Response

Egypt’s Economy Isn’t Tanking. It’s Thriving.

A recent article warned that the country faced imminent economic collapse. A careful reading of the economic data shows that reforms have placed it on a path to growth.

Egyptian President Abdel Fattah al-Sisi (C) welcomes Joe Kaeser (R) the CEO of German engineering giant Siemens during the inauguration of three large power plants on the outskirts of Cairo on July 24, 2018.
Egyptian President Abdel Fattah al-Sisi (C) welcomes Joe Kaeser (R) the CEO of German engineering giant Siemens during the inauguration of three large power plants on the outskirts of Cairo on July 24, 2018. KHALED DESOUKI/AFP/Getty Images

Yehia Hamed’s article for Foreign Policy earlier this month wrongly casts a bleak outlook on Egypt’s economy. Hamed, who served as investment minister in Mohamed Morsi’s ousted government, which led Egypt between 2012 and 2013, implicitly suggests that international investors must be clueless—having poured billions of dollars into the country’s equity and fixed-income markets—and that the government is mismanaging the economy despite lowering Egypt’s international risk, as measured by credit default swaps, to almost half the risk premium as when he was removed from his position as investment minister.

The article, which includes a somewhat reasonable criticism of Egypt’s high debt levels and its rise in poverty levels after the economic reforms of 2016, goes on to paint an unrealistic and unfair view of the country’s economic challenges. It was equally surprising to me, as an Egyptian living and raising my children here, to hear that Egypt was about to collapse. Hamed theatrically warns that Egypt is overstating its income by excessive borrowing and cries wolf that the international community may soon face an imminent flood of Egyptian immigrants at the shores of Europe.

Ironically, Hamed warns readers about the rising deficit, which is now at least 300 basis points lower than when he was a minister (calculating deficit as a percentage of GDP), while blaming the current government for using strong fiscal policies to control it. Although I am not a fan of extreme fiscal tightness in a country such as Egypt, where domestic demand comprises the lion’s share of GDP, Hamed uses a questionable methodology to support his thesis.

Government intervention and interest-rate policy do not mix. There are many serious issues for which Egyptians can blame the government, but it is folly to blame the government for the temporary high interest costs, as interest rates remain the mandate of central banks everywhere, and it is particularly harsh to apportion blame to a government that has fully delivered on its fiscal targets.

Criticizing austerity measures, in a country that suffers from structural fiscal imbalances, and blaming policies instituted by the International Monetary Fund (IMF) for the rise in poverty levels among Egyptians would have been very understandable had it come from Egypt’s left, which has genuinely stood against the measures the government has taken since 2016 to fix public finances. In fact, the IMF’s international reform programs have seen many failures, and its policies have never guaranteed success.

But it is a surprising critique coming from a member of the right-wing Muslim Brotherhood, which has long promoted itself to the West as a strong advocate of free market and investor-friendly policies. Hamed was a minister in an ousted economic cabinet that ironically enough approached the IMF in 2012 and was very close to inking a deal with its representatives in response to what was at the time a bleak economic situation: a severe foreign currency shortage, a mammoth black market, shortages in energy supplies and basic products, painful capital flight, and an investment slump that led to anemic growth, stagflation, and a rise in unemployment.

The period from 2012 to 2013 could indeed be labeled Egypt’s worst economic crisis since the 1930s. Unless Hamed can publicly claim that the IMF had proposed to the Brotherhood’s government a different program than the IMF’s classic historical combo of fiscal discipline and monetary tightness—or that his government was ready to reduce the massive twin deficits without raising tax revenues, rationalizing subsidies, and floating the currency—his article will remain nothing more than a polite attempt at political positioning that seeks to muddy the waters of the current government’s financial successes, rather than a serious analysis of Egypt’s financial and economic conditions.

