Egypt: economy update April 2014
Published 25 April 2014
The IMF expects growth in Egypt in 2014 to be broadly the same as 2013, as political uncertainty continues to weigh on tourism and foreign direct investment, notwithstanding the fiscal stimulus supported by Gulf financing. The IMF, in its World Economic Outlook published this month, put economic growth in 2014 at 2.3% (up from 2.1% in 2013), and expects it to rise to 4.1% in 2015.
The progress Egypt is making in its political transition is encouraging Middle East fund managers to invest in Egyptian equities, according to a Reuters survey. The Presidential Elections Commission announced that Egypt would have a president by the end of June. Elections will be held on 26-27 May with the results announced on 5 June. Run-offs, if needed, will take place on 16-17 June with the results announced on 26 June. Reuters reported that 40% of surveyed managers expected to raise their equity allocations to Egypt over the next three months, while none expect to reduce them. The stock market benchmark EGX30 rallied this year reaching its highest levels since 2008. The market is up 14.5% year-to-date.
In a push to restore confidence in the economy and attract investment in Egyptian equities and government papers, the Central Bank of Egypt (CBE) covered the entire backlog of dollars owed to foreign investors seeking to repatriate funds from the country. The CBE had covered 50% of the backlog on 13 March 2014. The CBE has been holding routine dollar auctions to commercial banks allowing the Egyptian pound to slide slowly. The pound hit a six month low of 6.965 to the US$ in the last auction. Meanwhile, the exchange rate has weakened to 7.42/$ on the black market compared to LE7 in the banking sector. Egypt’s net international reserves inched up slightly to $17.4 billion at the end of March, from $17.3 billion the previous month.
Egypt’s external position improved in the second half of 2013, as the trade deficit narrowed and official grants increased significantly with the inflow of Gulf aid. The balance of payments recorded a surplus of $2 billion compared to a deficit of $552 million in July-Dec 2012. The current account deficit declined to $756 million, compared to a deficit of $4.9 billion as the trade deficit declined to $15.4 billion (from $18.5bn), while official transfers (cash and commodity) increased to $6 billion. On the other hand, tourism revenues fell by 66% to $1.9 billion as tourists avoided travel to Egypt following the increase in violence over the summer. Net FDI amounted to $2.8 billion (from $2.5bn): $1.7 billion investments in oil sector and $1.1 billion in Greenfield investments. The Central bank liabilities to the external world declined significantly as Egypt repaid $3 billion to Qatar in the second half of 2013.
Egypt’s overall budget deficit stood at LE123.6 billion, 6% of GDP in the first eight month of FY2013/14 (Jul-Feb). Finance Minister Hany Dimian had revised up the projected fiscal deficit in FY2013/14 to 12% of GDP, from his predecessor’s target of 10.5%, citing strains on the budget from subsidies and a rising wage bill, despite the inflow of large aid from Gulf countries. In its efforts to increase tax revenues, the cabinet approved an amendment to the property tax law forming valuation committees to assess property values, paving the way for the law to come into effect in July. The authorities also approved measures to combat tax evasion by toughening penalties and making it a felony rather than a misdemeanour. Tax evasion is rampant among segments such as professionals (doctors, engineers, lawyers) where the authorities estimate the tax could bring in LE7 billion compared to only LE333 million now collected.
Egypt continues to suffer daily blackouts which have worsened over the past few weeks as several units of power plants have been out of service due maintenance work and shortage of fuel. The government announced plans to increase the country’s supply of electricity by importing natural gas and fuel oil and the construction of new power plants. About 2,400 MW will be added to the grid this summer. Nonetheless, the government has admitted that blackouts will continue over the summer even with no fuel shortages. A number of foreign companies are looking into the establishment of coal power plants in Egypt following the government’s decision to allow the use of coal as a source of energy for industrial and power generation purposes to mitigate the erratic gas supply. The cabinet has given the green light for companies to use coal while tightening penalties on the failure to adhere environmental standards in all phases of the import, storage, and use. A tax on coal users will also be imposed.
Egypt will start importing liquefied natural gas (LNG) this year as the country is set to receive a floating storage and regasification unit by September. The drop in natural gas production to 5.1bcf/day and the increase in demand has led to a shortfall in supplies to power plants and forced the government to cut its supplies to cement and fertilisers companies. The authorities are negotiating a deal to import LNG shipments this year and plan to launch a tender in 2015. The authorities say Egypt will need to import LNG for three to five years until the country can restore its previous levels of production, which have been affected by the decline in investments over the past three years.
Egypt is expected to begin in June negotiations for a free trade agreement with the Customs Union of Russia, Belarus and Kazakhstan. The decision to resume negotiations was announced during a visit by Egypt’s Trade, Industry and Investment Minister to Russia on 24 March. The talks also covered the establishment of a Russian industrial zone and the modernisation of a number of public sector factories as well as prospects for importing Russian liquefied natural gas.
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