Download 2015 Quarter 1 EGYPTIAN SNAPSHOT

EGYPTIAN
SNAPSHOT
2015 Quarter 1
Inflation – After slowing in the first half of 2014 (reaching a low of 8.2% y-o-y in June 2014), consumer price inflation surged in July after the government
raised the prices of administered fuels and other energy-related products. Since then, consumer price inflation has remained high: the most recent data from the
Central Bank of Egypt (CBE) shows that it reached 11.5% y-o-y in March 2015. Inflation in regulated items (i.e. subsidised and government-regulated
products) increased to slightly above 25% y-o-y in March.
Growth – Economic growth has been weak since 2011, as high political risk and uncertainty about the country’s economic prospects have led to a sharp
decline in investment. Real GDP growth did however rebound to an estimated 4.2% in the 2014 calendar year. Growth was especially high during the second
half of the year, averaging 5.5% y-o-y, although this was largely due to base effects, following a disastrous second half of 2013. There was a particularly
strong rebound in investment, while both private and government consumption expenditure continued their strong upward trend.
National development plan – Egypt hosted a widely-publicised economic conference over the weekend of March 13 - 15 where the government gathered
thousands of potential investors from around the world in an attempt to lure investment back to Egypt. The government also passed some investor-friendly
measures in the lead-up to the summit. Most notably, it reduced the top income and corporate tax rate from 30% to 22.5%. It also reduced the sales tax on
equipment used for production from 10% to 5% and reduced customs duties on equipment used for production to only 2%. The government also approved a
new investment law that is supposed to reduce red tape and make investment laws less vulnerable to legal disputes.
OPPORTUNITIES
STRENGTHS
Large and growing middle class provides substantial opportunity in the
consumer goods industries.
Natural gas potential is large; production could increase significantly over the
medium term if policies and political climate are attractive.
Immense scope for wind and solar power generation via the Desertec
programme in the Sahara Desert.
The planned mega-projects will provide large-scale opportunities in the
construction sector over the short to medium term.
Well diversified economy that showed very strong growth prior to the
uprising.
Proximity to Europe and the Middle East provides companies with a large
market.
The government has the backing of Saudi Arabia and other Arab countries;
these countries are providing substantial financial support to Egypt.
Well developed, well regulated, and liquid capital markets.
VULNERABILITIES
WHAT IS BEING DONE?
Tourism sector is susceptible to terror attacks. The terror risk remains elevated The army’s counter-terror operations in the Sinai are expected to eventually
as conventional avenues of contestation have effectively been shut down.
reduce the terror threat, but it will take some time.
The government has reduced energy subsidies. However, planned megaPublic debt is very high at above 90% of GDP. The pace at which the
projects will put additional pressure on fiscal finances and we expect the fiscal
government plans to reduce the fiscal deficit is also slow.
deficit to remain wide over the medium term. Therefore, the country will
remain dependent on aid from Gulf Cooperation Council (GCC) countries.
Egypt was one of the best reformers on the World Bank’s Doing Business
Limited economic freedom and challenging business environment.
Index in the five years prior to the uprising, but progress has slowed.
Currency risk is high due to a sharp decline in foreign exchange reserves since Government has secured large amounts of foreign funding from Arab
the start of 2011.
governments to prevent a currency and/or fiscal crisis.
MEGA TRENDS
Population
86,895,099 (July 2014 est.); Age 15 - 64: 62.9%
Population growth rate (%)
1.84% (2014 est.)
Life expectancy at birth
Total population: 73.45 years; male: 70.82 years; female: 76.2 years (2014 est.)
HIV/AIDS
Adult prevalence rate: <0.02%; People living with HIV/AIDS: 7,439 (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 73.8%; male: 82.2%; female: 65.4% (2015 est.)
and write)
Urbanisation
Urban population: 43.0% of total population (2013); Urban population growth: 1.7% (2013)
Population below national poverty line
26.3% (2013 est.)
Unemployment rate
13.4% (2013 est.)
