Countries like Iran, Russia and Turkey have been hard hit by the rapidly spreading coronavirus, but so far Egypt has got off lightly. Investors are wondering if it will last.

“I was assuming a spike of coronavirus] cases up to 1,000 a day that one of the ministers was suggesting would necessitate a full lockdown, but data is not coming anywhere close to that,” says Charlie Robertson, the global chief economist and head of macro strategy at Renaissance Capital, who has been tracking the spread of the virus around the world closely. “We did see record number increase yesterday at around 189 new cases in one day, but it’s nowhere near the thousand yet.”

Robertson says an important metric is to look at the share of people in recent tests that have tested positive for infection. In Ecuador, for example, this week 50% of those tested, tested positive for the virus.

“That is telling you a great number of people in Ecuador have the virus and they are not testing enough,” says Robertson. “In countries like Korea or Taiwan, to put this into perspective, are at less than 1%. The problem in Egypt is they don't tell us what the share is.”

Robertson reports that there is a “boom” in new cases in the Middle East with record high numbers reported infected in Qatar, Saudi Arabia and UAE, but so far Egypt is not showing the same results.

The upshot is the government has so far avoided a lockdown and the President Abdel Fattah el-Sisi has made it clear that he would prefer to avoid one, although the government has already introduced a nighttime curfew. What few measures have been put in place are also starting to fade as the population emerge from their homes and life on the streets picks up again, according to locals in Egypt.

Nevertheless, the economy has already been hit and Rencap is predicting an economic contraction in the second quarter of this year and probably for the third quarter.

“Part of the reason for that is tourism is going to get wiped out for these two quarters – at least,” says Robertson.

Tourism plays a crucial role in Egypt’s economy. Its other vulnerability is remittances as many well-educated Egyptians hold jobs in other countries of the Middle East and send money home.

GDP is expected to slow from the 5.6% gain this year the government predicted in early February to 2-4%. The IMF just produced a similar prediction last week, predicting growth of 2% for this fiscal year.

One of the few blessings Egypt has is it is almost oil neutral: so its trade balance is insulated from the current oil price instability that that has wracked the commodity markets.

Nevertheless, low prices will also adversely affect the economy, as they will the oil companies to cut back on investment. If oil companies do not invest then global oil production will automatically decline by 12% a year, according to Rencap.

The currency has also been stable so far as the central bank has stepped into support the currency.

“There is about $40bn left. Now they are letting the reserves run down and as the government is more concerned about currency stability. The exchange rate will be stable until around June when the fiscal year ends and then the central bank will allow some devaluation. But I’m not super confident in this!” says Robertson.

Companies are also in fairly solid shape as they do not carry much leverage and what there is is concentrated in the power sector. “Egypt is not a highly leveraged environment,” says Ahmed Hafez, head of MENA research at Rencap. And the central bank has given debtors a six-month payment postponement just to be sure.

Construction sites have not been closed down so investment, one of the main economic drivers, remains “on track” according to Hafez.

And the banking sector remains solid. After the whole region has been roiled by bank crises in the past most of the banking sector has remained very cautious and conservative and so the banks are in good health with decent liquidity. “The banks are well placed to weather the storm,” says Hafez.

Robertson doesn't recommend Egyptian domestic fixed income as while there are returns to be made he says there is more opportunity in other countries with a cheaper currency like South Africa and Brazil.

The country also enjoys strong support from the International Monetary Fund (IMF) and the US which will underpin the health of the economy.

“There is no debt crisis on the horizon. The rating agency S&P did not downgrade Egypt last week, although in my opinion they should be downgrading everyone at the moment,” says Robertson. “But on the GDP growth story we will wait and see.

So far so good, but things could get worse. Ahmed Hafez, the head of MENA research believes that the government will avoid, if at all possible, a full lockdown but that could lead to a growth in the rate of infection.

“Life has come back to the streets and the current measures are not enough to stop the virus spreading,” says Hafez. “The government imposed a tough lockdown, but now it is sliding.

 

The country’s very lack of progress towards global integration is also in the current environment its best protection as the economy was never tightly hooked up to the global economy.

Many Egyptians have chosen to go abroad to work and that exposes the country to a remittance shock. A recent study by the Institute of International Finance (IIF) found that one of the biggest sources of remittances in the region was from oil producing countries, which are only now starting to see their infection rates explode. Lockdowns in the Middle East will reverberate across the region as casual jobs are lost. While Egyptians tend to have more senior positions in these expat jobs they are less likely to lose their jobs, but remittances are expected to fall and that in turn will feed through to hurt the home economy; Rencap estimate remittances could fall 15-30%.

But while Egypt is largely insulated from external shocks it remains very vulnerable to internal shocks and anything that upsets domestic commerce will have widespread ramifications. A lockdown that stopped the population going to work or out to shop would be a disaster for the economy.

Rencap estimates that businesses total wage payments amount to EGP370bn and that they have a cash position of EGP185bn. That implies enough cash to survive for about 213 days.

“Of course, won’t actually go that far before they get into trouble as they will start making cuts once the cash starts to run out,” says Hafez.

However, that number is an aggregate and in individual subsectors businesses have been sometimes run on significantly smaller cash reserves. In food & accommodation services, for example, Rencap estimates that businesses have enough cash to last only 27 days of wages before they run out of money and they employ some 7% of the population or 594,000 people.

The extent of how tough the post-lockdown regimes in Europe in particular are will have a major impact on the Egyptian economy. If they are fairly loose then tourism may recover somewhat and bring in some badly needed cash, but if the regimes are tough, or Egypt is still suffering from high rates of infection, then “that's it for Egypt’s tourism sector for this year,” says Robertson. “Tourism will be 100% wiped out and could remain so until a vaccine is developed.”