Macroeconomic performance and outlook
Economic growth in Egypt, estimated at 5.6% for 2019, is forecast to strengthen to 5.8% in 2020 and 6% in 2021, supported by broad-based economic reform programs since 2016. Other factors supporting growth include the recalibration of government’s social inclu- sion programs away from general subsidies on energy products to targeted transfers and improvements in the business environment. Tourism, construction, and oil and gas were driving growth. On the demand side, consumption remained subdued as exports and invest- ments were more robust.
A broad-based consolidation plan introduced a new value-added tax and a gradual reduction in energy sub- sidies, putting the fiscal deficit on a downward trend from 12.5% of GDP in fiscal 2016 to 8.7% in fiscal 2019. Primary balances registered a surplus over the past two years. Debt growth has been contained as the debt-to-GDP ratio fell from 103% in 2017 to 89.5% in 2019, partly a result of fast-growing nominal GDP. The current account deficit narrowed to 2.3% in 2019, and foreign exchange reserves reached an all-time high at $44.96 billion in August 2019. Inflation pressures are also easing, standing at 8.7% year-on-year in July 2019, the lowest in the past four years.
The 2020 fiscal budget assumes an optimistic yet attainable 6% growth rate. In the first quarter of 2019, the unemployment rate dropped to 8.1%, its lowest in 20 years.
Tailwinds and headwinds
Egypt’s prospects are favorable. Real GDP growth is projected to maintain momentum driven by high domestic demand and export growth. Egypt is now a gas exporter, following the discovery of the Zohr field.
With growth becoming increasingly inclusive, unem- ployment declining, pensions improving, and civil ser- vant wages increasing, consumer spending should pick up. The government is advancing Egypt’s integration with the rest of Africa, which should boost exports.
Egypt climbed six ranks to 114 of 190 countries in the latest edition of the World Bank’s Doing Business. The improving business environment should boost domestic investment and further attract foreign direct investment. The decline in inflation is expected to con- tinue. As a result, monetary policy is becoming less restrictive. Cuts in central bank rates would also ease the repayment burden of the government’s large short- term debt.
The 2016 currency depreciation triggered a sharp increase in the cost of living. Despite government social inclusion policies and the positive economic results of the reforms, poverty rose from 27.8% in 2016 to 32.5% in 2019. This increase could further influence govern- ment social protection programs. In particular, the main cash transfer programs, Takaful and Karama (Solidar- ity and Dignity), have been significantly expanded since their introduction in 2016, from 200,000 households to 2.3 million households in 2019. Yet, they only benefit a third of the poor, around 10 million people.
The agricultural and manufacturing sectors, accounting for around 13% and 15% of GDP, remained flat. Private investment, concentrated in real estate and energy, still does not exceed 9% of GDP. And private credit remains subdued, going from 36.2% of total credit in 2011 to 22.7% in 2019. Although net exports became the largest contributor to GDP growth in 2019, nonoil exports remain modest, showing the weak pass- through of currency depreciation. And 60% of debt still carries a maturity of one year or less. While unemploy- ment has been trending down, it is still high among youth (26%) and women (38%).
Health sector preparedness
The 2019 Global Health Security Index ranked Egypt 87 among 195 counties globally, 7 among 54 African coun- tries, and one of the 21 more-prepared countries in Africa. It also ranks well in the prevention and response catego- ries (79 and 63 among 195), first on the trade and travel restriction, and 10 on emergency response operations. It also benefits from a very good lab system.
The authorities reacted swiftly, increasing testing capac- ities in all governorates, dedicating hospital for Coronavi- rus patients, reducing working hours at public institutions, banning large social and religious gatherings, and imposing a curfew. Egypt suspended all international flights and forced shops to close on weekends. To mitigate the impacts of the pandemic on the population and the economy, the government took measures to support industries and the vulnerable, earmarking $6.34 billion (1.9% of GDP) for the package. It also lowered natural gas prices for industry and provided $63 million for exporters. Starting in March 2020, outstanding property tax on factories and touristic institutions was postponed for three months, to be paid in monthly installments. Informal workers are to receive EGP 500 per month for three months. The central bank also slashed policy rates by 300 basis points. In the context of portfolio outflows, the depreciation of the exchange rate has been limited. On 11 May 2020, the International Monetary Fund (IMF) approved Egypt’s request for emergency financial assistance of $2.8 billion under the Rapid Financing Instrument. Egypt is also negotiating a Standby Arrangement with the IMF. The government should also benefit from the support of the African Development Bank and other development partners to bridge its financing gap.
The government securities yield curve extended to 20 years with five benchmark points along the curve (1.5-3-5-7 and 10 years)
Egypt is 3rd in the ABMDI 2017 Ranking Report.
