The world has been rattled by the recently-announced-then-paused Trump tariffs. No one knows how far this will go, but either way, Egypt stands to benefit.
U.S. vs. the Rest of the World (including China)
I would like to think of it as positioning the U.S. in one camp and the rest of the world in another camp. I actually think it is not a “U.S. vs. the Rest of the World” confrontation, but rather a “U.S. vs. China” feud, and everyone else is caught in between! It is about who’s got the strongest muscles and how much can they flex them?
With the implementation of the Trump tariffs, only prices in the U.S. should go higher, in my opinion, leading to lower U.S. demand for imported goods. This would create somewhat of an oversupply situation in the world (ex-U.S.), thus leading global prices lower. This could be another by-product positive for Egypt: lower prices. But it’s a double-edged sword. More on the other edge of the sword at the end.
On side of the sword: Lower inflation
Trump tariffs, if implemented, are bound to reduce world trade. This would hit Egypt’s Suez Canal revenues that are already down to 40% of their potential. Egypt’s finances would be constrained as a result, which would necessitate a reduction of expenses, the most important of which is interest payments. One way to do that is to try to lower interest rates. While some may argue that higher interest rates are needed to combat inflation, I believe that in Egypt’s case interest rates are not a function of inflation but a function of Egypt’s budget deficit.
The more Egypt has to borrow in the market, the longer interest rates would be sustained at such high levels. We all know the Egyptian society is not interest rate sensitive on the liability side (borrowers), but it is on the asset side (pensioners and depositors). Higher interest rates are relatively inelastic on the liability side, but they have proved to be more elastic on the asset side. We have all seen how individual stock trading has grown in size in the aftermath of the EGP devaluation.
The CBE’s upcoming action
Conversely, Egypt’s high inflation has been driven by not only imported inflation but also by higher interest rates. We have been in this “high inflation-high interest rate” spiral for quite some time, so it needs to be broken by cutting interest rates sooner rather than later. The Central Bank of Egypt meets on Thursday, 17 April, and I do hope it starts easing because Egypt does not have the luxury to consume a good bulk of state revenues in interest payments and debt repayments.
The other side of the sword: Higher imports
Back to Trump tariffs, I believe Egypt has the potential to benefit from all of this by exporting more, turning into the “go to” export hub, and all with a lower imported bill. But this would only be valid if, and only if, our imports do not increase as a result of lower global prices. Otherwise, Egypt’s FX situation would be exacerbated even further.
