Unsurprisingly Abdel Fattah al-Sisi won Egypt’s presidential elections. He is expected to focus on the continuation of the economic reforms he initiated in November 2016. Nevertheless considerable downside risks remain.

Event

On 26 March 2018 polls opened for the 3-day presidential elections in Egypt. As expected, the ruling president al-Sisi won the elections. He faced only one opposition candidate Moussa Mostafa Moussa who entered the race in a last-minute move after his party previously supported al-Sisi. Five other candidates were barred from running. Al-Sisi’s second term is expected to focus on the continuation of the economic reforms that were initiated during his first term.

Impact on country risk

The political turbulences after the ousting of Hosni Mubarak led to subdued GDP growth. While growth averaged 6.2% in the five years before the Arab spring, it averaged only 3.3% from 2011. Besides business uncertainty, one of the reasons for economic slowdown has been the strong decline in tourism – one of the main sources of current account receipts – following the ousting of Mohamed Morsi in 2013 and the terrorist attack on a Russian airliner in 2015. As a result of this economic downturn, total unemployment has risen to almost 12% of the labour force.
Youth unemployment has risen the most. Currently a third of the labour force younger than 24 is unemployed. This continues to create significant social tensions.

Egypt’s public finances have also significantly deteriorated. While the deficit averaged 7.8% of GDP in the seven years before the Arab Spring it averaged almost 12% of GDP in the seven years since then. This has led to a strong increase in public debt level, from nearly 75% at the eve of the ousting of Mubarak to nearly 110% at the end of the fiscal year 2017.

On the positive side, Egypt has been implementing, since November 2016, a number of significant reforms in the framework of a USD 12 bn IMF programme. The most important has been the decision to move to a floating exchange rate regime. In addition, the country has committed to a significant fiscal consolidation plan.

Due to the more flexible exchange rate regime, Egypt’s foreign-exchange reserves have doubled to almost 7 months of import cover in January 2018, a healthy level. It enabled Egypt to clear its foreign exchange backlog. Central bank officials claim that new foreign-currency requests are now met without delay. This is a significant development for a country that has been plagued by difficult access to foreign exchange reserves since the toppling of President Mubarak in 2011. This led Credendo to upgrade Egypt’s short-term political risk  to category 4/7 in June 2017.

In the framework of its IMF programme, Egypt has already implemented significant fiscal consolidation. The plan is to bring down public debt to 75% of GDP in the medium term. In order to reach this ambitious target, public deficit needs to be reduced from its current level of almost 11% of GDP to below 6% by 2022. This requires further significant fiscal adjustments that are likely to be achieved by reducing government expenditures – for example through subsidy cuts – rather than by increasing revenues.

The reforms have led to a strong inflow of investments and successful bonds issuance.  Investment inflows have also been facilitated by the creation of a one-stop shop for investments where all required licences can be obtained.

Looking ahead, main risk for Egypt remains popular discontent and protests, which can potentially derail economic reforms. After all, fiscal consolidation and the floating of the Egyptian pound are imposing significant hardship on the population. Currency depreciation has pushed up inflation to around 30% while subsidy cuts and tax increases have negatively impacted household income. Additionally,  high (youth) unemployment and the lack of political freedom are risk factors that may increase tensions. Even if political instability is unlikely to materialise in the short term given al-Sisi’s strong control over power, it looms over the medium.

While Credendo currently expects the economic reforms to continue, considerable downside risks remain. Therefore, Credendo currently maintains the country in category 6/7 for medium/long-term political risk.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com