Research and analysis

Egypt - Economic update - January 2015

Published 20 January 2015

This research and analysis was withdrawn on 8 August 2016

This publication was archived on 5 August 2016. This article is no longer current.

0.1 This publication was archived on 5 August 2016. This article is no longer current.

0.2 Summary

Egypt is to hold parliamentary elections over two phases from March to May. Fitch upgrades Egypt’s ratings. Egypt repays $2.1 billion to oil companies. PMI points to sustained gains in economic activity but economic recovery remains slow. Egypt is the best destination among emerging markets for stock market investors in 2014. Egypt will tap the international bond market within the coming few months. FDI inflows increase with a rise in both oil and greenfield investments. Kellogg’s acquires a controlling stake in confectionary maker Bisco Misr. Monthly urban inflation declines marginally in January. Deficit widens in the first five months of the fiscal year compared to the same period last year as the increase in revenues is offset by the decline in grants.

0.3 Detail

2015 Elections

Egypt will hold parliamentary elections over two phases on 22-23 March and 26-27 April, with run-offs on 1-2 April and 6-7 May respectively. The parliamentary elections are the final and third step of Egypt’s political roadmap that included drafting a new constitution (January 2014) and presidential elections (June 2014). The improvement in political stability is one of the drivers that prompted Fitch Rating agency to upgrade Egypt’s sovereign ratings last month.

International ratings

Fitch Ratings upgraded Egypt’s long-term foreign and local currency issuer default ratings to ‘B’ from ‘B-’. Fitch said the primary drivers behind the ratings upgrade were the fuel subsidy cuts and tax hikes that were implemented as part of a 5-year fiscal consolidation strategy as well as tackling the power shortages, reducing arrears to oil companies, and settling disputes with foreign investors. Fitch expects fiscal consolidation, stronger growth and lower commodity prices to pull down the fiscal deficit, although it will remain large compared with peers, at a forecast 10.2% of GDP in FY2015. Egypt’s debt to GDP ratio is also around double the peer median, at 90.5% at the end of FY2014. Fitch projected economic growth to continue to strengthen rising from 2.1% in 2013 to 4.7% in 2016.

Debt

Egypt paid $2.1 billion of its debt to international oil companies, bringing down outstanding debt to $3.1 billion. Egypt had repaid $1.5 billion in December 2013 and $1.4 billion in October 2014. The government said in November that it intended to repay all its debt within six months and many expect it to make another payment before the Economic Summit in March. The repayment encouraged oil companies to resume their investments. Forty-one exploration deals were signed since November 2013 with expected investments exceeding $2 billion (none had been signed since 2011). Net FDI inflows to the oil and gas sector reached $948 million in July-Sep 2014 from about $378 million in the same quarter of the previous year (and $1.6 billion in the entire FY2014).

Business confidence

HSBC’s Egypt Purchasing Manager Index (PMI), an index derived from monthly surveys of private non-oil sector, picked up in December at 51.4, from 50.7 the previous month. Readings above 50 signal an improvement in business conditions on the previous month. The figure has hovered above 50 since August 2014, pointing to sustained gains in economic activity, albeit at a modest pace. December data showed a continuation of the economic upturn in Egypt’s non-oil private sector with output, new orders and exports orders rising strongly. However, the employment index fell suggesting that firms’ confidence in the recovery remains weak.

Stock market

Egypt’s stock market showed a strong performance in 2014 and was the best performing market in the region. The benchmark EGX30 gained 31.6% in 2014 while market capitalisation rose by 17% to LE500 billion, bringing it back to its pre-2011 level. MSCI Egypt Investable Market Index shows Egypt topping emerging markets in 2014. Egypt was the best destination for stock market investors, producing a total return including dividends and share price rises of about 30%.

International bond market

Egypt may tap the international bond market very soon after the Cabinet gave the go ahead for the plan that aims at attracting foreign capital to Egypt. Egypt is planning to issue $1.5 billion bonds in different tenures. Egypt’s net international reserves declined in December to $15.3 billion, an 18-month low. Reserves will come under further pressure this month as Egypt has repaid $681 million of its Paris Club debt in early January. The shortage in dollars in fuelling the black market where the pound is now trading at 7.80 to the dollar, compared with 7.15 on the official market.

FDI

Egypt’s net FDI inflows amounted to $1.8 billion in Jul-Sep 2014, the first quarter of FY2014/15 (from $745 million in Q1 of 2013/14), driven by the rise in the net inflow to the oil sector (from $378 million to $948 million) as well as a pickup in greenfield investments (from $340 million to $735 million). Egypt is targeting FDI of $8 billion in the fiscal year to June 2015.

M & As

Kelloggs is to acquire a controlling stake in Egyptian confectionary maker Bisco Misr, a sign of the return of foreign investor interest to Egypt. Shareholders controlling 86% of Bisco Misr have agreed to sell their shares in a deal worth $125 million, after a bidding war with UAE private equity firm Abraaj Group which saw the bid price rise by over 20% from Abraaj’s initial offer. Abraaj decided to pull out of the deal at the end of 2014. Bisco Misr, originally a state-owned company, was partially privatised in 1998 and handed over in full to the private sector in 2005. Another food producer, cheese maker Arab Dairy, is subject to a takeover race between Egyptian Pioneers Holdings and France’s Lactalis.

Deficit

Egypt’s overall budget deficit stood at 4.6% of GDP in the first five months of FY2014/15 (Jul-Nov 2014), up from 3.2% in the corresponding period last year which saw an influx of Gulf aid to Egypt following the ouster of President Mursi. Spending increased 21.5% mainly as a result of the rise in spending on subsidies and social benefits (42%), wages 16% and interest payments 13.4%. It is worth mentioning that energy subsidies are not accounted for in both periods due to the accounting cycle so the impact of the cut in energy subsidies last July is not yet factored in. On the other hand, revenues remained almost unchanged despite the sharp rise in tax receipts (34%) as grants declined from LE36.8 billion to LE0.6 billion. Egypt’s budget deficit stood 12.8% of GDP in FY2013/14 but it would have exceeded 15% without the Gulf support. The government forecasts the deficit dropping to 10-11% of GDP in FY2014/15 and 8.7% of GDP by FY2017/18.

Inflation

Headline consumer price inflation declined by 0.07% (m/m) in December compared to a decline of 1.53% (m/m) in November, mainly due to the fall in food prices. The annual rate increased to 10.1% in December from 9.1% in November on the back of unfavourable base effect from the previous year; higher food and transport costs. The inflation rate in the period Jan-Dec 2014 compared to 2013 was 10.1% while food inflation was 12.3%.

0.4 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.