Friday,24 May, 2019
Current issue | Issue 1423, (20 December 2018 - 2 January 2019)
Friday,24 May, 2019
Issue 1423, (20 December 2018 - 2 January 2019)

Ahram Weekly

Egyptian economy: Sail planning

Egyptian policy-makers are wishing for favourable winds as they press ahead with economic reform efforts in 2019, report Niveen Wahish and Sherine Abdel-Razek

Tens of infrastructure projects are helping the economy grow
Al-Ahram Weekly

Egypt’s economic reform programme is now in its third year, and it was in late 2016 that it all began with floating the pound, imposing new taxes and slashing subsidies. The government’s programme is backed by a three-year $12 billion extended fund facility from the International Monetary Fund (IMF), of which it has received $8 billion. Early last month, the IMF carried out its fourth review and approved the disbursal of another $2 billion scheduled for early 2019.

Over the last two years, Egypt has passed successive IMF checks with a pat on the back. “The Egyptian economy has continued to perform well, despite less favourable global conditions, supported by the authorities’ strong implementation of the reform programme,” an IMF press release said following the fourth review.

Finance Ministry figures show that Egypt’s gross domestic product (GDP) grew by 5.3 per cent in the first nine months of the 2017-18 fiscal year compared to 3.9 per cent during the 

same period last year. Tourism, exports and natural gas were major contributors to the growth, spurred by public and private consumption at a lower rate than foreign direct investment.

Going forward into 2019, the government’s calculations are optimistic. The Finance Ministry sees the economy growing at 6.5 per cent in the 2019-20 fiscal year. The ministry’s 2019-20 budget guidelines forecast GDP growth at 6.9 per cent in 2020-21 and 7.3 per cent in 2021-22.

Other positive figures were rolled out this year. The Central Bank of Egypt (CBE) showed an overall surplus of $12.8 billion in the country’s balance of payments and a retreat in

the current account deficit by 58.6 per cent during the 2017-2018 fiscal year. This was made possible due to improved tourism revenues, which rose to $7.4 billion from $1.6 billion.

Suez Canal receipts increased by 15.4 per cent, to register $5.7 billion against $4.9 billion last year. Remittances from abroad reached $26.5 billion, an increase of $4.6 billion over last year. These contributed to propping up the country’s hard currency reserves, which reached $44.5 billion at the end of November 2018, covering 8.5 months of imports. They had reached a low of $13.4 billion at the end of March 2013, covering only 3.5 months of imports.

The unemployment rate also fell to 9.9 per cent in the second quarter of 2018, compared to 12 per cent a year ago. The number of employed reached 23 million during the same period, compared to 25.7 million a year ago. 

This generally positive performance has triggered improved credit ratings for the Egyptian economy. In November, ratings agency Standard & Poor’s (S&P) affirmed Egypt’s sovereign credit rating at B and its outlook at stable on the back of a “more competitive exchange rate, improving macro fundamentals and rising domestic gas production.” 

It had upgraded its rating for Egypt from B- to B in May. S&P said it might raise the rating to positive if the country’s economic growth exceeded its expectations or if it reduced its financing needs or government debt.

In August credit ratings agency Fitch affirmed Egypt’s long-term credit rating at B with a positive outlook. Ratings agency Moody’s upgraded its outlook on Egypt to positive, reaffirming its long-term issuer rating at B3. It also upgraded its outlook to positive from stable on the back of what it said were improvements in the economic and business environment in the country.


source: Capital Economics

INFRASTRUCTURE FOR GROWTH: Major infrastructure projects continued in 2018 in different parts of the country, propelling growth and creating jobs. 

The government continued work on expanding and upgrading the road network, power stations and urban developments. Among them were the development projects in Galala located between Ain Al-Sokhna and Zaafarana on the Red Sea. These aim to create a new urban area including residential, commercial, educational and tourism facilities.

The latest of these projects were inaugurated in mid-December by President Abdel-Fattah Al-Sisi. They included a wastewater treatment plant in Qalioubiya and several housing projects aimed at combating informal settlements.

