Download Egypt: growth sustains gradual recovery, led by private sector

Economic Update
29 November 2014
Macroeconomic outlook
> Nemr Kanafani
Senior Economist
+965 2259 5365, [email protected]
Egypt: growth sustains gradual
recovery, led by private sector
Chart 1: GDP
Overview and outlook



(LHS: EGP bn, RHS: % y/y)
Egypt’s economic activity is picking up, with the pace of real growth
3,000
Real growth (%y/y, RHS)
expected to reach 4.0% in FY14/15 and 4.5% in FY15/16.
2,500
An improved political outlook, solid support from GCC allies and a host
2,000
4
of government led investment projects are driving the recovery.
1,500
3
The fiscal deficit remains a key concern; commitment to fiscal reforms
1,000
2
500
1
is essential to avoid a crisis in the medium term.

6
Nominal GDP (EGP bn, LHS)
0
The external position has improved though imbalances continue to
Egypt’s economy is showing every sign that its fragile recovery remains
on track, as it accelerates above average growth of around 2% for the
first time since 2010. A more stable political environment, solid financial
support from GCC allies and improving business confidence underpins the
recovery. The economy is also benefiting from a number of governmentled capital spending initiatives. Various recent data support the recovery
story, including real growth, Markit’s Purchasing Managers’ Index (PMI),
and private credit growth.
The private sector has been a key driver of growth in recent months, with
manufacturing particularly strong. In the months ahead, tourism, which
remains weak, is likely to provide an additional boost as the sector
bounces back from the low levels of the prior year. Meanwhile, the
country’s external position has stabilized thanks to support from Egypt’s
GCC allies and the improving outlook.
Egypt continues to face substantial risks which could threaten the
recovery. Chief among them is the large fiscal deficit which has only
improved in FY13/14 thanks to large donations from key GCC allies. The
authorities now have ample time to address this risk and the government
of Prime Minister Mahlab has shown it is indeed inclined to do so.
Recovery has been picking up pace
Economic growth improved further in recent months. Real GDP growth
accelerated to 6.8% year-on-year (y/y) in 3Q14, with growth for the 12
months ending in September 2014 rising to 3.6%. Other data revealed a
similar pick-up in activity including the Ministry of Planning’s production
FY11/12
FY13/14F
FY15/16F
Chart 2: Real GDP
(% y/y)
7
FY12/13
FY13/14
FT14/15F
FY15/16F
1,753
268
2.1
9.8
-13.6
1,998
286
2.1
8.2
-12.2
2,322
322
4.0
13.5
-10.6
2,651
358
4.5
9.0
-10.0
7
Quarterly
Annual
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
Source: Ministry of Planning, Thomson Reuters Datastream
Chart 3: Purchasing Managers’ Index
(index, seasonally adjusted)
54
54
52
52
50
50
48
48
46
46
44
44
42
42
40
40
38
38
36
Oct-12
Table 1: Key economic indicators
EGP bn
USD bn
% y/y
% y/y
% of GDP
0
FY09/10
Source: Ministry of Planning, NBK estimates
plague the current account.
Nominal GDP
Nominal GDP
Real GDP growth
Inflation
Budget balance
5
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
36
Oct-14
Source: Markit
Source: Central Bank of Egypt, Ministry of Finance, Ministry of Planning, NBK estimates
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2014 NBK
www.nbk.com
index through September and the PMI; the latter stood at 51 in October,
reflecting a cautious expansion is underway.
Chart 4: Consumer price inflation
(% y/y)
14
The economic recovery should see Egypt’s growth register its most rapid
pace in four years, with real GDP growth expected to pick up to 4.0% in
FY14/15. In FY15/16, the pace of growth should accelerate further to
4.5% as the recovery takes hold, but remains below growth rates seen
before 2011.
Private sector has been a key driver of the recovery
The private sector has generally been growing more rapidly than the
public sector during the last two quarters. Real private GDP growth
accelerated to 5.9% y/y in 2Q14 compared to a mere 0.2% y/y for the
public sector. The private sector’s lead in the recovery is a positive sign,
but could also point to possible problems, particularly if public sector
growth remains weak. While the private sector suffered more significantly
under the political uncertainty that followed 2011, the public sector is
likely to be under more pressure today with moves to rationalize and cut
cost. The private sector’s share of GDP declined from 63% in 2010 to 60%
in 2013 before rising again.
Expenditures on investment is growing again
Another sign of the cautious recovery is that aggregate investment is
growing again following a sustained decline since 2011. Investment in
2010 stood at 20% of GDP and by 2013 the level had fallen to 13% of
GDP. Public sector investment took the lead in 2013 but is now being
overtaken by the private sector. Total investment in the 12 months
through 2Q14 grew by 9.7% y/y; private investment growth alone
topped 13% y/y.
Core inflation
12
Tourism remains the main source of weakness in the economy. The
decline in activity was significant during the last year, as the sector was
plagued by security concerns and weak demand from Europe. As a result,
tourist numbers were down by 35% y/y during FY13/14; the number of
tourist nights spent was 49% y/y lower. This has principally been felt in
the restaurant and hotel sector which shrank by 18% y/y in real terms in
2Q14. The numbers have recovered recently though from a very low
base.
