Africa > North Africa > Egypt > Egypt Outlook for 2015-17

Egypt: Egypt Outlook for 2015-17

2015/08/11

The country (Egypt) is situated in Northern Africa, bordering the Mediterranean Sea, between Libya and the Gaza Strip, and the Red Sea north of Sudan, and includes the Asian Sinai Peninsula. Israel for 266km, Libya for 1115km and Sudan for 1273km.
Land in Egypt is vast desert plateau interrupted by Nile valley and delta

The climate is desert with hot and dry summers with moderate winters. OverviewEgyptian(s) speak Arabic (official), English and French widely understood by educated classes. The climate is desert with hot and dry summers with moderate winters.

Egyptian(s) speak Arabic (official), English and French widely understood by educated classes.

OVERVIEW

 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, after 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 growth in that year is estimated at around +2.2% and a further political upheaval in mid-2013 again disrupted economic activity, with GDP growth last year of only +2%. Most of the factors impeding higher growth 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 growth of +2.8% in 2014 but this is markedly below potential. Growth 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 meeting expectations of the population. With the fall of the Morsi government in July 2013 and installation of a military-backed interim administration, 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 countries, 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 largest 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 expenditure 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 agree 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 progress will be achievable in relation to fiscal deficits, given the social imperatives of maintaining cheap foodstuffs and overall stability. Accordingly, a fiscal deficit of around -9% of GDP in 2015 is currently forecast by EH.

Public debt is increasing

The public debt-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 debt is set to rise, perhaps to around 75% of GDP by 2014, with little likelihood of marked improvement in 2015.

Current account deficits, weak FDI but low foreign debt 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 debt ratios and servicing of existing obligations were relatively low going into the crisis period. In 2010, external debt/GDP and external debt to total FX earnings were below 17% and 59%, respectively, and annual debt 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 debt 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, including 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 (including 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.
 

Economic growth will remain slow, at around 2% in fiscal years 2012/13 and 2013/14, because of ongoing political uncertainty. However, economic growth is expected to begin to accelerate from 2014/15, as improved stability on the ground leads to a recovery in domestic demand. Despite increased donor support, the currency will continue to come under downward pressure, forcing the Central Bank of Egypt to introduce further foreign-exchange controls.

Political outlook

Fears of an emerging militant Islamist threat have risen, after the attempted assassination of the interior minister, Mohammed Ibrahim, in a car bombing in September.

Economic policy outlook

The outlook for the fiscal account has deteriorated slightly, in light of a government announcement that it will allocate an additional E£22.3bn (US$3.2bn) to public investment projects over the next ten months. As a result, The Economist Intelligence Unit now expects the deficit to come in at 12.9% of GDP in 2013/14.

Economic forecast

We have lowered our forecast for real GDP in 2013/14 to 1.9%, reflecting the impact on business and consumer confidence of the worsening security situation. It should recover thereafter, however, as the political scene stabilises.

The ratings contained in the present report and the report itself were produced outside of the European Union and therefore are not issued by The Economist Intelligence Unit Ltd credit rating agency, which is registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended. This report and rating, therefore, are not issued pursuant to such Regulation and do not fall within its scope.

 

Outlook for 2013-17

  • Political uncertainty will remain high, as the new president, Adly Mansour, struggles to oversee a consensual and inclusive transition in the wake of the ousting of his predecessor, Mohammed Morsi.
  • The six-month timetable for amending the constitution and holding new parliamentary and presidential elections is likely to be missed, given the wide ideological gulf between the parties and the worsening violence.
  • In the face of a crackdown and the mass killings on August 14th, the Muslim Brotherhood will refuse to participate in the political transition. However, this will only encourage further suppression of its activities by the military.
  • The new, technocratic government will seek to boost growth and employ‑ment, as the transition process drags on. This will include seeking continued foreign aid and, in the medium term, introducing a measure of fiscal austerity.
  • We have revised up our forecast for the fiscal deficit in 2013/14, to 12.9% of GDP, in light of a recent government announcement to allocate an extra E£22.3bn (US$3.2bn) to public investment projects over the next ten months.
  • We have lowered our real GDP forecast for 2013/14 to 1.9%, reflecting the impact on business and consumer confidence of the worsening security situation. It should recover thereafter, however, as the political situation stabilises.
  • The pound will be buttressed in the near term by the disbursal of aid from the Gulf states. However, it is set to slide again in 2014, as the economy remains weak and the political situation febrile.

Review

  • Hosni Mubarak, the former president who was forced to stand down in February 2011, is to be released from detention.
  • The interior minister, Mohammed Ibrahim, has escaped unhurt after a bomb exploded near a convoy of vehicles in which he was travelling.
  • According to the Ministry of Petroleum, three Gulf Arab states provided petroleum products worth US$865m in the six weeks up to mid-August.
  • The cabinet has approved an additional E£22.3bn of public investment projects, as part of an expansionary policy to stimulate economic growth and create jobs.
  • In light of the worsening violence in Egypt, several car companies temporarily halted production in August, and Europe's largest travel company, TUI, has suspended holidays to Egypt for its German customers.
  • China's Sinopec has agreed to pay US$3.1bn in cash for a one-third stake in the Egyptian oil and gas operations of Apache Corporation of the US.
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