The debt managment target in the medium term is:
- The central government debt as percentage of GDP to reach 84.9 percent (70.6 percent for domestic debt and 14.3 percent for external debt) by 2020/21 and to reach 79.5 percent (66.2 percent for domestic debt and 13.3 percent for external debt) by 2021/22.
- The maximum share of central government domestic tradable debt allowed to mature within one year and the maximum amount of debt subject to interest rate re‐fixing both are limited to 50 percent of the total domestic tradable debt.
- Share of tradable debt vs. non tradable debt to reach 70 percent tradable vs. 30 percent non tradable by end of 2020‐2021.
- Average Time to Maturity of central government domestic and foreign tradable debt to reach 4 years by end of FY (2020‐2021) and 4.5 years by end of 2021‐2022.
To do that , the debt managment strategy is to issue gradually larger volumes of longer-dated Treasury bonds by means of constant issuance and re-openings in order to lengthen the average life of the debt stock, to consolidate the government securities yield curve, and to reduce refinancing risk.
The strategy recommends diversifying sources of financing by issuing new instruments, such as "Sukuk" to finance development and infrastructure projects and enlarge the investor base by attracting retail investors and incorporating more non-banking financial institutions.
To support market development and to move to a more transparent and visible phase, four steps are related to the issuance plan:
- Focus on a “limited number” of benchmark maturities, namely 3, 5, 7 and 10 years.
- Increase the number of re-openings of each security and raise target amount outstanding to about EGP 12-15 bn per T-Bond.
- To avoid crowding, maturities are organized to be issued every other week: 1.5, 3 and 7 years T-Bonds are issued on the same day, while 5 and 10 years are issued on the following Monday.
- Auctions days are organized to avoid crowding out among competing maturities. Therefore, 6-and 12-month securities are issued on Thursday, 3- and 9-month are issued on Sunday, and T-Bonds issuance takes place on Monday.
Egypt was focused on a limited number of benchmark maturities, precisely, 1.5-3-5-7 and 10 years to build a consolidated yield curve. To support the development and availability of a wider range of financial products for participants in the financial sector and the improvement of the capital market and derivatives, the Central Bank of Egypt (CBE) has introduiced a new risk free interest rate benchmark CONIA, the Cairo Overnight Index Average benchmark.
Yield curve calculation models
Building a benchmark yield curve is a consideration for issuance. The country built a yield curve based on the Nelson-Siegel model. This curve is an implied yield curve.
The linear interpolation method is used.
Yield curve managed by
The yield curve is produced by the Central Bank of Egypt.
The yield curve is accessed from Bloomberg.
Challenges in building an efficient yield curve
- Market fragmentation
- Illiquid and limited secondary market
- Narrow investor base
Guide to Buying Bonds
Procedures for market participation
Before investors can trade in securities listed or traded on the Egyptian Stock Exchange (EGX), Investors are required to open a brokerage account with a licensed member of the EGX or a brokerage firm approved by the Financial Markets Authority. All investors must open accounts with the "guardians", which are primarily banks and other members. This enables the EGX to see their account balances online before all sales transactions. Trading in the Egyptian markets is through the EGX’s Trading System.
Licensed Members firms of the EGX must register their customers' orders immediately upon receipt. Members must ensure that the securities being sold are available before the execution and if members do a purchase order for securities, they must ensure that the necessary funds are available before executing the transaction.
The settlement is as follows:
- T+0 for equities processed from intra-day trading
- T+1 for Treasuries processed from the Primary Dealers System
- T+2 for all other asset classes
No tax is levied on dividends and capital gains for investments by individuals, companies, mutual funds and international funds. In addition, there are no stamp taxes duties on investments in securities. Interest income on corporate bonds is tax-exempt. However, interest income on treasury bills is taxed at 20%.
Egypt has signed tax treaties with the United States and the United Kingdom. Therefore, investors from these countries are taxed at 15% instead of 20%.
|Rating Agency||Current rating||Outlook|
|Standard and Poor's||B||Stable|
The EGX publishes the list of Primary Dealers on a daily basis on its website.
Openness to international investors
There are no restrictions that exclude foreign investors from participating in the Egyptian capital market. Moreover, foreign investors and members of foreign firms are treated in the same way as their Egyptian counterparts.
The transfer of proceeds of sales of foreign customers limits the attraction of the Egyptian Stock Exchange for foreign investments. Therefore, the MCDR in collaboration with the Financial Markets Authority and the Central Bank of Egypt has developed a new mechanism to transfer the value of these transactions.
Restrictions on FX and profit repatriation
There is no rule against the repatriation of profits or capital gains.