The oil and gas sector has also been a drag on overall growth, contracting
by 9% y/y in 2Q14. Most of the decline came from natural gas output;
the sector shrank by 16% y/y in 2Q14. The decrease in gas output is due
to hindrances that have discouraged investment in the sector including
delays in payment of dues to oil and gas companies by the government.
Oil output too has been shrinking, registering a 2% y/y decline in 2Q14.
It will be a while before unemployment returns to pre-2011 levels
Employment levels have also been improving, albeit slowly. By the end
of 2Q14, the unemployment rate declined for the first time in over two
years to 13.3%. The number of jobs added during FY13/14 reached
328,000, more than 3.5 times the figure for all of FY12/13. Still, there is a
long way to go before unemployment returns to the 8.9% level seen
before 2011. With the current labor force, this would require around 1.3
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2014 NBK
12
10
10
8
8
6
6
4
4
2
2
0
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
0
Oct-14
Source: Central Bank of Egypt, Thomson Reuters Datastream
Chart 5: Production index
(% y/y)
40
40
Monthly (%y/y)
35
35
Annual average (%y/y)
30
30
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
-25
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
-25
Sep-14
Source: Ministry of Planning, Thomson Reuters Datastream
Manufacturing has been a key source of growth
Manufacturing has been the main engine of growth over the last year.
The sector, which accounts for around 19% of GDP and includes oil
refining, saw growth accelerate to 22% in 2Q14. Other growing sectors
include real estate services, construction, domestic trade, and
communication.
14
Headline inflation
Chart 6: Tourism
(% y/y)
80
80
Arrivals
Nights
60
60
40
40
20
20
0
0
-20
-20
-40
-40
-60
-60
-80
-80
-100
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
-100
Aug-14
Source: CAPMAS, Thomson Reuters Datastream
Chart 7: Employment
(LHS: thousand; RHS: %)
300
13.5
250
200
13.0
150
100
12.5
50
0
12.0
-50
Employment, net change q/q (LHS, 000)
Unemployment rate (RHS, %)
-100
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
11.5
2Q14
Source: CAPMAS, Thomson Reuters Datastream
www.nbk.com
million new jobs to be created, nearly four times what was created the
12 months ending in June 2014.
Chart 8: Private credit
(% y/y)
25
Credit growth bounces back
Credit growth has also reflected the improved levels of economic activity.
Total claims on the private sector grew by 10.3% y/y in September, up
from 5.5% growth earlier this year. Still, the recovery in corporate activity
remains cautious as revealed by the fact that much of the strength in
credit growth has come from household borrowing. Corporate credit
growth was somewhat more moderate at 6.8% y/y.
25
Corporate
Household
20
Total
20
15
15
10
10
5
5
Fiscal deficit remains high despite narrowing
Though the budget deficit has narrowed slightly over the 12 months
ending August 2014, it remains high and a key risk to the outlook. Egypt’s
12-month trailing deficit stood at 12.6% of GDP at the end of August
2014, down from a peak of 13.6% at the end of FY12/13. However, the
improvement has been largely due to GCC grants which amounted to
$10.6 billion during FY13/14.
Nonetheless, the current government is committed to fiscal reforms, as
revealed by the summer’s fuel price hikes. While further measures are
required to ease the drain on valuable government resources, the impact
of the hikes is already being felt. The subsidies bill fell to 6.2% of GDP,
from a peak of 8.9% in January. The government also plans to take some
steps to boost revenues with measures such as a value-added-tax (VAT)
expected in 1Q15.
Foreign currency bond yields and CDS sustain declines
As a reflection of retreating country risk, Egypt has seen a sustained
decline in its sovereign yields. Yields on USD denominated sovereign debt
due in 2020 and 2040 have fallen to their lowest levels since 2010,
reaching 4.3% and 6.8%, respectively. The country’s credit default swap
(CDS) has also been falling to its lowest level in three years, reaching 266
basis points in November.
Domestic rates have been more stable, declining only slightly since the
Central Bank of Egypt (CBE) lifted policy rates in July in an effort to rein in
inflation. Yields on government bills retreated to around 11.6% in
November, down from 11.9% in July, but remain above their level earlier
in the year.
Inflation up as fuel price hikes hit general prices
Inflation has accelerated since the government raised fuel prices in an
effort to cut government subsidies. The fuel price hikes have been
filtering through to general prices, with y/y inflation rising to 11.8% in
October. We expect inflation to remain elevated in the coming months
and to peak at 13-14% in mid-2015 before easing thereafter. We also
cannot rule out additional increases in regulated prices in the coming
months.
External pressures have receded, though imbalances remain
Egypt’s current account deficit continued to narrow over the 12 months
ending in June 2014. Indeed, the deficit was the smallest since 2008. The
12-month trailing deficit fell to 0.8% of GDP from a 4% peak in 4Q12.
GCC support of around USD 12 billion masked deterioration in other parts
of the current account. Without official transfers, the current account
deficit would have been 5% of GDP.
