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Egypt and Turkey turn a corner but Lebanon flounders

The phrase 'two out of three ain't bad' offers no solace for a struggling nation

Shoppers and tourists in the spice bazaar in Istanbul. Turkey and Egypt are viewed as being on the way to economic recovery Shutterstock/Alexey Pevnev
Shoppers and tourists in the spice bazaar in Istanbul. Turkey and Egypt are viewed as being on the way to economic recovery

The countries of the Eastern Mediterranean have faced significant and ongoing economic, financial and political crises. 

But while Turkey and Egypt may have turned a corner, Lebanon’s economic recovery will be more protracted.

Following a $35 billion investment deal with UAE sovereign wealth fund ADQ, Egypt took several steps to alleviate its worsening foreign currency liquidity crisis.

At an unscheduled meeting, the Central Bank of Egypt (CBE) extended recent tightening with an outsized 600 basis points rate hike, lifting the overnight deposit rate (policy rate) to 27.25 percent.

The CBE announced a liberalisation of the Egyptian pound, rather than the devaluation we expected, closing the gap to the black market. The EGP is now trading near the E£47/$ level, down 34 percent.

Next, the IMF recognised Egypt’s vital role as a lifeline to Gaza by nearly tripling funding to $8 billion

In addition to tighter monetary policy and a more flexible approach to currency, the IMF requires the authorities to raise the bar on fiscal discipline and control infrastructure spending.

The foreign exchange (FX) reprieve from the UAE and the IMF is leading to a visible easing of restrictions. The government is aiming to clear a backlog of imports, which sources put at $6 billion-$8 billion, and remove restrictions. 

Banks have also begun to ease restrictions on FX transactions including credit card spending limits.

We think the slew of announcements has the potential to set off a virtuous cycle of more foreign direct investment and portfolio flows, while remittances have reportedly surged since the currency was floated. 

The rise in nominal yields in the wake of the CBE rate hike will limit downside to the pound and we think it will settle in the E£45-50/$ range. 

However, there will also be economic pain from the inflationary impact that arises from floating the currency. 

That said, most goods, services and imports were already priced at black market rates before the float, likely limiting further increases in inflation. 

Egypt has emerged out of crises before but we also have seen authorities revert to old ways

It looks likely inflation will end this year lower than where it is now. Still, households will face higher debt costs, which will hit demand. 

We are also cautious about longer-term sustainability. Egypt has emerged out of crises successfully before but we also have seen authorities revert to old ways. For instance, improved FX buffers could motivate re-pegging. 

Fiscal headroom in Egypt is limited and discipline will be central to the economy’s long-term success.

Although Moody’s changed Egypt’s credit outlook to positive from negative, it maintained a Caa1 sovereign credit rating due to Egypt’s high debt ratio and weak debt affordability compared to its peers. 

S&P and Fitch have also yet to revise Egypt’s sovereign credit rating, with all three ratings agencies undertaking reviews in the coming months. 

Given Egypt’s poor track record on sustainable policy changes, we are staying cautious on the longer-term outlook.

The ratings cycle is turning for Turkey

The turnaround in Turkey’s policies since the election in May 2023 has earned it a credit rating upgrade from Fitch, the first positive assessment in over a decade. 

Turkey had an investment-grade credit rating briefly but lost it in 2016-2017, and subsequent downgrades brought the rating to a very low level. 

However, we think the rating cycle is now turning based on the assumption the orthodox policy course is upheld.   

Turkey is now rated B+ by Fitch, B by S&P and B3 by Moody’s. All three agencies have assigned a positive outlook to the ratings signalling further upgrades in the months ahead.

Recently released GDP figures showed a stronger Turkish economy than we expected, while high-frequency data suggests a steady rise in activity. For example, the February purchasing managers index edged up to 50.2 from 49.2 in January, marking the first time above the neutral 50 mark in eight months.

The central bank (CBRT) kept the policy rate on hold at 45 percent in March, in line with our baseline, and they are likely to remain on hold for a while yet. The sticky course of inflation will limit the CBRT’s room to cut rates before 2025.

Conflict adds to Lebanon’s woes

The news is less positive for the third Eastern Mediterranean country that has battled an economic and financial crisis.

Lebanon’s economy contracted for the sixth consecutive year in 2023, with military hostilities on its border with Israel undermining the short-term outlook. 

We project only modest growth at best in 2024 as a domestic political vacuum and proximity to the ongoing war in Gaza continue to weigh on recovery prospects.

Reports suggest Lebanon has sought to revive talks with the IMF though we expect no imminent breakthrough on proposed reforms or disbursal of funds.

Lebanon remains under temporary leadership, with no president since Michel Aoun’s term ended in October 2022. The country is governed by caretakers while Wassim Mansouri is acting as the head of the central bank. 

Mansouri’s focus will remain on restoring people’s confidence in the banking sector, with the aim of eventually securing much-needed foreign financial assistance. 

However, it is likely it will take some time before the economy moves into a recovery phase and closes the 35 percent contraction seen since 2017.

Scott Livermore is chief economist at Oxford Economics Middle East

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