Research and analysis

Egypt: economic update - May

Published 3 June 2014

0.1 Detail

The Egyptian Cabinet endorsed the draft budget for FY2014/15 and referred it to the President for approval.

Spending is projected to increase to LE807 billion ($113bn), up 10% on the current year, as the government honours its constitutional commitment to increase spending on health, education and scientific research, and implement the minimum wage. Revenues are forecast at LE517 billion ($72.4bn), lower than the current fiscal year which saw exceptional inflows of Gulf aid. The new budget does not factor in much foreign assistance, except for $2.4 billion, mainly in petroleum shipments to be delivered by August 2014. The deficit is put at 12% of GDP, provided a series of reforms to restructure energy subsidies and increase tax revenues are implemented. The budget projects a 22% cut in subsidies on petroleum products to create fiscal space to finance the increase in social spending. Petroleum subsidies are forecast to decline to LE104 billion ($27bn) as the authorities take steps to increase prices, introduce smart cards for the distribution of petroleum products and encourage investment in renewable energy. The budget also proposes a number of reforms to increase tax revenues, which currently stand at only 14% of GDP. These include amendments to the income tax law to widen the tax base, introducing a temporary 5% tax on incomes exceeding LE1 million, and closing loopholes that allowed tax evasion.

Economic growth remains sluggish with preliminary figures putting real GDP growth at 1.5% in the third quarter of FY2013/14 (Jan-Mar 2014), compared with 1.4% the previous quarter.

Growth is projected to reach 2% by the end of the financial year in June, rising to 3.2% in FY2014/15. The government continues pumping funds to stimulate growth. By the end of April, the government had disbursed 60% of the LE29.7 billion first stimulus package, with the remainder to be spent by the end of September. UAE-funded projects under the second stimulus project are also underway. Unemployment was almost unchanged in the first quarter of 2014 at 13.4%. Nearly 70% of the unemployed are aged between 15 and 29, and more than 79% hold diplomas or university degrees.

Headline consumer price inflation fell to 8.9% in April y/y from 9.8% in March y/y, partially due to favourable base effect from last year.

Monthly inflation increased by 0.6% in April compared to 0.7% in March 2014, well below the average monthly inflation of 1.04% recorded in the first quarter of 2014. The bulk of the monthly increase was due to increases in the prices of fresh vegetables (up 5.2% m/m) and clothing (up 2.9%). Food inflation remained high at 13.4% y/y.

The Egyptian pound hit a new low after the currency lost 1.3% against the US dollar over the past two weeks.

The fall began after the Central Bank held an exceptional foreign exchange auction where it sold $1.1 billion to banks to finance imports of staple foods. The weighted average price of the pound dropped 0.7% to LE7.095/US$ from LE7.0451/US$ the previous day. The pound has lost 2.8% of its value since the start of the year. Banks trade the dollar at about LE7.16 compared with 7.50 on the black market. Egypt’s net foreign reserves stood at $17.5 billion at the end of April, 3.7 months of import cover.

Headline consumer price inflation fell to 8.9% in April y/y from 9.8% in March y/y, partially due to favourable base effect from last year. Monthly inflation increased by 0.6% in April compared to 0.7% in March 2014, well below the average monthly inflation of 1.04% recorded in the first quarter of 2014. The bulk of the monthly increase was due to increases in the prices of fresh vegetables (up 5.2% m/m) and clothing (up 2.9%). Food inflation remained high at 13.4% y/y.

Egypt will start importing liquefied natural gas (LNG) to address the energy crisis the country is facing.

The state-owned natural gas holding company has signed a deal with Norway’s Hoegh to rent a floating storage and re-gasification unit for 5 years. The unit has a capacity of 500mcf/day and will start operations on 1 September. Meanwhile, the government has reached deals for 12 shipments of LNG, totalling 2 million cubic metres, from Russia’s Gasprom and France’s EDF and is in discussions with Algeria’s Sonatrach over more imports. The authorities are also expected to issue an international tender for the import of LNG for 2 years to cover the decline in gas production, which has fallen to 4.8 billion cubic feet a day versus a demand of 5.5 to 6 billion cubic feet. The shortage in gas and the increase in demand for power generation over the summer have pushed the government to cut gas supplies to energy intensive industries and to increase imports of heavy oil to keep power plants running during the summer.

An appeals court halted all privatisation cases until a decision is made by the Supreme Constitutional Court on the constitutionality of the law preventing third parties from challenging contracts between the government and investors.

The court will look into the case on 2 September. Since the revolution, Egypt has seen a raft of lawsuits filed by lawyers and activists challenging contracts that have been signed under the Mubarak regime. The courts have issued at least 11 rulings annulling privatisations and contracts since 2011.

Egypt’s stock market has put a strong performance since the start of the year.

The benchmark index EGX30 has gained nearly 29% since the beginning of 2014, rising to its highest levels since August 2008. The market has seen a number of acquisitions in the past two weeks.

Fairfax Financial Holdings Ltd, a financial services holding company headquartered in Toronto, has acquired 6.5% of Commercial International Bank (CIB), Egypt’s largest listed private sector bank, from private equity firm Actis, after buying a 2.6% stake in March. An affiliate of US private equity firm Ripplewood Holdings LLC has acquired 2.3% and 10% stakes in Egypt’s second and third largest listed real estate developers ¬– Palm Hills Developments and Six of October Development and Investment, respectively.

Egypt’s banking sector witnessed healthy growth in 2013.

The aggregate assets of banks operating in Egypt (excluding the central bank) rising by nearly 17% in local currency terms to the equivalent of $242 billion in December 2013. Asset quality saw an improvement with the ratio of non-performing loans to total loans falling to 9.1% in December 2013 compared with 9.8% a year before. Loan provisions to non-performing loans stood at 99.7% at end of 2013, compared with 97.1% a year ago. As for liquidity indicators, the loan to deposit ratio stood at 42% at the end of 2013 compared with 48.1% in December 2012.

0.2 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.