One of the potential winners of the global financial crisis, Egypt has maintained a relatively high level of income from Suez Canal and tourism receipts, spurring a GDP growth rate of nearly 5%. However, on the back of a massive stimulus spending package in 2009, the country is looking to take advantage of low global interest rates and sell government debt.

At the start of March, the Egyptian Finance Ministry announced plans to issue between $1bn and $1.5bn in Eurobonds within the next two months. Morgan Stanley and HSBC Holding have reportedly been hired to manage the issue.

"We plan to test the outer limits of maturities. We are testing 20 to 30 years," the finance minister, Youssef Boutros-Ghali, told international press. In its last visit to international markets in 2001, the country sold five- and 10-year Eurobonds worth $1.5bn.

The announcement of the Eurobonds sale comes on the heels of an IMF Consultation Mission report, released in February, which called Egypt "resilient to the crisis" but recommended that the country take measures towards reducing its deficit, which is expected to reach 8.4% this fiscal year. After averaging around 7% in recent years, Egypt's real GDP growth decelerated to 4.7% in 2009, but is expected to exceed 5% in 2010.

The government has targeted halving the deficit within five years, which the IMF believes is not fast enough to achieve private sector growth. According to its report, "A tightening of 1.5% to 2% of GDP would provide an upfront signal to investors that progress towards the medium-term objective is well under way."

However, the country is instead aiming for a 0.5% deficit reduction in the next fiscal year. "Our economy has recovered but not fully recovered, so I want to make sure that we are on a self-sustaining momentum before I start really cutting down on the budget deficit," Boutros-Ghali said. "The IMF always says reduce the budget deficit no matter what happens or what the circumstances are. Our problem now is creating jobs."

One of the most tangible effects of the crisis has been a rising unemployment rate, which reached an official rate of 9.4% in the fourth quarter of 2009. To combat this, the government initiated a slew of construction projects using stimulus money, which has totalled $2.7bn since the onset of the crisis.

However, the education system has not had enough time to respond to the demands of the labour market. "There is a shortage of skilled labour in Egypt, compared to an excess of semi-skilled university graduates who need extensive training to become eligible for the Egyptian labour market," local investment bank Beltone Financial wrote in a research note in February 2010.

At the start of 2010, the government announced another $2.05bn stimulus package to try and strengthen economic expansion, despite the IMF's recommendation to reduce spending and "shift back towards fiscal consolidation and other growth-oriented reforms".

The majority of the $2.05bn will go to labour-intensive sewage and water-treatment projects, including a clean-up of the Nile, while the rest of the money is targeted at family aid, road improvement and housing construction.

One potential hazard of excessive stimulus spending is inflation, which rose 13.6% year-on-year in January, compared to 13.3% in December. A proposed reduction in energy subsidies, for which Egypt has paid up to $12bn annually, will heighten the impact of rising prices for the population. As a result, the government will have to raise interest rates if inflation does not ease up, having slashed them six times over the course of 2009 to encourage lending.

Provided that inflation does not get out of control, Egypt is well-positioned to exit the global financial crisis in better shape than it went in, with an abundance of much-needed infrastructure development, but the government will have to keep an eye on a growing deficit.



Global Arab Network