Employment (% of total)
Agriculture: 29.2%; Industry: 23.5%; Services: 47.1% (2011 est.)
Labour participation rate (% of total
population ages 15+)
49.1% (2013)
Business languages
Arabic, English, French
Telephone & Internet users
Main lines in use: 6.82 million; Mobile cellular: 99.7 million; Internet users: 43.07 million (2013)
Sources: CIA World Factbook, World Bank, UNESCO, ITU, UNAIDS, Ahram Online, CAPMAS & NKC Research
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Total
Egypt
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
189
112
Global Competitiveness 2014-15 (1 most, 144 least competitive)
148
119
Economic Freedom 2015 (1 most, 178 least free)
178
124
HDI Ranking 2013 (1 most, 187 least developed)
187
110
0
Source: NKC Research
175
94
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
B-/Stable
B/Stable
B3/Stable
Moody’s Investors Service upgraded Egypt’s sovereign credit rating from “Caa1” with a stable outlook to “B3” with a stable outlook in April 2015. Moody’s
provided three main reasons for the upgrade: improving macroeconomic performance; a reduction in external vulnerabilities; and, ongoing commitment to
fiscal and economic reform. Despite the upgrade, the rating remains constrained by Egypt’s weak fiscal finances, with both the fiscal deficit and public debt
levels still exceeding the median for “B3”-rated countries. In addition, elevated security risk and a challenging business environment also weigh on Egypt’s
rating. Following the upgrade, the rating is equivalent to the “B-” rating afforded by Standard and Poor's (S&P). Specifically, S&P affirmed its long-term
foreign-currency sovereign risk rating on Egypt at “B-” with a stable outlook in November 2014, saying that the country’s political landscape has begun to
stabilise and that the security situation is improving. According to S&P, the recent improvement in political stability has resulted in a mild uptick in economic
growth. It also made note of an international investor conference in March 2015, where a number of projects are set to be unveiled. The agency expects these
projects, combined with the recent sale of hydrocarbon exploration licences and the paying off of arrears to oil companies, to improve Egypt’s economic
prospects. Finally, Fitch Ratings upgraded its long-term foreign currency sovereign credit rating for Egypt by one notch to “B” with a stable outlook in
December 2014. This came on the back of the policy measures implemented by the government in recent months, especially fuel subsidy cuts and tax
increases (although some of these tax increases have been reversed since then). According to S&P, power shortages are also being addressed, oil debts to
foreign oil companies are being repaid, and disputes with foreign investors are being settled. Lower international oil prices will also help to reduce the subsidy
bill, thereby leading to a narrower budget deficit. The rating agency also noted that foreign reserves have stabilised at below three months’ worth of imports
and that it does not expect a significant increase in import cover over the next few years.
Infrastructure
Diversity of
the Economy
Banking
Sector
Continuity
of Economic
Policy
Signs of
Well
improvement
Insufficient for
developed by
Well diversified
under President
large population
African
Abdel Fattah alstandards
Sisi
GDP
Growth
Key
Balances
Foreign
Investment
Large budget
Slow, but
Strong prior to
deficit & current
signs of
uprising; low
account deficits
improvement
currently
since 2008
Market Cap
Socioeconomic
Development
Forex
Reserves
Moderate
Low; foreign
aid/loans needed to
prevent further
decline
Dominant Sector
Daily Trading
Volume
112 million shares
($81m)
Stock Market
Listed Companies
Liquidity
Egyptian Exchange
250: 225 on main market;
25 listed on Nilex
Liquid
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Developed
Liquid
91-day to 20-year
No
Yes
$71.7bn on main market; Telecoms, Construction,
$150m on Nilex
Financials
Macro-economic overview
Real GDP growth rebounded to an estimated 4.2% in the 2014 calendar year. Growth was especially high during the second half of the year, averaging 5.5%
y-o-y, although this was largely due to base effects, following a disastrous second half of 2013. There was a particularly strong rebound in investment, while
both private and government consumption expenditure continued their strong upward trend. On a sectoral basis, the manufacturing, construction,
telecommunications, Suez Canal, and real estate sectors all grew strongly over the first three quarters of 2014. Looking forward, the construction sector is
expected to grow strongly over the short to medium term on the back of the planned mega-projects. However, once the construction phase of these megaprojects is completed, Egypt is expected to struggle to maintain high real GDP growth rates. In our view, the policies of the new government are not enough to
address the structural constraints to economic growth. In particular, macroeconomic risk and microeconomic distortions will remain substantial; high
government financing requirements will continue to crowd out private sector lending; and, export competitiveness will remain poor due to an overvalued
exchange rate and structural constraints such as a challenging business environment, low human capital, and the State’s dominance in many sectors.