More than 150,000 direct and indirect job opportunities in different fields are said to have been created by the projects. And more than 100 Egyptian companies and 10 engineering consultancy offices are involved. The area also includes a marble factory and the King Abdullah bin Abdel-Aziz University, a new university development. 

This year also saw the inauguration of four power generation projects worth some $7.2 billion. They include three electricity plants built by German conglomerate Siemens in Beni Sweif, Borollos and the New Administrative Capital, with a total capacity of 14.4 Gigawatts (GW).

In a bid to increase the country’s renewable sources of energy, a wind power plant at Gabal Al-Zeit on the Red Sea consisting of three interlinked projects producing 580 Megawatts (ME) of power from 390 wind turbines was also inaugurated this year. Egypt has targeted 20 per cent of all electricity consumption to be generated from renewable sources by 2022. 

The new plants will boost power production by 50 per cent and have a combined capacity eight times that of the Aswan High Dam, Presidential Spokesman Bassam Radi said.

“The projects will transform Egypt into a regional power hub and allow us to export electricity to neighbouring countries,” he added. Excess electricity generated by the plants will help supply planned interconnection projects with Sudan, Cyprus, Greece and Saudi Arabia, added Electricity Ministry Spokesman Ayman Hamza.

The first phase of the new Alamein City on the North Coast was also inaugurated this year. It will eventually cover 48,000 feddans and cost LE2 billion and is part of a series of ambitious urban development projects that will accommodate Egypt’s growing population while offering job opportunities and acting as engines of economic growth.

“The construction of these fourth-generation cities is not a luxury. They have become an urgent need, both in tackling population growth and in upping Egypt’s profile on the global investment map,” President Abdel-Fattah Al-Sisi said at the inauguration. Other cities being developed include the New Rafah City in Sinai, built on 535 feddans and containing 10,000 housing units, and Salam City, to be constructed on 16,415 feddans east of Port Said. 

“Alamein City and other similar projects have already successfully absorbed workers returning from Libya and other countries,” the president said.


source: Capital Economics

INFLATION COOLS: Inflation figures were better in 2018. After reaching highs of 33 per cent in the summer of 2017, inflation cooled to 11 per cent in May this year.

The hikes in prices that followed the floatation of the pound in November 2016 halted, and prices increased at a much slower pace than the previous year. 

However, inflation began accelerating again in the second half of the year on the back of another wave of fuel subsidy cuts implemented in mid-June, raising fuel prices by up to 51 per cent, in addition to increasing gas-cylinder prices by 67 per cent.

Egypt’s annual headline inflation increased to 17.5 per cent in October, up from 16 per cent in September largely due to higher vegetable prices. However, inflation eased in November to 15.6 per cent, mainly due to a decrease in food and beverage prices by 1.4 per cent month-on-month. 

The CBE has announced an inflation target of 13 per cent (plus or minus three per cent) by the end of 2018 and a reduction in inflation to single digits over the medium term.

Another cut in fuel subsidies is on the government’s books as part of its plan to phase out fuel subsidies by the end of the IMF programme in 2019. When that happens, it is certain to cause an increase in inflation, though not as drastic as the inflation in the summer of 2017.

Inflation has dented the purchasing power of most people, and economists fear that the erosion of consumer spending power could halt the momentum of growth if efforts are not made to ease inflationary pressures and structural reforms are not implemented to address market bottlenecks and monopolistic powers distorting market distribution.

In a bid to tackle monopolies, parliament agreed in principle earlier this month on government-drafted amendments to the Supply Affairs Law and the Protection of Competition and Prevention of Monopolistic Practices Law.

The new amendments introduce the crime of hoarding strategic goods with the aim of driving up prices. They also give greater powers to inspectors affiliated with the Ministry of Supply, the Consumer Protection Agency and the Ministry of Interior’s Supply Control Department to help them tighten the grip on monopolistic practices. 

