Friday,16 November, 2018
Current issue | Issue 1356, (10 - 16 August 2017)
Friday,16 November, 2018
Issue 1356, (10 - 16 August 2017)

Ahram Weekly

An incomplete recovery?

Recent improvements in some indicators may not tell the whole story about Egypt’s economy, writes Sherine Abdel-Razek

#An incomplete recovery? #Source: Prime Group
# #

The recent increase in foreign investment in Egypt together with a decline in the trade deficit and a jump in the foreign reserves is news that should warm the hearts of all Egyptians. However, observers say a closer look at the economy may reveal that problems of high inflation and piling-up foreign debt remain worrisome.

Egypt made the headlines in business publications this week on the news that Saudi billionaire Al-Walid bin Talal would invest $800 million in the local tourism industry. The deal would see Kingdom Holding, owned by Talal, partnering with the local Talaat Mustafa Group to expand the Four Seasons resort on the Red Sea and build two new hotels at Alamein on the North Coast and at the Madinaty development in Cairo.

The huge investment illustrates the maverick businessman’s confidence in the prospects of the Egyptian economy. “This is a global investor, and he compares places first when deciding on where to invest,” Investment Minister Sahar Nasr told reporters on the news. “He sees that the business environment is now attractive and is committed to investing in Egypt,” she said.î

Emirati business mogul Mohamed Al-Abbar, founder of the Emaar Group, has also expressed interest in a large investment at Alamein. Al-Abbar is said to have other planned projects in Egypt’s new administrative capital and South Sinai. 

Investors from the US, Singapore and China have also expressed interest in Egypt, with projects in the pipeline covering oil and gas, logistics, tourism and real estate. Companies that are already present in Egypt, including Mars and General Electric, are also planning to expand, Nasr told Bloomberg earlier this week. 

 Assured by this increased investment appetite, Nasr expects foreign direct investment (FDI) inflows to exceed $10 billion in 2107/2018. FDI for fiscal year 2016/20 is expected to hover around $8.7 billion, around 26 per cent higher than the year before.

ì    With the devaluation of the pound last year, the cost of labour in Egypt is lower than elsewhere, Nasr said, adding that even with recent reductions in fuel subsidies, the cost of energy in Egypt remains less than in neighbouring countries or other emerging economies.

Furthermore, the long-awaited new investment law that is intended to cut red tape and streamline investment procedures is to be enforced soon, as executive regulations for the law were approved by the cabinet’s economic group on Monday. 

The new law comes as part of a reform programme that has seen Egypt devaluing its currency by 50 per cent, slashing fuel subsidies three times, introducing a new value-added tax (VAT), and putting a number of state entities up for sale. Such reforms helped in clinching a $12 billion loan deal with the IMF last November.

On another positive note, the value of the trade deficit, being the difference between exports and imports, declined by 46 per cent in the first half of 2017, the Ministry of Trade revealed last week. The news came as imports fell 30 per cent to $24 billion compared to the same period last year. Exports rose eight per cent to $11 billion. 

The improvement came on the back of the government’s crackdown on lower-quality imports, replacing imported manufacturing inputs with local ones when feasible and expanding exports, Trade Minister Tarek Kabil said. A recent Reuters survey of Egyptian importers concluded that the tonnage they had brought into the country was down 25 per cent compared to last year.

Egypt hopes that the weaker currency will increase the competitiveness of its exports and give them a push from $19 billion in 2016 to $34 billion in 2020. 

The sustainability of any improvement, however, depends largely on the country’s expanding its import substitution industries and on upgrading the quality of its exports. 



MPROVING PMI: Another positive development has been the improvement in the Purchasing Managers Index (PMI) for Egypt. 

The Emirates NBD Bank PMI figure is based on data compiled from monthly replies to questionnaires sent to purchasing executives in approximately 450 private-sector companies. It is a composite index that reflects developments in five sub-indices, including new orders, output, employment, suppliers’ delivery times, and stock of items purchased. 

New orders stabilised during July, thereby ending a 21-month sequence of decline. Meanwhile, output declined at the slowest pace in 12 months, thereby leading to only a marginal fall in input buying. 

In response to lower output requirements, firms reduced their staffing levels. New export orders rose for the fourth consecutive month, but only marginally during July. Meanwhile, firms saw a sharp pick-up in input cost inflation.

Egypt’s economy appears to be stabilising, with new orders unchanged in July following nearly two years of contraction, commented Khatija Haque, Emirates NBD’s head of MENA research. 

The PMI report also notes that firms have remained optimistic with regard to output growth over the next 12 months. Some companies also mentioned hopes of stability in currency markets and economic conditions.

However, firms saw input costs rise sharply on the back of higher fuel costs as subsidies were cut further at the end of June. Inflationary pressure is likely to remain elevated as higher electricity tariffs come into effect this month, Haque added. 

Inflation is a major challenge to the government of President Abdel-Fattah Al-Sisi, with many suffering from spiralling increases in the prices of goods and services. Last week the government introduced a 50 per cent hike in water prices on all tiers of consumption together with a LE0.5 hike in public buses fares. 

The inflation figure has been around 30 per cent over the past four months, its highest in 30 years. The rate is expected to be elevated by at least five per cent on the back of the recent increases together with last month’s fuel subsidies cuts.  

The inflation is adversely affecting consumption and is expected to put the brakes on economic growth, and the decline in the profits of Egypt’s largest listed food companies is an indicator of such slowed consumption.

Edita for Food Industries, a local maker of cakes and croissants, dipped by 88 per cent in terms of profits in the second quarter of the year, while those of Juhayna, the leading dairy and juice producer, inched down by eight per cent. 

Sales of passenger cars dropped 44 per cent in June compared with the year before. 



IR STRENGTHENED? In July, Egypt’s net international reserves (NIR) recorded their highest ever increase of $4.73 billion to reach $36 billion.  

The increase would have been larger but for repaying $720 million to the Paris Club of creditor countries at the beginning of July. 

According to Eman Negm, senior economist at Prime Group, an investment bank, the increase came on the back of receiving the second tranche of the IMF loan worth $1.25 billion, with the rest being related to increased inflows of portfolio and treasury bills investments that exceeded $2.5 billion, following the two per cent increase in interest rates in June.  

However, according to Negm, reaching such levels of reserves is built mainly on acquiring loans, which makes them fragile, especially when foreign investments in treasury bills have exceeded $10 billion since the decision to liberalise the local currency in November, with $7 billion set to mature before the end of 2017. 

Added to this is $1.7 billion in projected medium- and long-term external debt servicing to be repaid over the current year. 

Egypt’s dependence on loans to cover its foreign currency shortage pushed external debt during the first nine months of 2016/2017 to $73.88 billion, recording a 36 per cent increase. Such ballooning debt is attributed not only to increases in the absolute figure of the external debt, but also to the weaker pound since devaluation.  

Negm pointed out that it is not only the value of the debt that is worrisome, but also its structure, as the portion of short-term debt is increasing while medium and long-term debt is diminishing. 

By the end of March, short-term debt had jumped to $12.6 billion, compared to $6.8 billion by the end of March 2016. This, together with medium and long-term debt maturing within one year ($5.6 billion), reaches a total of $18.2 billion, exhausting around 50 per cent of the country’s reserves that stood at $36 billion in July. 

Accordingly, any appreciation in the local currency will be offset by repaying external debt servicing and outflows in treasury bills investments as well as increased level of imports, taking it back to its current level. 

Negm expects the current exchange rate of around LE17-18 to the US dollar to be maintained until the end of 2017. 

add comment

  • follow us on