The factors that affected the Egyptian economy in 2020

The Egyptian economy is subject to the vagaries of four main factors (Photo by Shutterstock).

Ahmed Abdul-Rahman explains the four factors that affected the Egyptian economy in 2020.

There are four factors that affected the Egyptian economy during in the year 2020. These included the volatility of cash flows into Treasury Bills and instruments, the volatility of the US dollar; the volatility of the oil price and the limited growth in investments. At the same time there were geopolitical tensions but these were usually short-lived. Politically, there was a tense start to the year.

At the  beginning of the year people in Egypt seemed enthusiastic about life and there were many events going on. There were also many events going on. The world was also hardly breathing a sigh of relief after reaching the so-called first phase of the an agreement between the US and China, This indicated a truce in the trade war.

Later, however, tensions grew in the Middle East including between the US and Iran and between Egypt and Turkey.  Egypt warned Turkey
against interfering in Libya.

Despite hopes that  these factors would have a temporary impact on the Egyptian economy, tensions were protracted. Each factor differs in  its intensity and speed of its impact on the Egyptian economy.

The cashflow into Treasury Bills flows is one of the top influencing factors

Cashflows into Egyptian Treasury Bills - the cost of government borrowing- had a big impact on the Egyptian economy. There was also the fear that geopolitical risks could cause investment flight or at least limit the inflows of cash into the Treasury Bills. Like other emerging markets, especially in the Middle East and North Africa, if the region witnessed an undesirable event, this would have a big impact on Egypt. This could push the value of the US dollar up.

US dollar price
 If the value of the US dollar against the Egyptian pound goes too high, and the global impact on the US dollar is severe and, if fears escalate, investors will turn to safe-haven currencies, including some currencies such as the US dollar, the Swiss franc and the Japanese yen. Precious
metals such as gold, are also appealing for investors. Gold is one of the most preferred investments during times of fear and turmoil.

After the American attack on the Iranian leader Qasem Soleimani, the US dollar fell against against some Asian currencies. This was
surprising. But if the dollar reverses its direction this will affect the Egyptian pound. Egypt could face an outflow of foreign investment, particularly in local debt instruments that include Treasury Bills and bonds offered by the Ministry of Finance.

Oil prices

When it comes to oil prices, a rise in oil price negatively affects Egypt's trade balance. Moreover, in the shorter term, the tension between the US and Iran, could hurt the cost of oil  price hedging contracts for Egypt. If the cost of oil is high in Egypt, this will could lead to a rise in the cost of fuel to the final consumer, which may, in turn, result in higher inflation.

The economy, generally

When it comes to the economy and some of its components – economic growth, foreign direct investment (FDI), and trade – high oil prices are likely to have a long-term structural impact on the Egyptian economy. 

Recently, Egypt has relied on FDI for economic growth. But it is possible that high oil prices could harm FDI or cause a decrease in private investment. This could push the trade deficit up. which may lead to a decrease in expected growth rates.

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Saturday, 30 September 2023