Hamed’s article is a polite attempt at political positioning that seeks to muddy the waters of the current government’s financial successes, rather than offer a serious analysis of Egypt’s financial and economic conditions.Egypt’s economy is only collapsing if the definition of an economic collapse is when a country has managed to cut its current account deficit from more than 5 percent of GDP to less than 2.5 percentfrom sustainable income sources (excluding grants)—and nearly halved its budget deficit from 16.5 percent in 2013 to 8.5 percent of GDP in five years, while growing by 5.5 percent (up from the anemic 2.2 percent growth in 2013), according to IMF and Ministry of Finance data. By every definition of the phrase, this is a strong economic recovery.

Egypt has indeed accumulated external debt in the past couple of years, and its public debt has increased, but this is only one side of the story. But before coming to the startling conclusion that the economy is collapsing, one must first compare the growth in debt to that of GDP, analyze the balance of payments’ fundamentals and sustainable sources of foreign currencies, and examine the cost of servicing the external debt.

The answer to these questions would take only a few minutes to obtain by comparing domestic and external debt levels to GDP in both emerging and developed markets. In fact, according to World Bank and CEIC data, Egypt’s external debt at approximately 32 percent of GDP is well below the emerging markets average of 42 percent and much more favorable than most of its emerging peers, such as Turkey (58 percent), Malaysia (63 percent), Chile (62 percent), South Africa (48 percent), Morocco (44 percent), Vietnam (43 percent), and Mexico (36 percent).

Apart from the macroeconomic ratios, the structure of Egypt’s external debt is key. Of the country’s external debt of about $100 billion, more than 60 percent of this is from international institutions (such as the IMF and World Bank) and Gulf Cooperation Council (GCC) allies at a subsidized cost, averaging less than half of what Egypt pays today for its Eurobonds. Egypt’s foreign debt service obligations in the next two years, which include interest and principal repayments, currently stand at $15 billion, according the Central Bank of Egypt (excluding the GCC deposits that were rolled over recently)—almost 70 percent of the net portfolio inflows that Egypt has managed to attract into its capital markets since the start of the economic reform program.

Even assuming Hamed’s extremely pessimistic scenario—that Egypt will fail to reschedule any of its outstanding foreign currency debt, will not improve its balance of payments any further, and will be unable to attract even $1 of foreign direct investment—the total external funding gap (defined as the foreign debt obligations plus the current account deficit) would still not exceed $25 billion in the next 24 months, which amounts to just 55 percent of the country’s current foreign reserves. No international investor in his or her right mind would call this a default scenario.

The economy in Egypt is by no means perfect, but the country has delivered on the financial and monetary side of its reform program, with the exception of the still very high interest rates that are a real burden. There remains a long way to go to fix the structural imbalances in the economy. The informal sector remains large enough to weigh on overall economic efficiency; capital accumulation remains below target; the domestic savings rate is very low, even after the consumption shock the economic rebalancing process has triggered, as disposable income for Egyptians has been hit by inflation and the government’s fiscal controls; and foreign investors remain challenged by global emerging-market risks, geopolitical tensions in the Middle East, and poor domestic institutional capacity.

Egypt’s middle- and lower-income citizens have borne the brunt of the reforms and are yet to reap the benefits in terms of more jobs, recovery in real income, and overall state services. Egyptians need to see inclusive growth strategies and a stronger safety net, despite the various initiatives and social programs the government has so far implemented. Most importantly, Egypt needs a vibrant, dynamic, and healthy private sector to lead growth and employment. Egypt’s private sector suffers from crowding out by the state, higher input costs, and, hence, a lower return on capital in its traditional industries.

Egypt still needs to unleash the potential of its private sector, which could turbocharge the country’s economic growth potential, by further supporting small businesses and investing heavily in innovation, financial inclusion, and vocational training to foster growth and sustainable development. Even so, if you compare Egypt’s economic challenges today to those of five years ago and reflect on other emerging markets’ structural economic and financial challenges, it is clear that Egypt is far more likely to boom than bust.

 The views expressed in this article are the author’s alone and do not necessarily reflect the views of his current or former employers.

Ahmed Shams El Din is an Egyptian capital markets professional and an adjunct professor at the American University in Cairo. He is a managing director and head of global research at one of the largest frontier-emerging markets investment banks.

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