While this step may help clamp down on some monopolistic practices, some market players do not believe this is the solution, adding that the amendments could open the door for discretionary practices that could harm private businesses.


market

DECLINING BUDGET DEFICITS: According to the government, the phasing out of fuel subsidies is an important component of plans to cut the budget deficit and free up fiscal space for more social spending in areas such as health and education. 

Egypt’s budget deficit narrowed slightly to 1.9 per cent during the first quarter of the 2018-19 fiscal year, down from two per cent during the same period last year, according to Finance Ministry figures. The narrowing of the deficit indicates that Egypt is on track to meet its budget deficit target of 8.4 per cent for the current fiscal year, Finance Minister Mohamed Maait had told Reuters. 

The budget deficit in 2017-19 reached 9.8 per cent, down from 10.9 per cent the previous year. It had reached a high of 12.5 per cent in 2015-16.

During the second quarter of the year, there were fears that escalating global oil prices, which reached highs of $80 per barrel, could upset government plans to cut the deficit. Initial budget projections had assumed an oil price of $67 per barrel and had allocated LE89 billion for fuel subsidies in the 2018-19 budget. 

However, in October prices began cooling off, down to an average $60 per barrel. If that had not happened, the government would have either increased subsidy allocations, thus disrupting its plans to contain the deficit, or hiked fuel prices making life harder for consumers.

A September 2018 report by the Institute of International Finance (IIF) expected the fiscal deficit to narrow to 8.4 per cent of GDP and the primary surplus to increase to 2.1 per cent, supported by higher tax revenues and lower fuel subsidies. 


source: CBE

HOLDING INTEREST RATES: In late November, one foreign senior portfolio manager told the US financial chain Bloomberg TV that while Egypt’s economic progress was “remarkable”, high-interest rates remained the biggest hurdle to investment in the real economy. 

“It’s very tough for anyone sitting in Egypt to let go of such high returns by parking cash in banks and government instruments and instead choosing to put money in investments that might not pan out,” he said. 

Despite expectations of a reduction in interest rates at the beginning of 2018 as a means to contain interest payments and thus tighten the budget deficit, the year has passed with only a two per cent reduction earlier in the year to stand at 16.75 per cent for deposits and 17.75 per cent for loans.

The CBE held rates steady at five consecutive meetings of its monetary policy committee, the last of which was held in mid-November. The main reason offered has been inflation, which while it eased at the beginning of the year, has surged since August on the back of fuel subsidies cuts.

The government was faced with the hard choice of either lowering interest rates to spur growth and encourage investment, but risk losing foreign investors attracted by high yields on treasuries or keep them high to maintain the appeal of treasuries and strengthen the currency. 

The emerging markets crisis has made the second choice the more sensible, but it came at a price. 

According to consultancy Capital Economics, this fiscal year’s budget was prepared with the assumption that yields on Egyptian treasuries would be along the lines of 14.7 per cent as compared to 18.5 per cent in the previous fiscal year. However, yields have been averaging around 19 per cent since the fiscal year started in June, raising the costs of debt-servicing in the budget.

Every percentage point increase in average rates raises the debt-servicing bill by LE4-5 billion. The CBE’s monetary policy committee will meet on 27 December to decide on rates going into the new year. 


source: CBE

DOUBLE-EDGED TREASURIES: Until the middle of the year, the demand for Egyptian treasuries was good, as there were no other emerging markets providing similar returns with the relatively low risk enjoyed by Egypt.  

The average yield on local-currency government debt in developing nations was about five per cent, compared with an average of 15 per cent for Egyptian bonds.

The emerging market crisis shook investor confidence in these markets’ stability, however. While Egypt was among the least damaged, demand for treasuries waned in August and September compared to the average of the preceding 13 months.

According to a report by consultancy Arqaam Capital, foreign holdings of Egyptian treasury bills fell in September to 18 per cent of total buys, compared to 32 per cent in February. Factoring in the risks, investors asked for exceptionally high yields, a fact that led to the cancellation of four treasury bond auctions during September that saw the government selling one-year bonds at a pre-tax rate of 19.29 per cent.