Tourism and exports have been the key sources hurting the current
account. Egypt’s tourism revenues declined by USD 4.7 billion during
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2014 NBK
0
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
0
Sep-14
Source: Central Bank of Egypt, Thomson Reuters Datastream
Chart 9: Fiscal balance
(% of GDP, 12-month trailing)
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
-12
-14
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
-14
Aug-14
Source: Ministry of Finance, Thomson Reuters Datastream
Chart 10: USD sovereign bond yields
(%)
12
11
12
Matures in April 2020
Matures in April 2040
11
10
10
9
9
8
8
7
7
6
6
5
5
4
Oct-11
May-12
Jan-13
Aug-13
Mar-14
4
Nov-14
Source: Thomson Reuters Datastream
Chart 11: Interest rates
(%, weekly)
12
11
12
Overnight Interbank
3mn t-bill
CBE deposit
CBE lending
11
10
10
9
8
Nov-13
9
Feb-14
May-14
8
Nov-14
Aug-14
Source: Central Bank of Egypt, Thomson Reuters Datastream
www.nbk.com
FY13/14 or 48% y/y. Meanwhile, exports were down by 3.2% in
FY13/14 mostly on a decline in oil exports.
Egypt’s net private transfers, that consist primarily of worker remittances
and usually help buoy the current account, were mostly flat during
FY13/14. Still, at 6.5% of GDP in FY13/14, such transfers remain
substantial and are up compared to pre-2011 levels.
Egypt has not yet seen foreign investment return to levels seen before
2011, though the country’s capital and financial account has improved
notably. Foreign direct investment (FDI) was stable at 1.4% of GDP during
the 12 months ending in June 2014 while net portfolio inflows were
weaker at 0.4% of GDP. Expectations are that foreign investment will
gradually return as the economy returns to health and exchange
restrictions are removed.
Official reserves are stable, supporting the pound
Official reserves held by the CBE have been very stable over the last year
or so. They stood at USD 16.9 billion in October, or 3.5 months of imports.
Official support, capital controls, and a decline in the value of the pound
have helped reduce pressure on reserves. The government is expected to
repay around $2.5 billion in Qatari deposits made during the previous
administration, though this is not likely to pressure reserves as other GCC
allies have already pledged to provide additional funds.
The Egyptian pound (EGP) has appreciated in recent months thanks to a
stronger US dollar. While the currency has been unchanged against the
USD at 7.15 since May, it has gained against other currencies. This has led
to an appreciation in the weighted value of the Egyptian pound as
measured by an EGP index published by JP Morgan. While a stronger
pound should help keep inflation at bay, it can hurt exports and tourism.
Meanwhile, the value of the pound in the black market has been quite
stable, with buyers paying a premium of around 4.8%.
(LHS: USD billion; RHS: % of GDP)
Thousands
A resumption of import growth was also a source of current account
deterioration as imports rose by 3.7% y/y. Import growth had slowed
considerably in 2013 but has picked up and is likely to continue to do so
as the economy recovers. Growth in oil imports was particularly strong at
9.3% y/y. The recent retreat in oil prices should help keep a lid on
growth in oil imports in the coming period and is positive for the
country’s current account.
Chart 12: Balance of payments
6
3
Portfolio investment (LHS)
FDI (LHS)
CA balance (LHS)
CA balance (12mt, % of GDP, RHS)
4
2
2
1
0
0
-2
-1
-4
-2
-6
-3
-8
-4
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
Source: Central Bank of Egypt, Thomson Reuters Datastream
Chart 13: Official reserves
(LHS: USD billion; RHS: months of imports)
4
4
3
3
Change (LHS, USD bn)
Months of imports (RHS)
2
2
1
1
0
0
-1
-1
-2
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
-2
Oct-14
Source: Central Bank of Egypt, Thomson Reuters Datastream
Chart 14: Exchange rate
(LHS: EGP/USD; RHS: index)
5.9
53
EGP/USD (LHS, reverse)
6.0
Nominal effective exch. rate (RHS)
6.1
52
51
6.2
50
6.3
49
6.4
48
6.5
47
6.6
46
6.7
45
6.8
44
6.9
43
Stock market maintained a strong performance
7.0
42
7.1
41
Egypt’s stock market index has more than doubled from its bottom in
June 2013 and has recorded a 40% gain in 2014 year-to-date (ytd)
through October 2014. For dollar investors, the gain in equity prices was
also quite strong at 36% ytd. The performance of the Egyptian bourse has
been among the best in the region, boosted by optimism that the
political situation has stabilized and the economy is recovering. The
market experienced a 12% correction in October followed by a strong
bounce back, alongside regional and world equities.
7.2
Nov-11
Jun-12
Jan-13
Aug-13
Mar-14
40
Nov-14
Source: Thomson Reuters Datastream
Chart 15: Stock exchange
(EGX30)
10000
10000
9000
9000
8000
8000
7000
7000
6000
6000
5000
5000
4000
4000
3000
3000
Nov-10 Jun-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Oct-14
Source: Thomson Reuters Datastream
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2014 NBK
www.nbk.com
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2014 NBK
www.nbk.com