(Bloomberg Opinion) -- As Saudi Arabia and Russia engage in a war on oil prices, their mutual friend Egypt could fall victim to the fallout. The timing could hardly be worse for an economy already threatened by the global novel-coronavirus epidemic. As always, poor governance is likely to make a bad situation worse.
Remittances, estimated by the World Bank to be worth $26.4 billion last year, make up roughly 10% of Egypt’s GDP. This vital source of hard currency comes mostly from Egyptians working in countries dependent on oil exports. A collapse in prices could lead to layoffs, placing downward pressure on remittances reaching Egypt’s banks.
The coronavirus crisis is already affecting Egyptian expatriate workers returning to the Arabian Gulf from home visits. New restrictions require them to be tested for the virus in Egypt before they can go back to work. Huge crowds have assembled outside laboratories run by the health ministry, overwhelming the supply of test kits.
The restrictions will likely grow more stringent as authorities in the Gulf states respond to reports of an outbreak on a Nile cruise ship.
Even before the oil war, two other important pillars of Egypt’s economic growth—tourism and natural-gas exports—were wobbling from the impact of the virus crisis. With people everywhere canceling their travel plans for fear of contagion, the tourism sector was already bracing itself for a hit. Hossam Al Shaer, the head of Egypt’s chamber of tourism companies, says new bookings are down 70%-80% compared to the same period last year. The sector brought in over $12.5 billion last year, just under 5% of GDP.
The epidemic has also reduced global demand for energy, a relatively new problem for Egypt, which has only recently become a significant exporter of natural gas. While oil prices have received the most attention, natural-gas prices have also dropped precipitously, accelerating a trend that began last November. While natural gas exports are relatively small valued at $1.2 billion in 2019, the sector has been an important draw for investors and increased production has allowed the government to save billions in hard currency that used to be devoted to imports.
Yet another of the consequences of the epidemic, a slowing of global trade, will impact Egypt’s hard-currency earnings from tolls at the Suez Canal, further constricting the country’s access to dollars and adding to its current-account deficit.
The final pillar of Egypt’s economic growth has been construction. Much of the growth in this sector has been due to debt-driven stimulus that the government has largely channeled through military-owned enterprises. These companies are contracted to undertake large infrastructure projects, ranging from expanding transportation links to building new cities like the new administrative capital on the outskirts of Cairo.
To date, Egypt has been able to sell its debt to fixed-income investors quite easily, as it has been one of the best carry trades in the world. Large inflows have helped buoy the Egyptian pound against the dollar, adding handsomely to the returns investors have received over the already generous interest paid on Egyptian treasuries. But recent debt auctions failed to meet their sales targets, with only half the six-month treasury bills on offer sold as investors demanded higher interest rates.
While Egypt has managed to stabilize and shrink its debt-to-GDP ratio, borrowing in the first half of the 2019-2020 fiscal year rose 12%. The central bank governor, Tarek Amer, recently boasted Egypt no longer needs lending from the International Monetary Fund since it can access funds from the private sector, but this may soon change. The combined effect of the epidemic and the oil war could increase the risk associated with lending to Egypt, adding to doubts that the country has the revenue to support growing levels of borrowing without support from multilateral agencies.
Without such support, international investors in Egyptian capital markets may look to shrink their exposure in Egyptian debt. They will likely demand higher interest rates as the currency’s excellent performance over the past year is unlikely to be sustained. Government officials may believe Egypt is too big to fail, and that international assistance will be forthcoming if needed, however the generosity of international financial institutions may be limited as they seek to manage a global economic crisis.
While no economy is impervious to the virus, Egypt’s vulnerability is accentuated by the government’s failure to support growth in the private sector, which has shrunk nearly every month since the IMF bailout in 2016. Depressed levels of consumption, already a drag on the private sector, are likely to be exacerbated by the crisis. As the military’s economic empire has expanded, thanks to unfair competitive advantages, private-sector competitors have been squeezed.
It is an all-too-familiar Egyptian saga: Poor governance and rentier economic policies exacerbate economic challenges and leave the country highly vulnerable to external shocks. The twist in the tale this time is that Egypt's feuding friends are making matters worse.
To contact the editor responsible for this story: Bobby Ghosh at aghosh73@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Timothy Kaldas is an independent risk adviser and nonresident fellow at the Tahrir Institute for Middle East Policy.
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