October marked the seventh consecutive month for foreigners to exit Egyptian treasuries, selling LE24.3 ($1.4 billion) worth of them. Non-Egyptian holdings of treasuries stood at $11.7 billion at the end of October, down from above $23 billion at the end of 2017.

These outflows have been financed by Egypt’s state-owned commercial banks, according to a dispatch from Reuters backed up by research reports by Capital Economics and Arqaam Capital. 

The logic is that while the CBE has vowed not to interfere in the foreign-exchange market to support the pound, as part of its deal with the IMF, the public banks step in to cover any gap in the supply of dollars to support the pound. 

The pound has maintained the LE17.78-17.98 level to the dollar since May, despite the fact that foreign investors have fled emerging markets around the world, leading to catastrophic declines in many currencies like those of Turkey and Argentina.

The National Bank of Egypt and Banque Misr, the two biggest state-owned commercial banks, are probably shouldering the bulk of this burden, “often stepping into the interbank market towards the end of the day to fill outstanding requests for dollars”, bankers and economists told Reuters. 

However, the continuity of this trend was put into question by the end of the year when the government approved amendments to the income tax act that if enacted will oblige the banks to separately account on their income statements for returns from investments in government debt.

While Finance Minister Mohamed Maait said the move aimed at bringing accounting practices in line with international best practices and allowing the government to tax earnings on these yields in a “fairer” way, consultancy Shuaa Securities Egypt expects the move to increase the effective tax rate of the banks to 37 per cent compared to 24 per cent under the current system.

In order to meet its target of trimming the budget deficit to 8.4 per cent of GDP in the fiscal year ending in June 2019, compared to 9.89 per cent in 2017/2018, Egypt needs $20 billion in new funds, the government has said.

As borrowing in Egyptian pounds via issuing treasuries has proved to be too costly, Egypt has resorted to borrowing from foreign institutions in the form of loans or through issuing international bonds.

It sold more than $13 billion in foreign-currency denominated bonds after the flotation of the pound in November 2016 as a pre-requisite to securing the $12 billion loan from the IMF. This includes $4 billion in dollar-denominated bonds in February, and bonds worth two billion euros, its first ever euro-denominated bond issue, in April.

Moreover, Maait has said Egypt is looking to sell around $5 billion in Eurobonds, possibly in the first quarter of 2019. He has also noted that the government will be targeting new Asian markets to promote new issues. 

 

REINING IN DEBT: Regarding borrowing from international institutions, Maait said recently that Egypt was due to access $4 billion in additional foreign funding this month, including $2 billion from the IMF.

A few days later, it was announced that the World Bank had agreed to provide Egypt with a new $1 billion loan to help finance the next phase of the government’s economic reform programme, which focuses on spurring private-sector growth.

According to reports, the country has received $500 million from the Arab-African International Bank and expects the same amount from France and Germany.

Egyptian foreign debt has been ballooning during the last three years to reach $92.64 billion in the fiscal year ending in June, equivalent to 37.2 per cent of the country’s GDP. This is compared to $79 billion in the 2016-17 fiscal year and $56 billion a year before.

The figure includes $28.42 billion in loans from international and regional financial institutions, $17.4 billion from Saudi Arabia, the United Arab Emirates and Kuwait, and $14.28 billion in bonds.

According to the CBE, Egypt will have to repay $24 billion in due obligations over the next two years. With many loans due, Egypt is in a tough situation as it needs to borrow more to repay the maturing bonds. It expects the country’s total foreign debt to reach $102.863 billion in 2019/2020.

In response, the government has adopted a policy of limiting external debt. According to a report that Reuters acquired in late November, Egypt wants to put a ceiling of $16.733 billion on external borrowing during the current financial year, to be lowered to $14.3 billion in 2019/2020.

