11-Jul-2019
Egypt Economics: 1Q19 BOP Chartbook - Widening non-oil trade deficit grabs attention on disappointing exports performance
CAD deepens in the red in 1Q19, as trade deficit widens
Egypt’s current account deficit (CAD) widened further in 1Q19, expanding by 94% Y-o-Y and 79% Q-o-Q to USD3.7bn, driven mainly by a deepening of the trade deficit (up 13% Y-o-Y), as imports grew while exports dropped. The trade deficit was impacted negatively by a deterioration in the hydrocarbon balance, which re-entered deficit territory after hitting its first surplus in five years in 4Q18, likely affected by higher oil prices. The non-oil merchandise balance also continued to widen, driven primarily by a disappointing export performance (contracted 9% Y-o-Y in 1Q19), while imports continued to recover. The widening trade deficit did not find much support from other key current account drivers, with Suez Canal revenues down 3% and remittances 5% (with the latter normalising from last year’s record levels). Tourism was one of the few bright spots that delivered another strong quarter, seeing 15% Y-o-Y growth in revenues.
BOP was still in surplus, thanks to carry trade flows, Eurobonds
Despite the widening CAD, which hit a peak since devaluation at USD3.8bn, and the continued lacklustre performance of FDI (-22% Y-o-Y), the balance of payments (BOP) still managed to achieve a surplus of USD1.4bn, thanks largely to sizable portfolio inflows. Egypt benefitted from a more favourable outlook for emerging markets, seeing net inflows of more than USD3bn into its local debt market and issuing USD4bn in Eurobonds. In addition, medium-term borrowings, most notably a USD2bn tranche of the IMF loan and USD1.7bn of suppliers’ credit, further deepened the BOP surplus. The latter was only cushioned by the local banking sector’s build-up of net foreign assets, allowing them to turn into a positive NFA position by April, as the CBE considerably eased its pace of reserve accumulation. As such, the USD4bn in Eurobonds during the quarter did not result in any increase in reserves, and so was the case for the EUR2bn issued in the following quarter.
In focus – Non-oil trade deficit deterioration sends a wake-up call
In this quarter’s “in focus” section, we give special attention to the continued widening of the non-oil trade deficit. The numbers showed a notable deterioration in the non-oil trade deficit, which continued for the sixth consecutive quarter, requiring policymakers’ attention for the need of structural reforms to complement the macro stabilisation achieved in the past three years. Dissecting the widening of the trade deficit, we note that it is really the disappointing performance of exports that drove the negative surprise more so than the recovery in imports. The latter is just taking more of a normal trend, which grew 12% Y-o-Y nearly three years post the devaluation and was mostly driven by investment and intermediary goods (at least, numbers up until 4Q18 show that), indicating good quality growth of imports. The widening non-oil trade deficit is an indication, in our view, that EGP’s appreciation cannot continue much further from current levels; our calculations for the real effective exchange rate show it is back to the long-term average. We also think the CBE will be keeping a close eye as it decides on the pace of the prospective policy rate easing cycle, which we expect to resume later this year. Too much easing, especially in light of the stronger EGP, might risk widening the trade deficit even further.
Mohamed Abu Basha
Mostafa El Bakly
Egypt’s current account deficit (CAD) widened further in 1Q19, expanding by 94% Y-o-Y and 79% Q-o-Q to USD3.7bn, driven mainly by a deepening of the trade deficit (up 13% Y-o-Y), as imports grew while exports dropped. The trade deficit was impacted negatively by a deterioration in the hydrocarbon balance, which re-entered deficit territory after hitting its first surplus in five years in 4Q18, likely affected by higher oil prices. The non-oil merchandise balance also continued to widen, driven primarily by a disappointing export performance (contracted 9% Y-o-Y in 1Q19), while imports continued to recover. The widening trade deficit did not find much support from other key current account drivers, with Suez Canal revenues down 3% and remittances 5% (with the latter normalising from last year’s record levels). Tourism was one of the few bright spots that delivered another strong quarter, seeing 15% Y-o-Y growth in revenues.
BOP was still in surplus, thanks to carry trade flows, Eurobonds
Despite the widening CAD, which hit a peak since devaluation at USD3.8bn, and the continued lacklustre performance of FDI (-22% Y-o-Y), the balance of payments (BOP) still managed to achieve a surplus of USD1.4bn, thanks largely to sizable portfolio inflows. Egypt benefitted from a more favourable outlook for emerging markets, seeing net inflows of more than USD3bn into its local debt market and issuing USD4bn in Eurobonds. In addition, medium-term borrowings, most notably a USD2bn tranche of the IMF loan and USD1.7bn of suppliers’ credit, further deepened the BOP surplus. The latter was only cushioned by the local banking sector’s build-up of net foreign assets, allowing them to turn into a positive NFA position by April, as the CBE considerably eased its pace of reserve accumulation. As such, the USD4bn in Eurobonds during the quarter did not result in any increase in reserves, and so was the case for the EUR2bn issued in the following quarter.
In focus – Non-oil trade deficit deterioration sends a wake-up call
In this quarter’s “in focus” section, we give special attention to the continued widening of the non-oil trade deficit. The numbers showed a notable deterioration in the non-oil trade deficit, which continued for the sixth consecutive quarter, requiring policymakers’ attention for the need of structural reforms to complement the macro stabilisation achieved in the past three years. Dissecting the widening of the trade deficit, we note that it is really the disappointing performance of exports that drove the negative surprise more so than the recovery in imports. The latter is just taking more of a normal trend, which grew 12% Y-o-Y nearly three years post the devaluation and was mostly driven by investment and intermediary goods (at least, numbers up until 4Q18 show that), indicating good quality growth of imports. The widening non-oil trade deficit is an indication, in our view, that EGP’s appreciation cannot continue much further from current levels; our calculations for the real effective exchange rate show it is back to the long-term average. We also think the CBE will be keeping a close eye as it decides on the pace of the prospective policy rate easing cycle, which we expect to resume later this year. Too much easing, especially in light of the stronger EGP, might risk widening the trade deficit even further.
Mohamed Abu Basha
Mostafa El Bakly