percent in 2018-19, the IIF estimates.

On the ground, the country's purchasing managers' index also saw a dramatic decline in April, as the economy reeled from the effects of the virus.

The index fell to its lowest level of 29.7 points since IHS Markit started the series in April 2011.

"Business activity, as measured by the survey, decreased at an unprecedented rate during April as firms were hemmed in by measures to stop the spread of COVID-19 and subsequent tail-off in consumer demand," according to a survey of Egyptian purchasing managers' views in April. "Measures included the forced closure of hospitality venues, with other firms constrained by restricted operating hours and curfews."

While employment levels fell again in April, firms are hoping the setback is temporary and they could rehire workers again.

"The outlook may darken though should the crisis worsen, and measures are extended," IHS said.

INVESTMENT ENVIRONMENT

Egypt, which has seen foreign direct investment (FDI) surge over the past few years, may also see a pullback in commitment from international operators. Egypt's FDI rose 5 percent last year to $8.5 billion, according to the United Nations Conference on Trade and Development, making Egypt the largest recipient of international investments in Africa last year.

But as commodity prices plummet and international companies review their spending budgets for the year, some of the projects may struggle. In February, Daily News Egypt reported that the proposed Hamrawein coal-fired power proposal is being postponed indefinitely.

Led by a consortium of China's Shanghai Electric and Dongfang Electric and Egypt's Hassan Allam Construction, the project was part of China's Belt and Road Initiative (BRI) that aims to connect Asia, Middle East, Europe and Africa via a series of infrastructure and energy projects.

"The indefinite postponement of the Hamrawein plant would mean a total of 15.2GW of proposed coal-fired power plants in Egypt have been either cancelled or shelved. There would be no coal projects left in the country's project pipeline," the Institute for Energy Economics and Financial Analysis posted on its website in April.

The Egyptian Electricity Transmission Company has also suspended a tender for an Egypt-Saudi electricity interconnection project, citing coronavirus.

The under-construction Grand Egyptian Museum, which was expected to open this year, has also been postponed till 2021.

However, the Egyptian government is keen to ensure that the project pipeline flow remains uninterrupted, with the Ministry of Planning and Economic Development noting that more than 229 projects valued at 47 billion Egyptian pounds will be completed this year, according to a report by the financial news website Mubasher in May.

Indeed, the government's pushed back against reports that some development projects in Upper Egypt were being suspended, noting that work was under way, according to a May report on the Egypt Today news website. In April, the website had reported that Egyptian president Abdel Fattah El-Sisi visited the seaport city of Suez to inaugurate a slew of projects, including a major tunnel connecting Suez to the Sinai peninsula between the Red Sea in the west and the Mediterranean Sea in the north.

The Arab Petroleum Investments Corporation (APICORP), which recently rolled out $500 million to help energy contracts across the region, expects Egypt and other regional governments to persist with their energy projects.

"I think the end result of all this mobilisation funding will be really useful for a number of countries, including Egypt, Bahrain, Jordan, Morocco, Iraq, all have projects that could be affected unless additional funding from us and others could help," Ahmed Ali Attiga, chief executive of Apicorp, told Abu Dhabi-based The National newspaper in May.

REOPENING THE ECONOMY

The Egyptian government is now working on a plan in collaboration with domestic businesses to ease restrictions and slowly open the economy. The Ministry of Planning and Economic Development and the Minister of State for Immigration and Egyptian Expatriate Affairs recently held talks with Egyptian businesses, while a ministerial economic committee headed by Prime Minister Mostafa Madbouly met last week to review the recommendations by a group of experts.

Amid the downturn, there are green shoots of recovery.

Egypt's tourism sector, which is an important source of revenues, will be allowed to operate at 25 percent capacity from June 1, while hotels will operate at 50 percent of capacity. However, there will be restrictions on large gathering and buffets, and the operators will have to take preventive measures including social distancing.

Tourism is the country's third largest revenue source and jumped by 28 per cent to about $12.2 billion in the fiscal year 2018-2019.

In May, Italian engineering group Maire Tecnimont said it's ready to proceed with a $500 million ammonia plant, after finalising the deal with Egypt Hydrocarbon Corporation S.A.E. (EHC). The company had been selected as the engineering, procurement and construction contractor last year.

The Sovereign Fund of Egypt (TSFE) also struck a memorandum of understanding with U.S.-based Concord International Investment Group to launch a $300 million healthcare fund and seek opportunities in the Middle East and Africa region.

"Investing in healthcare is a priority for the Egyptian government at this critical time when the world is facing the COVID-19 pandemic crisis," said Hala al-Saeed, minister of Planning and Economic Development and TSFE chairperson.

It might also be an opportunity for more economic reforms, noted the IIF.

As the COVID-19 crisis abates, there is need to proceed with a new wave of reforms to support further private sector development and job creation.

"In particular, the authorities should aim at reforming public procurement and breaking the iron grip of the state and the army in the economy--to entrench resilience, boost growth potential, and deliver broad-based benefits for all Egyptians," the IIF said.

(Writing by Syed Hussain; Editing by Anoop Menon)

(anoop.menon@refinitiv.com)

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