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Egypt: Egypt Finance Profile


Financial Sector Profile 

Growth momentum depends on the political transition

Growth of GDP in North Africa fell markedly in 2011, particularly in Libya, and registered only +1.8% in Egypt, next over +5% the year before. All sectors of the economy were adversely affected by the period of demonstrations, strikes and regime change and by the uncertainties that followed. In particular, tourism was badly affected, with visitor numbers and sector earnings down sharply. Widespread demonstrations have dwindled in intensity and levels of activity have therefore increased, but only moderately.

Uncertain governance (changes to the electoral timetable) and policies (with several key reversals) continued into 2012, so that domestic consumption and investment were constrained and foreign investment very limited. GDP increase in that year is estimated at around +2.2% and a further political upheaval in mid-2013 again disrupted economic activity, with GDP increase last year of only +2%. Most of the factors impeding higher increase in 2011-13 remain evident in the early part of 2014, although business confidence has improved moderately under the military-backed government. EH expects GDP increase of +2.8% in 2014 but this is markedly below potential. Increase of +4% is possible in 2015 but GDP forecasts are dependent on stability being maintained (election uncertainty and militant attacks provide downside risks) and are therefore tentative.

Since the fall of the Mubarak regime in 2011, economic policies have been uncertain, reflecting the inexperience of new leaderships and an inability to counter the economic deterioration while conference expectations of the people. With the fall of the Morsi government in July 2013 and installation of a military-backed interim government, activity levels have picked up, although lingering uncertainties have only been partially assuaged. Until elections are held and a civilian government is in place, an IMF financial support package is unlikely. In the interim, the Egyptian economy is reliant largely on the GCC nations, which have provided injections of liquidity and supplies of oil and oil products.

Inflationary pressures exacerbated by EGP weakness, reflecting economic uncertainties

Average annual inflation was over 7% in 2000-08 and remained elevated through to the time of the political transition, ending 2011 at 9.5%. The social impact of high prices will remain a key concern of the government as it attempts to limit further protests. A policy of subsidy reduction is difficult to implement against such a background. Moreover, EGP depreciation and a high import propensity (Egypt is an exporter of crude oil and gas but requires inflows of refined energy products and it is the world’s major wheat importer) will keep inflationary pressures high in 2014.

The central bank will remain cautious in relation to monetary policy, balancing the inflation/growth dynamics and social imperatives. While aid from the GCC is providing some support for the EGP (and reserves), currency depreciation is likely to continue and against this background, EH expects inflation to average 9.9% in 2014 and end the year at around 11.7%. EH expects the exchange rate system of a managed float of the EGP will be maintained throughout 2014.

Wide fiscal deficits will persist, reflecting limited revenue streams and large social spending commitments

Traditionally-high annual fiscal deficits (-7% of GDP in 2009-10, with subsidy provision a leading cause) have been heightened because of the current political and economic environment. Annual average fiscal deficit-GDP ratios are likely to register double digits throughout the period 2011-14. Deficits of this magnitude are not sustainable and the IMF, if it is to acknowledge financial support, is likely to want strong evidence that whatever government is in place can implement some austerity measures in this regard. EH believes that only limited evolution will be achievable in relation to fiscal deficits, given the social imperatives of maintaining cheap foodstuffs and in general stability. Accordingly, a fiscal deficit of around -9% of GDP in 2015 is currently estimate by EH.

Public deficit is increasing

The public deficit-GDP ratio had been declining pre-crisis compared with a ten-year average trend and is estimated to have remained below 70% in 2012. However, with revenue streams limited but spending needs remaining high, public borrowings will increase and deficit is set to rise, perhaps to around 75% of GDP by 2014, with little likelihood of marked development in 2015.

Current account deficits, weak FDI but low foreign deficit ratios

The current account balance registered an annual average surplus of 1.5% of GDP in 2000-08 but deficits began to be registered even before the Mubarak regime change and accompanying economic slowdown from 2011. As with the fiscal accounts and other economic indicators, current account deficits increased with the onset of political change, reflecting a combination of disruption to the domestic economy, high propensity to import and reduced tourism earnings. Foreign direct investment (FDI) is unlikely to recover to inflow levels seen pre-regime change (Mubarak’s fall) until stability and security and a track record of political consolidation are observable. While some stability has ensued following the fall of the Morsi government in mid-2013, FDI is unlikely to recover until a new civilian government is voted into power and its policy stance has been assessed.

External deficit ratios and servicing of existing obligations were relatively low going into the crisis period. In 2010, external debt/GDP and external deficit to total FX earnings were below 17% and 59%, respectively, and annual deficit servicing was below 5% of export earnings. At such levels, obligations are unlikely to present problems in the short term. However, it remains to be seen what impact existing and ongoing external financial assistance will have on deficit levels. Some of this assistance is in the form of outright grants.

Foreign exchange reserve depletion has stabilised, but FX levels remain fragile

From the onset of the social/political crisis, net international reserves fell sharply from their peak of over USD30 billion. Currently, they stand at USD17 billion (January 2014 and +25.7% y/y, reflecting somewhat of a recovery) and provide import cover of around three months, which is the international benchmark minimum comfort level. However, official foreign exchange reserves (excluding gold and SDRs) are currently only USD13.2 billion. Recent relative stability in reserves reflects large inflows of aid from the GCC states, inclunding Saudi Arabia, that have pledged a further USD12 billion in loans, grants and oil concessions.

In contrast, the domestic economic activities that should be responsible for reserve accumulation (inclunding the tourist sector, associated and other service sectors and the manufacturing industry) remain weak. Accordingly, and in the absence of a financial support package from the IMF, Egypt will remain dependent on support from bilateral sources.

Country Rating D4


    Large domestic market and strategic position between the regional Middle Eastern and African markets
    Relatively diversified economy and sources of FX generation: including oil and gas, tourism, Suez Canal and a manufacturing base
    Although an IMF facility is proving time consuming, financial assistance from the US and the region (particularly the GCC) remains supportive
    External debt repayments are comfortable


    Nascent political system, with untested abilities of new government to implement policies and retain support within the country. Recently unseated elected head of state and uncertain political transition
    Regional uncertainties (relationship with Israel, contagion risk from Syria and Iran’s nuclear programme)
    Poverty and lack of job prospects, two underlying reasons behind pressures for regime change, have not been tackled effectively
    The difficult and protracted political transition has slowed the rebound in economic performance, with consumption and investment (domestic and foreign) awaiting clarity of policies