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Monday, 28 December 2020

Of lockdowns, stimulus, and vaccines

THE YEAR IN COVID- At the beginning of February, Egypt suspended flights to China and began to evacuate its citizens from Wuhan — the point of origin for the coronavirus — as the number of cases began to rise. Covid-19 then hit Egypt around two weeks later, when the first confirmed case of covid-19 was detected. Relative to regional and global peers, Egypt’s outbreak and the economic fallout have been, to a great extent, contained. This is thanks in no small part to a raft of medical, fiscal, and monetary measures that were introduced early on and in quick succession, helping to curb the spread of the virus that causes covid-19 and keep the economy — and Egyptians — afloat.

The Great Lockdown: After Egypt breached the 100-case mark, the Madbouly Cabinet decided in mid-March to ban large gatherings and ordered the closure of all schools and universities for an initial two-week period. Shortly thereafter, the cabinet announced it would suspend all inbound and outbound flights for two weeks, giving people wanting to return home a 2.5-day window to do so. The government spent the following weeks bringing stranded citizens home from all corners of the globe.

And then came the curfew: Cabinet imposed a strict 11-hour curfew, which entailed the complete closure of cafes, bars, gyms, and sporting clubs, and allowed shops to remain open for a portion of the day, while restaurants were only allowed to operate delivery services. The curfew was only lifted at the end of June — a few short days before Egypt reopened its airports to international commercial flights.

In the midst of all this was a whole lot of stimulus — both on the fiscal and monetary policy fronts. The Central Bank of Egypt (CBE) moved swiftly to protect the economy from the effects of covid-19 with a 300 bps preemptive interest rate cut in March — its largest on record — and announced it would allow borrowers a six-month payment holiday. The CBE then followed up with another two unexpected rate cuts of 50 bps apiece in September and November, bringing the grand total for 2020 to 400 bps. The rationale for the rate cuts was to continue supporting economic activity, particularly as inflation remained muted thanks to low consumer spending levels. The CBE also slashed interest rates for its financing initiatives for factories, homebuyers, and tourism companies to 8% from 10%.

The November rate cut was also designed to set the scene for a ramp-up in corporate borrowing going into 2021, especially after years of businesses keeping their capex borrowing on ice until interest rates come down to pre-float levels. Now, some 87% of businesses in Egypt say they plan to increase their investments in 2021, according to an HSBC survey.

The CBE separately rolled out debt relief initiative for individuals, with a decision to drop lawsuits against individuals at risk of default with debt under EGP 1 mn and scrub their names from i-Score’s blacklist as long as they pay 50% of the loan’s principal. The Financial Regulatory Authority also ordered mortgage lenders, and factoring and leasing companies to give a six-month grace period to any client who asks.

Other measures from the CBE designed to simultaneously simplify the flow of money and push digitization during the early days of the pandemic in March: Raising the ceiling on ATM withdrawals, scrapping fees on all EGP transfers between local banks and withdrawals from out-of-network ATMs, as well as adjusting the limit on mobile wallets and prepaid cards.

The government also acted fast with a package of fiscal measures to help support the economy and financial markets, including slashing taxes on EGX transactions, granting a three-month real estate tax holiday to companies in the industrial and tourism sectors, and lowering the cost of natural gas for the entire industrial sector. That payment holiday was extended until the end of 2020 before getting extended for a second time last week, with the Madbouly Cabinet deciding to exempt airlines, hotels, and other tourism establishments from paying real estate taxes from 1 January until 30 April 2021. These businesses are also being allowed to restructure utility debts.

The stimulus kept on coming… Just a few days after the first round of fiscal support measures, President Abdel Fattah El Sisi announced a stimulus and bailout package worth EGP 100 bn, which included a two-year suspension of the tax on agricultural land, hiking annual raises for pensioners to 14% as of FY2020-2021 and allowing pensioners to add the previous five raises to their pensionable pay at 80% of their basic wages (amounting to some EGP 27.6 bn disbursed to 2.4 mn families), and the CBE’s EGP 50 bn tourism bailout fund for impacted hotels. El Sisi announced the stimulus package included EGP 20 bn the CBE would allocate to support the EGX, which a senior official at the central bank told Enterprise would be used to directly purchase equities to support asset prices and stem market volatility caused by a covid-induced sell-off. Businesses in several affected industries were also given a breather with a two-month extension on the deadline to pay income taxes and a three-month extension on the deadline to pay corporate real estate taxes, without interest, fines, or late fees.

… and we could see yet more: Finance Minister Mohamed Maait said last month the government is prepared to roll out a fresh stimulus package if a second wave of covid-19 takes hold — but noted that the availability of a vaccine would change things.

The stimulus — and the lifting of the lockdown — helped the private sector get back on track into expansion territory in September as consumer demand picked up and business activity strengthened. The expansion momentum has so far carried through to October and November, albeit at a slower pace in November as fears over the second wave dimmed business’ outlook for business activity over the next 12 months.

Then there was the vaccine rush: Scientists and companies the world over jumped to develop a vaccine for the disease, and have managed to break all sorts of records in pushing out the inoculations with emergency approvals. Just two weeks ago, the UK became the first Western country to roll out a nationwide vaccination program, administering the Pfizer / BioNTech inoculation to its citizens based on risk-based priority. Egypt is securing its vaccine needs from several sources, including AstraZeneca, Pfizer, Russia, and China’s Sinopharm. Egypt was among the countries participating in clinical trials for Sinopharm’s vaccine, while Russia has signed an agreement with Egyptian drugmaker Pharco to distribute 25 mn doses of its Sputnik V vaccine.

So, what should we expect going into 2021?

The vaccines: Egypt had planned to begin the rollout of its vaccination program in the next couple of days, just in time for the new year, with the Health Ministry planning to distribute doses of the Sinopharm vaccine — which is 86% effective — last week. The government had announced it secured a total of 500k doses of the Chinese jab, with a plan to receive another 20 mn vaccination doses in 1Q2021. Hiccups in Beijing’s supply chain have delayed our receipt of the full shipment of the first 500k jabs, Cabinet spokesperson Nader Saad said yesterday, suggesting the kick-off of the vaccinations could be later than expected. Once it does begin, the vaccination program will prioritize frontline healthcare workers and citizens with chronic conditions, but we’re so far not clear on how long this stage is expected to take before healthy, younger citizens who opt into the vaccine can get their first dose. It is also still unclear how long the government expects it will take for us to secure our entire stock of required vaccine doses and administer those to the wider population. Egypt is also in talks to manufacture a vaccine locally, where Vacsera could export surplus production once local needs are met.

Economic recovery: With the vaccines, the global economy is expected to register 2-3% growth if the jabs that are administered are 85-95% effective, but these numbers will vary significantly between countries and individual industries, IMF executive board member Mahmoud Mohieldin said. Even before the vaccination program, Egypt was already widely expected to be the only country in the region to eke out growth in FY2020-2021. The EBRD has penciled in 5% growth for calendar year 2021, while the IMF expects our economy to expand only 2.8% in 2021, while Renaissance Capital most recently predicted 2.8% growth in 2021, followed by a resurgence to 5% growth in 2022.

These institutions all pointed to our years-long economic reform program as the key to helping Egypt come into the pandemic on solid footing, which has helped drive expectations that our economy will bounce back in the short and medium terms: The World Bank says Egypt’s economy will return to pre-pandemic growth levels as of FY2021-2022, while Fitch Solutions thinks we’re on track to grow at an average 4% clip over each of the coming four years.

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