BEIRUT: Bank Audi said that Egypt’s main challenge remains the fiscal consolidation and the rationalization of the country’s costly subsidy system in the medium term.
“Debt sustainability and fiscal challenges are growing, as the country’s fiscal deficit is forecast at close to double-digit levels, raising the percent to GDP ratio close to the 80 percent threshold,” Audi said in its economic report on Egypt.
It added that Egypt’s public finance conditions have come under significant pressure over the past year, with the popular uprising and ensuing sharp slowdown in economic activity exacerbating fiscal imbalances.
The fiscal deficit is estimated to have reached a high of 9.9 percent of GDP in fiscal year 2011, according to the IMF. This deficit is among the highest such levels in the region, thus putting upward pressure on government indebtedness.
The Egyptian government recently said it plans to stick to a projected fiscal deficit of 8.6 percent of GDP for FY 2012 through expenditure reduction and new revenue generating measures.
Audi stressed that the country’s near-term economic risks are tied to whether the government can implement policies to help stabilize its finances and balance of payments.
“Monetary risks could rise further in the event that foreign-exchange reserves continue to decline at the pace seen over the past months, as this would bring the country closer to a currency or a balance-of-payments crisis,” the report noted.
Egyptian FX reserves reached a historic low of $15.6 billion in February 2012, the equivalent of 9.1 percent of money supply against a peer-country average of 30 percent.
It reached as low as 12.5 percent of Egyptian pound deposits and 3.5 months of imports, i.e among the lowest ratios in the region and worldwide.
“Egypt’s external financing needs are rising rapidly, and are currently estimated at about $14 billion, with somewhat less than $5 billion of the total attributable to a widening current account shortfall,” the report explained.
It cautioned that without multilateral support, it will be a matter of months before the total falls to less than the country’s short-term external financing requirement.
“A continued upward trend in the government’s funding costs driven by monetary and financial fears would further increase refinancing risks and would also constitute risk pressures,” the report said.
Audi emphasized that continued social unrest and uncertainty about the transition to civilian rule would also be negative to the outlook.
“The threat of dangerous turmoil and a high degree of political uncertainty will continue to deter both foreign tourists and foreign investors, whose return in large numbers will be essential to the resumption of healthier growth rates,” it added.
The bank indicated that the current account deficit would remain large in 2012, as growth of export revenues is stunted by economic troubles in Europe, the main market for Egypt’s goods, and weak inflows of tourism income continue to have a negative impact on the services balance.
Audi said that the tough and growing challenges Egypt’s economy is facing, despite its solid and sound fundamentals, need to be addressed through an economic program that safeguards macroeconomic stability and creates conditions for a strong recovery.
“While portfolio inflows are unlikely to return to Egypt in size unless assured of currency stability and decreased political risks, an ambitious externally backed economic adjustment program that has broad domestic political support behind it can serve to this end,” the report said.
It added that amid tough local, regional and global conditions, government authorities need to make significant efforts and there must be awareness among Egyptians to ensure all needed concessions are made with the aim of avoiding wide, uncontrollable drifts in the future.