Moreover, the Finance Ministry is working on raising the average borrowing period to 3.5 years compared to the current two or less by the end of this fiscal year. Vice-Minister of Finance Ahmed Kouchouk told local media that the ministry aimed to increase the period to five years in the medium term. The goal of raising the time-to-maturity of the debt was “to avoid having to borrow on a monthly basis to settle loan payments”, he said.

Imposing a limit on foreign borrowing comes in parallel with the public debt control strategy that is currently in the making and aims at reducing public debt to 72-75 per cent of GDP by 2021-22 from 98 per cent today.

 

MORE SOCIAL SPENDING: Inflation hikes over the past two years have hit the most vulnerable groups in society, and in order to compensate the government has continued the implementation of programmes it has put in place since 2016. 

These include the Takaful and Karama (Solidarity and Dignity) cash-transfer programmes implemented in villages where poverty rates reach 70 per cent. Upper Egypt has received 72 per cent of the programmes’ budget. The Ministry of Social Solidarity put the number of families benefiting from the programmes in mid-November at 1.9 million. Takaful provides cash transfers to poorer families on condition their children go to school and make visits to a health clinic.

To help include more families under the programme, Prime Minister Mustafa Madbouli announced in late November that the beneficiaries of the Takaful programme would be limited to two children instead of three. The step was needed, according to officials, because of limited resources. 

Karama is a cash-transfer programme that targets the elderly, people with special needs, widows and divorced women. Other attempts at improving lives have included a nationwide campaign to treat the Hepatitis C virus, with 15 million people being screened for the disease. 

 

PRIVATE-SECTOR GROWTH: While improved growth rates have been undeniable, economists stress that these must be sustained through dependence on productive sectors, not only revenues from tourism, oil and gas exports or remittances, in order to insulate against external shocks.

The Egyptian Centre for Economic Studies (ECES), an NGO, has said dependence on productive sectors is important to ensure sustainable GDP growth and resilience to internal and external shocks. It also stresses the need for the equitable distribution of the fruits of growth to different regions and groups to avoid the pre-2011 situation when GDP growth rates were estimated at about seven per cent in 2007 and 2008, but the fruits of development were not felt by all.

On a similar note the IIF has recommended that to achieve higher and sustainable growth, Egypt needs to make the economy more responsive to market forces and empower the private sector. “Laws and regulations governing business and investment need to be overhauled and brought into line with best practices in successful emerging economies,” it said in a September note.

 

NATURAL GAS: Petroleum Minister Tarek Al-Molla announced in October that Egypt would no longer import liquefied natural gas (LNG), saving the government the LE3 billion it has earmarked annually to meet local demand.

This was possible thanks to the output of the Zohr Gas Field, discovered in 2015. With 30 trillion cubic feet (tcf) of gas, Zohr is one of the largest gas fields discovered so far in the Mediterranean. Three years ago, Egypt imported up to 1.2 billion cubic feet per day (bcfd) of gas. ENI, the Italian multinational oil and gas company which discovered Zohr, announced in early September that the gas field was now producing two bcfd.

Zohr, along with other developments in the oil and gas field, put Egypt on track to become a regional energy hub. Part of the plan is to receive natural gas through pipelines from countries around the Mediterranean to liquefy and then re-export it. A $15 billion agreement to import gas was signed in February between the Egyptian private firm Dolphinus Holdings and Delek Drilling LP and Noble Energy Inc, the operators of Israel’s Leviathan and Tamar Fields. 

The gas will be transported through the East Mediterranean Gas (EMG)-owned pipeline connecting Israel’s grid to Egypt’s at Arish. Noble Energy and Delek have finalised agreements with an Egyptian partner to acquire a 39 per cent stake in the pipeline operator EMG. The agreement includes the settlement of outstanding arbitration rulings against the Egyptian government. 

Egypt this year also signed an agreement with Cyprus for a $1 billion pipeline connecting Cyprus’s Aphrodite Field to liquefaction plants to be constructed in Damietta and Edfu. These deals were made possible thanks to new legislation liberalising the gas market and allowing the private sector to acquire permits to import natural gas. The executive regulations of the new law were issued in February 2018.

