EUR 21.33 For Business Accounts Only

Egypt - Fiscal framework monitor | Higher than budgeted deficit, yet non-inflationary

Fiscal deficit not alarming amid potential pickup in investments and funding availability. Accounting for c40% (cEGP560bn) of total expenditures, interest expense should drop EGP5bn, on the falling trend of interest rates in FY20/21e, on our calculations. This creates fiscal space, to offset higher wheat prices, effectively increasing the subsidy cost (accounts for 11%/EGP185bn of total expenditure). However, the government increased budget investments by 60% in 1H20/21e (potentially increasing investment cost by EGP20bn for full year vs. budgeted), in an effort to raise investment contribution to GDP, and compensate for slower private business activity resulting from the COVID-19 pandemic. This directly contributes to growth, and maintains a positive non-inflationary primary surplus. As such, FY20/21e deficit could expand by 40bps to 6.7% of GDP vs. the government’s budget. Implied deficit remains lower than consensus expectations, with ample available funding sources (mainly domestically).

Y-t-d drop in yields to spare budget EGP5bn in debt service cost. This comes in line with the current average rate of c13.0% vs. 13.5% budgeted for FY20/21e. While local issuances have reflected less than a 30bps drop since Jan-21, the latest international Eurobond issuance in Feb-21 reflects a c200bps decline vs. the May-20 issuance, and c140bps vs. the Sep-20 green bond issuance. Accordingly, this provides potential savings worth EGP5bn in interest cost. Nonetheless, government recently indicated that oil subsidies are budgeted at an average oil price of USD61.0/bbl. We see the estimate in line with current dynamics, and flag that the cost from higher-than-budgeted oil prices is hedged. We calculate that for every USD1.00/bbl higher/lower oil price, the budgeted oil subsidies could increase/decrease by EGP3-4bn.

Russia’s wheat export tax could increase food subsides by EGP5.6bn in FY20/21e. The market price of wheat follows the dynamics in Russia, with a EUR25.0-50.0/tonne wheat export tax (imposed as of Feb-21), to result in an increase in Egypt’s average import price by USD25.0/tonne to cUSD220/tonne versus the budgeted figure for FY20/21e. This accounts for GASC’s six-month stock, at the beginning of FY20/21e. The budget initially allocated EGP53bn for the bread subsidy cost (c60% of food subsidy). We estimate a cEGP2.65bn rise in food subsidy costs for every USD10.0/tonne in wheat prices. Russia’s time-bounded tax implies the easing of prices following the tax expiration in Jul-21.

Government investments key to stimulate ST growth. In efforts to increase investments’ contribution to GDP in FY20/21e to 16-18% from a seven-year low of 14% in FY19/20, the budget compensated for muted private business activity, amid COVID-19 current backdrop. This, in addition to the drop in unemployment to 7.2% in 4Q20 from a two-year peak of 9.6% in 2Q20, should lend support to the estimated GDP growth of 4% in FY20/21e.