Thursday,23 November, 2017
Current issue | Issue 1302, (30 June - 13 July 2016)
Thursday,23 November, 2017
Issue 1302, (30 June - 13 July 2016)

Ahram Weekly

Brexiting the economy

The British decision to leave the EU brings both challenges and opportunities for the Egyptian economy, writes Sherine Abdel-Razek

Brexiting the economy
Brexiting the economy
Al-Ahram Weekly

The relationship between Great Britain and Egypt goes back a long way. Egypt was once under British control, and it has been an important trading partner and investment destination over the years.

The EU is Egypt’s largest trading partner, more than two-thirds of tourist nights are spent by European visitors to Egypt, and around half of all foreign direct investment in Egypt comes from companies based in Europe.

So when the UK decided to untie the knot with the EU lastweek, triggering fears of drastic political and economic repercussions for both partners and the rest of the world, Egypt had a lot to worry about. 

The first reaction was a sharp drop in the Egyptian stock market on Sunday, the first trading session after the result of the British referendum was announced. The EGX30 index nosedived to lose 5.5 per cent of its value, and the exchange suspended trading on 95 stocks for half an hour after it declined by more than the permitted five per cent a day, with market capitalisation decreasing by LE16 billion.

The drop in the market was mainly attributed to panic selling by local retail investors due to fears that the free fall seen in international markets could reach the local one. The drop was reversed on Monday, however, with international investors grabbing attractive low-priced shares.

The decline came despite the fact that there are no significant European investments in the local market. “High volatility will be the name of the game in the medium term as the volatility brought to the global markets by the British vote to leave the EU brings different repercussions in the short, medium and longer term,” said Radwa Al-Sweefy, head of research at local investment bank Pharos.

Both the government and the Central Bank of Egypt (CBE) are conducting studies to assess the effect on Egypt’s balance of payments, forex market, tax system and customs of the British EU exit or Brexit.

Because the Brexit will likely result in a weaker euro and sterling pound, Egypt’s foreign trade in both currencies will be affected. The EU is Egypt’s single largest trading partner and accounted for roughly 30 per cent of its external trade volume in fiscal year 2015 and the first half of 2016.

Egypt’s net imports after deducting exports of EU goods came in at $10 billion and $5.5 billion in 2015 and the first half of 2016, respectively. Trade with the UK accounted for about four per cent of Egypt’s trade volume in 2016.

For this reason, a post-Brexit euro and sterling could be positive for Egypt’s current-account equation, making imports cheaper, particularly imported cars, pharmaceutical products, consumer goods and organic and inorganic chemicals, said a note issued by Naeem Brokerage this week.

But it might also lead to more imports at a time when the government is trying to restrict them to stop drains of foreign currency. “Further pressure on Egypt’s external balance of payments will mean higher chances of a weaker currency,” Al-Sweefy said.

Egypt has been suffering from a dollar crunch since the 25 January Revolution, which has been exacerbated by a decline in tourism revenues, a drop in investment and weaker exports.

The decline in the country’s international reserves to almost half their level on the eve of the revolution, together with a thriving currency black market, pushed the CBE to devalue the pound in March by 14 per cent to LE8.78 per dollar.

However, this failed to end the problem, with the dollar still currently trading at LE10.5 in the parallel market.

As a member of the EU, the UK has been included in the trade deals the EU has negotiated, including the Egypt-EU Association Agreement in force since 2004. The agreement established a free-trade area between Egypt and the European Union. It is not clear if Egypt will retain this preferential treatment in the UK market or whether it will have to renegotiate trade deals with the UK alone.

The UK is Egypt’s third-largest trading partner after China and Italy, according to Ministry of Trade and Industry data.

A research note prepared by the Egyptian Centre of Economic Studies (ECES) stressed that Egypt should move quickly to negotiate bilateral trade agreements with the UK in order to get preferential conditions as there will be fierce competition with other countries seeking trade and investment agreements with the UK.

More generally, the Brexit is expected to lead to a recession in international trade, which will lead to a decline in Suez Canal revenues, according to the ECES. “We must start studying the effects and the ways of dealing with them,” it said.

Suez Canal dollar-denominated revenues have been edging down despite the New Canal providing more space to more and larger vessels to pass. This is due to the global slowdown in trade.

Another effect of a weaker euro as a result of the Brexit on Egypt’s balance of payments will be lower foreign debt repayments. Around 16 per cent of the country’s external debt was denominated in euros by the end of the first quarter of 2016.

However, indirect impacts could be on the negative side if the Brexit results in higher yields across the globe on new debt, making Egypt’s borrowing on the international markets costlier.

Finance Minister Amr Al-Garhy said on Monday that Egypt is considering issuing a $3 billion Eurobond at some point between September and October to cover part of the budget’s financing gap, which is expected to reach $10 billion.

Egypt has delayed its return to the international bond market, after selling its first Eurobond in five years in January of last year, due to the emerging markets currency crisis.

The possible retreat in the number of EU and UK visitors to Egypt in the wake of the Brexit is not of major concern, given that the number of tourists is already a fraction of its pre-revolution levels. While European visitors represent 75 per cent of tourists visiting the country, the figure has almost halved since the downing of the Russian plane over Sinai last October, resulting in a British caution on travelling to Egypt.

British Airways released a statement last week confirming it will continue its suspension of services from Gatwick Airport near London to Sharm El-Sheikh. The ban is continuing despite the efforts of Egyptian authorities to improve security measures at the country’s airports.

“The safety and security of our customers will always be our top priorities, and we have suspended our flights from Gatwick to Sharm El-Sheikh indefinitely,” the statement said.

Al-Sweefy expects a limited impact on tourism of the Brexit as Egypt is currently trying to make up for the decline in European tourism by counting more on Asian and Arab tourists.

However, the EU accounted for 59 per cent of Egypt’s investment inflows in the first half of 2016, with the UK alone accounting for 39 per cent of total inflows. The bulk of these investments are in the oil and gas sectors, “which we believe will continue to receive some inflows,” according to Al-Sweefy.

Simon Kitchen of EFG Hermes, Egypt’s largest investment bank, noted some benefits for investment in the wake of the Brexit. Retail and high-net-worth investors, the owners of significant capital in the Gulf countries, are likely to show greater risk aversion in the face of political uncertainty in developed markets, he said. But returning capital could help stabilise Middle East asset markets, balancing the impact of lower oil prices and rising asset price volatility over time.

Oil prices dropped eight per cent in the four days after Britain’s decision to leave the EU. The effect will not be reflected in the amount of aid Egypt receives from oil-rich countries, however, as this has been levelling off anyway. But it might be translated into lower remittances from Egyptians working aboard, Al-Sweefy said. Remittances have been important since the 25 January Revolution and are mostly secured from the Gulf.

Political factors will also play a role in calculating Egypt’s losses and gains from the British step. One of the main arguments of the Leave campaign in the UK was concern over immigration and the lack of strict border controls in the EU. A politically and economically stable Egypt is in the best interests of the EU, the UK and the rest of the world, according to Naeem Brokerage.

“This leads us to believe that aid in the form of cheaper funding, grants and investments will continue,” it said.

While the UK is the third-largest non-Arab single donor to Egypt, the EU is Egypt’s largest foreign donor.

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