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© European Bank for Reconstruction and Development 2010 | www.ebrd.com

April 23, 2012Cairo, Egypt

Economic Challengesfor the Trade Finance Market in Egypt

Heike Harmgart Senior Regional Economist

EBRD

Egypt: Dire Macroeconomic Outlook

The turmoil in Egypt has had a severe impact on the economy:

• Contraction of GDP by about 0.6 per cent in 2011

– Sharp declines in tourism and industrial production

• Severe capital flight instigates balance of payments difficulties

– Depletion of reserves ($15.1 billion at end-March) to defend currency

– Continued outflow of capital amid political uncertainty

• Fiscal pressures have risen

– Increases in subsidies bill and other social spending

– Cost of government borrowing has increased

• Weaker trade flows and financing in wake of turmoil

Egypt: Growth collapses in 2011

-4

-3

-2

-1

0

1

2

3

4

5

6

2008/09 2009/10 2010/11 2011/12

percent, y-o-y, quarterly data

Egypt: Sharp fall in economic activity; Recovery pending political stabilization

200

400

600

800

1000

1200

1400

2006 2007 2008 2009 2010 2011 2012

thousands, seasonally adjusted

Tourist Arrivals

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012

per cent change, y-o-y, s.a.

Industrial Production

Egypt: Substantial Capital Flight in 2011

0

2

4

6

8

10

12

14

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

US$ billion

0

5

10

15

20

25

30

35

40

45

50

55

60

Dec-10 Apr-11 Aug-11 Dec-11

LE billionForeign Direct Investment Foreign Holdings of Treasury Bills

Egypt: On a more positive note…

0

1

2

3

4

5

03/2008 03/2009 03/2010 03/2011

US$ billion

250

300

350

400

450

500

Dec-08 Sep-09 Jun-10 Mar-11 Dec-11

US$ millionRemittances Suez Canal Receipts

Egypt: Recent pick up in bank lending

0

2

4

6

8

Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11

percent change, y-o-yCredit to the Private Sector

Egypt: Reserves depleted to defend currency

10

15

20

25

30

35

40

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

US$ billion

5.7

5.8

5.9

6.0

6.1

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

4% depreciation

Foreign Exchange ReservesUS$ billion

Foreign Exchange Reserves

Egypt: Significant rise in gov’t borrowing costs

4

6

8

10

12

14

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Deposit

Lending

3-month T bill

percent

Egypt: Weak domestic demand subdued inflation

6

8

10

12

14

Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12

Headline

Core

Consumer Pricespercent change, y-o-y

Egypt: Fiscal pressures due to subsidy bill

per cent of total

Breakdown of Expenditures

0

2

4

6

8

10

12

2004/05 2006/07 2008/09 2010/11

per cent of GDP

Fiscal Deficit

2011/12 budget

2006/07 budget

Subsidies, grants, and social benefits

Subsidies, grants, and social benefits

33%

27%

Egypt: Government Debt—External & Domestic*

0

200

400

600

800

1000

1200

2002/03 2004/05 2006/07 2008/09 2010/11

40

50

60

70

80

90

100

110External debt (rhs)Domestic debt (lhs) % GDP (rhs)

LE billion

* Domestic debt excludes borrowing from the Social Insurance Fund for gov’t employees and those from public and private business

per cent of GDP

Egypt: Current Account and Trade Balances

-25

-20

-15

-10

-5

0

5

10

15

1999/00 2001/02 2003/04 2005/06 2007/08 2009/10

Trade BalanceTransfersCurrent Account

LE billion

* Domestic debt excludes borrowing from the Social Insurance Fund for gov’t employees and those from public and private business

Egypt: Main Trading Partners

per cent of total, Jan-Nov 2011

Imports by Destination

per cent of total, Jan-Nov 2011

Exports by Destination

Euro Area

Italy-6.7%

Germany-5.9%

U.S.-11.9%

14.5%

Dev. Asia-10.3%

China12.8%Turkey-5.1%

MENA-8.7%

GCC-5.3%

Other14.3%

Saudi Arabia4.5%

Euro Area

Italy-10.6%

France-5.4%

U.S.-6.5%

19.8%

Dev. Asia-13.6%

Turkey-4.2%

MENA-20.8%

GCC-4.6%

Libya-4.7%

Saudi Arabia-6.0%

Other-14.3%

Egypt: Macro Impact on Trade Finance

• Turmoil in the past year has had significant impact on trade flows and trade financing:

– Reduction in overall credit supplied by banks

Prioritization of certain imports over others (e.g. oil/commodities over consumer goods)

Credit crunch faced by SMEs/local companies as banks turn focus on bigger, well-established entities

Increase in inflation as imports become more expensive

– Shortening of payment cycles as suppliers no longer comfortable with extending longer repayment options

Thank you!Thank you!

Contact details:Contact details:Heike HarmgartHeike Harmgartharmgarth@ebrd.comharmgarth@ebrd.com