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Thursday, 16 April 2020

Egypt’s financing gap forecast at nearly EGP 1 tn- FY 2020-21 budget

FinMin sees Egypt’s financing gap at nearly EGP 1 tn next fiscal year: The Finance Ministry needs EGP 988 bn next fiscal year to close the fiscal gap, up 20% y-o-y from the EGP 820 bn projected for the ongoing fiscal year, according to the recently-released budget forecasts (pdf). The rate of increase is on par with previous years, and the bulk of the gap, nearly EGP 892 bn, will be plugged through local treasury sales. The remainder, EGP 96 bn, will come from eurobonds and loans from foreign institutions. The government will continue its gradual shift to long-term debt, as stated in its debt control strategy, and targets an average tenor of 4.4 years by the end of 2020-2021.

Is this the same as the overall deficit? Not quite. The gap is the sum of the deficit (which is forecast to come at EGP 432 bn) and debt due to mature this fiscal year (EGP 555.5 bn).

Our debt servicing bill will come at EGP 566 bn, which is a minor improvement from EGP 569 bn in this fiscal year's projections. Only EGP 49 bn of the total will go toward servicing loans from abroad.

Interest spending is again the largest single item in the budget, accounting for nearly 33% of this fiscal year’s total expenditures, and just over 36% in last year’s projected spend. The draft budget expects that as the CBE resumes its monetary easing cycle, every 100 bps point rate cut would lead to EGP 10-12 bn in interest savings.

Other noteworthy figures in the forecast:

  • Tax collection is expected to grow 12.6% y-o-y to EGP 964.8 bn, accounting for close to 78% of overall revenues (EGP 1.28 tn);
  • Revenue from customs, meanwhile, could fall 13.9% y-o-y to EGP 44 bn, and Suez Canal revenues could also dip in case of a contraction in global trade;
  • Government investments are forecast to rise substantially to EGP 281 bn, up 33% from EGP 211 bn in FY 2019-2020 forecasts.

Draft budget outlines covid-19 worst case scenario: If the covid-19 outbreak isn’t contained before the start of the fiscal year in July, the budget deficit could grow to 7.7% of GDP, instead of narrowing to the targeted 6.3%, as revenues tied to economic activity could fall short of targets by up to 25%, according to a more conservative scenario outlined in the budget. In this scenario, the primary surplus will also likely come at 0.5-0.6%, down from the project 2% and resulting in a public debt to GDP ratio of 84.5 by June 2021, up from a target of 82.8%.

The ministry has left its growth projections in the budget unchanged at 4.5%, but made it clear that it could revisit them as the covid-19 situation becomes clearer, we noted earlier this week.

Meanwhile, RenCap thinks Egypt’s expectation of 1% growth in the current quarter might be “a bit optimistic,” according to a research note by Ahmed Hafez, head of MENA research at the investment bank. “Assuming a 20% drop in non-essential private demand, a 23% decline in exports, an 8% drop in imports and leaving all else constant, our numbers suggest a 4% y-o-y drop in real GDP, should restrictions last until the end of May,” Hafez writes.

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