 

YEAR ON THE BOURSE: The stock market saw a promising start of the year. It maintained a robust performance throughout the first half, with March and April witnessing the highest trading volumes. The market’s main index the EGX30 had realised eight per cent gains by the end of June. 

However, the emerging markets crisis triggered by a combination of a stronger dollar on the back of the increase in interest rates in the US and worries over a fully-fledged trade war between the US and China made investors reluctant to invest in emerging markets across the globe. 

While Egypt’s losses were less than those of its peers, as high interest rates made it appealing to foreigners and kept its currency stable compared to steep devaluations in others, the market was stripped of its first-half gains, reversing the robust trend and incurring a loss of 13 per cent by mid-December. 

This was reflected in market capitalisation (the total value of traded shares), which while culminating at LE911 billion at the end of the first half of the year, declined to LE750 billion in mid-December. In 2017, market capitalisation ended the year 40 per cent higher at LE892 billion.  

On a positive note, transactions made by non-Arab foreigners represented 23.25 per cent of overall turnover, the stock market’s highest-ever percentage. 

The CBE’s decision to cut interest rates by only two per cent during the year, after raising them by seven per cent during the flotation of the pound, had a mixed effect on the market. While many retail investors pulled out in pursuit of relatively safer and more lucrative bank deposits yielding 14 to 15 per cent, companies suffering from the high cost of acquiring bank loans considered launching initial public offerings (IPOs) to acquire needed finance.

This was one of the reasons many companies and the government itself considered a handful of IPOS during the year. 

While the government said it would be offering stakes in five state-owned companies this year, starting in October with a 4.5 per cent stake in cigarette-maker Eastern Company and a 20 per cent stake in Alexandria Mineral Oils Company (AMOC), the year ended without any shares being put on the bloc due to international market volatility. 

The government is planning to privatise 23 state-owned companies in the coming two years as a means to produce revenues that should help it reduce the budget deficit to 8.4 per cent of GDP in the year to June 2019. Earlier in the year, Finance Minister Mohamed Maait said the government had budgeted LE10 billion in revenues from share sales until June.

Three private IPOs planned to be offered in the fourth quarter of the year, including Rameda Pharma, Giza Spinning and Weaving and Hassan Allam, have been postponed for the same reason. 

Meanwhile, the market received several successful IPOs of private companies during the year. A public share offering of 41 per cent of the shares of Egyptian investment bank CI Capital was covered 29.45 times over in April. CIRA, the owner of Future Schools and Badr University, listed LE1.244 billion worth of shares through an IPO in October. 

However, the IPO of consumer-finance player Sarwa Capital made the headlines. The offering was covered 30 times over, but the shares then plummeted in its debut on the stock market. Soon afterwards, the market regulator the Financial Regulatory Authority (FRA) suspended Beltone Financial’s investment banking arm, the manager of the Sarwa offering, from carrying out any activities for six months.

The suspension came on the back of alleged financial irregularities in Beltone’s management of the Sarwa Capital IPO. Beltone appealed the decision that came one day after Orascom Investment Holding, owned and founded by businessman Naguib Sawiris and the mother company of Beltone, had acquired at least 25 per cent of Sarwa Capital.   

The news of a possible takeover of Medinet Nasr for Housing and Development by real-estate developer SODIC was the most important merger and acquisition news on the bourse this year. While it has not yet materialised, the deal would create one of Egypt’s largest real-estate entities. 

One important decision that saw the light in the last month of 2018 was the CBE’s termination of the foreign-exchange repatriation mechanism for portfolio investments made after 4 December. A CBE statement noted that the reason was improved macroeconomic indicators, including an improved foreign-reserves position.

The mechanism was introduced in 2016 to reassure foreign investors that they would be able to repatriate their profits back home in dollars.

Meanwhile, the new capital markets act has also been approved by parliament. This should enable companies to issue Islamic sukuk bonds to finance specific projects as well as opening the door to trading in futures contracts and permits as well as the establishment of an exchange specialising in them. 

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