Research and analysis

Egypt: economic update - August

Published 15 September 2014

This research and analysis was withdrawn on 8 August 2016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 This article is no longer current.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 This article is no longer current.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

Private sector non-oil companies report an increase in economic activity in August. Egypt falls on the Global Competitiveness Index. Inflation reaches 11.5% y/y. Net international reserves marginally increase but reserves will come under pressure over the coming two months as Egypt repays final debts owed to Qatar. Capital inflows are starting to recover. Egypt raises almost half the amount needed to finance the Suez Canal expansion project in just four days. Technical problems in Egypt’s national power grid cause many parts of the country to experience a simultaneous prolonged blackout.

0.3 Detail

Private sector non-oil companies reported an increase in economic activity in August. HSBC’s Purchasing Manager Index showed an increase in output supported by a rise in both new orders and new export orders. Export demand, from both European and Middle Eastern markets, strengthened in August to its highest level in 33 months and the quantity of purchases was at a record high suggesting that firms were more optimistic about near-term prospects. Output prices increased indicating that input costs may have started feeding into higher consumer prices. Although HSBC recognises that a much stronger boost in activity is needed to make up for the lost output of recent years, they are bullish about the economy; anticipating that economic growth will continue to gain momentum reaching 4% within 2015, the same estimate as the IMF.

Instability over the past three years has impacted on Egypt’s competitiveness, which has significantly deteriorated. Egypt ranked 119th out of 144 countries on the Global Competitiveness Index published by the World Economic Forum, down from 118 in 2013-14 and 94th in 2011-12 (reflecting data collected before the revolution). Access to finance is one of the main barriers to doing business. On the other hand, the size of Egypt’s domestic market is one of its major strengths. Expectedly, Egypt ranks particularly low on the macroeconomic environment index at 141 due to the growing domestic debt (LE1.7 trillion in June 2014, 84% of GDP) and the large budget deficit (14% in FY2012/13 and projected at 12.5% in FY2013/14). Labour market efficiency and financial market development are also among Egypt’s weakest areas; ranking the country at 140th and 125th, respectively.

Inflation remains high. Egypt’s urban consumer inflation increased to 11.5% y/y in August up from a revised figure of 11% in July. However, monthly inflation has slowed at 1.1% in August compared with 3.5% in July when the government increased the prices of petroleum products, electricity and tobacco. But, indirect and second round effects of the July subsidy cuts pose an upside risk to the inflation outlook and the introduction of a value added tax (VAT) in January will create further inflationary pressures. An IMF team is in Cairo to work with the Egyptian authorities on overhauling the sales tax system and converting it to a VAT. The new tax rate has not been disclosed but tax will be imposed on most services for the first time. The draft law will be put for public discussion once it is finalised.

Egypt’s net international reserves increased by $98 million in August to $16.8 billion, still less than 3.5 months of import cover. However, reserves will come under significant pressure over the coming two months as Egypt is due to repay $0.5 billion to Qatar in October and another $2.5 billion in November, the final tranches of debt owed to the Gulf State. To ease pressures from imports of petroleum products, Egypt is negotiating a deal with the UAE to supply Egypt with close to $9 billion worth of petroleum products next year under concessional terms including a one year grace period.

There are signs that capital inflows have started to recover. According to the Central Bank, foreigners have invested $120 million in local Egyptian government debt over the past six weeks. FDI has also started to pick up with FDI rising to $4.7 billion in the first nine months of FY2013/14 compared with $3.6 billion in the comparable period a year before. A number of foreign companies are eyeing the market, including US food manufacturing and cereal maker Kellogg’s, which is competing with two Saudi and Emirati companies to acquire at least 51% of Bisco Misr; one of Egypt’s largest confectionary producers.

Egypt has raised LE27 billion ($3.77bn) in four days to finance the Suez Canal extension project, almost half the target amount. The government has opted to finance the project through issuing investment certificates because they do not grant certificate-holders ownership rights. The five-year certificates, which are tax-exempt and guaranteed by the Ministry of Finance, pay an attractive annual interest of 12%. Only Egyptian individuals and companies can invest in these certificates but there is no limit to the number of certificates an individual or company can purchase. The interest will be initially paid from the proceeds of the canal ($5.3 billion in FY2013/14) but the authorities expect the revenues to rise as traffic passing through the waterway increases and projects established in the area start generating income. The attractive interest has allowed the government to tap into large amounts of capital held by households outside the banking system. Last month, President Sisi launched a mega project which entails creating a 72-km canal parallel to the Suez Canal (involving the digging of 35km and the expansion and deepening of another 37km) as well as developing the Suez Canal region. Digging the new canal and the associated infrastructure are expected to cost LE60 billion ($8.4bn).

Technical problems in Egypt’s national power grid caused many parts of the country to experience a simultaneous blackout in the early hours of 4 September grinding to a halt most state facilities, including the metro, and some hospitals and radio stations. This was a reminder of how serious Egypt’s electricity crisis is. Egypt dropped 14 places to rank 121 out of 144 countries in terms of electricity supply according to the Global Competitiveness Index. In an address to the nation, President Al-Sisi said that electricity production had not been increasing proportionately to meet the increase in consumption, while the distribution network and control stations were not modernised. He estimated investments needed in the power sector at LE130 billion ($18bn). At least 2500MW should be added every year for the next five years at a cost of $12 billion. The government has a plan to double power capacity to 60,000MW over the coming ten years at an estimated investment cost of $35-40 billion. It is not yet clear where investment of this scale would come from. Renewable energy presents a huge opportunity but the government has yet to announce the new feed in tariff to encourage private investment. However, a number of Arab and foreign investors have submitted expressions of interest to invest in Egypt’s renewable energy sector, particularly wind and solar.

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.