The CBE devalued the pound from E£7.15/$ to E£7.63/$ during the second half of January. Despite this, the currency is still considered overvalued. In fact,
the International Monetary Fund (IMF) found evidence that the pound was up to 28% overvalued in October 2014. In turn, this has contributed to the widening
current account deficit and constant pressure on foreign exchange reserves. Since July 2013, though, the country has benefited from billions of dollars of aid
from GCC members, which has ensured that foreign exchange reserves have remained fairly stable despite a large current account deficit and limited foreign
direct investment (FDI) inflows. At the recent economic summit, GCC countries pledged a further $12bn in aid to Egypt, which will boost foreign exchange
reserves significantly in the near term and help to ease macroeconomic risk.
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Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
14.5%
Service/GDP
45.6%
Industry/GDP
39.9%
The Egyptian economy is well diversified; however, the government maintains significant involvement in the economy. Official figures show that the public
sector accounts for almost 40% of GDP. Egypt is almost entirely covered in desert with only 3% of the country’s land surface being arable. Nonetheless,
farming is an important part of the economy, with the sector employing roughly 6.6 million people, or almost 30% of total employment. Egypt recorded strong
real GDP growth during the 2000s – in the last seven fiscal years (FY, July - June) before the uprising, real GDP growth averaged 5.6% p.a. However, this
growth did not generate enough jobs to absorb the growing population into the workforce. Furthermore, growth was accompanied by widening
macroeconomic imbalances as it was mainly driven by consumption rather than investment, and as there was a decline in net exports.
Real GDP Growth & Net FDI/GDP
6.0
4.0
Source: NKC Research
5.0
3.0
4.0
2.0
3.0
1.0
2.0
0.0
1.0
-1.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %, fiscal years) (lhs)
Net FDI/GDP (%, calendar years) (rhs)
The Red Sea resort of Sharm Al-Sheikh hosted the much-anticipated EEDC over the weekend of March 13 - 15. The summit was successful in attracting
investment in the energy and real estate sectors. The energy-related investments, in particular, should provide a significant boost for the Egyptian economy, as
the country has been struggling with power shortages for a number of years, partly because of a drop in natural gas output. In fact, Egypt’s gas production has
declined to such an extent in recent years that the country has gone from being a fairly sizable gas exporter over the 2006-10 period to a net-importer. As a
baseline, we forecast that real GDP growth will average 3.5% in the 2014/15 FY, up from 2.1% in 2013/14. However, this is a conservative projection;
following the strong performance in the first half of the FY (July - December 2014), the government is projecting growth of 4.3% for the FY as a whole. For
the 2015/16 FY, we project real GDP growth of 3.6% on the back of mega-projects and a continued recovery in tourist activity. In the subsequent two FYs, we
project an average growth rate of 3.9% p.a. This is much lower than the government’s target of around 5.8% p.a. In our view, once the construction phase of
the planned mega-projects is completed, Egypt will struggle to maintain high real GDP growth rates unless more structural economic reforms are made.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
Main Imports: % share of total
2016F
Mineral fuels, oils & distillation
products
Machinery
2014E 2015F
2016F
Mineral fuels, oils & distillation products
21.09
14.99
15.69
Machinery
10.13
11.07
10.81
Cereals
7.86
8.26
7.68
Iron & steel
6.42
7.08
6.92
Cereals
Iron & steel
Oil & gas
Main Exports: % share of total
Electrical & electronic equipment
2016F
Oil & gas
40.65
29.84
29.91
Electrical & electronic equipment
4.64
5.49
5.40
Fertilisers
4.15
4.79
4.71
Gold
3.94
4.92
5.08
Fertilisers
Gold
Source: NKC Research
2014E 2015F
0.0
3.0
6.0
9.0
12.0
15.0
Egypt’s trade deficit is estimated to have widened by 27% from $29.3bn in 2013 to $37.2bn in 2014. This was because of a 4.3% drop in exports to $25.4bn
and a 12.1% increase in imports to $62.6bn. Declining oil and gas production contributed significantly to both the decrease in exports and the increase in
imports. Hydrocarbon export earnings (which account for nearly half of Egypt’s total exports) decreased by an estimated 12.3% to $11.5bn, while hydrocarbon
imports increased by 12.7% to $13.6bn. It is unlikely that there will be a rebound in oil and gas production in the short term; therefore, hydrocarbon export
volumes are expected to decline further, while import volumes will increase. As a result, the country is set to start importing liquefied natural gas (LNG) this
year. Although the trade deficit is forecast to remain wide (averaging 11.5% of GDP in 2015-17), the current account deficit is forecast to remain reasonably
narrow (averaging 2.7% of GDP in 2015-17) thanks to foreign aid and remittances from Egyptians working abroad. Tourism revenues are also forecast to
continue recovering on the back of a more stable security situation, and to reach $8.1bn in 2015 and $9bn in 2016.
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Current Account & Budget Balance
(% of GDP)
0.0
-5.0
-1.0
-7.5
-2.0
-10.0
-3.0
-12.5
-4.0
Source: NKC Research
-15.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (%, calendar years) (lhs)
Budget Balance/GDP (%, fiscal years) (rhs)
The fiscal position remains very weak: the country has been recording budget deficits of 10% of GDP or higher over the past four FYs, public debt is above
90% of GDP, and debt interest payments are nearing 40% of total fiscal revenues. In recent years, the central bank has also financed a large share of the fiscal
deficit, which has kept inflation high. Under the presidency of Mr Sisi, however, the government implemented significant fuel subsidy cuts in July 2014 in
order to improve fiscal finances. This, combined with a sharp decline in global oil prices, is expected to result in a 41.6% decline in fuel subsidies this FY –
from the equivalent of 6.3% of GDP to 3.2% of GDP. This is forecast to limit total government spending growth to 6.5% this year. Even so, we still project a
budget deficit of around 11% of GDP due to declines in grants and oil-related revenues. Thanks to the drop in fuel subsidies, however, we now expect the
deficit to move into single digits in the 2015/16 FY.
Average CPI (% change, y-o-y)
13.0
Source: NKC Research
12.0
11.0
10.0
9.0
8.0
7.0
6.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
The central bank’s Monetary Policy Committee (MPC) lowered its policy interest rates by 50 bps at its meeting on 15 January 2015. Although core inflation
has been stable of late (in the region of 7% y-o-y to 8% y-o-y), we do not think there was much scope to loosen monetary policy. By keeping real interest rates
negative, the central bank is putting further pressure on foreign exchange reserves and the currency; it also signals that the authorities are not overly concerned
about inflation. In its recent Article IV Consultations, the IMF also stated that Egypt’s central bank independence needs to improve and that a slowdown in
inflation would be critical to “support competitiveness, protect the poor, and foster [economic] growth”. For now, though, monetary policy remains
accommodative, partly with the aim of keeping borrowing costs for the government down. CBE data also shows that central bank lending to the government
has continued to rise at a rapid rate, reaching E£535.5bn in January 2015 (an increase of 35.3% y-o-y and 4.6 times higher than in January 2011).
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Hatem Montasser – designation is Partner
Tel +20235362211
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
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S33°45.379'
E018°58.015'
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such information or opinions.
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