Egypt – Open for business?
Published 22 January 2015
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0.1 This publication was archived on 5 August 2016. This article is no longer current.
0.2 Summary
Egypt has taken some positive steps to stabilise and promote its economy to investors. But high level of unemployment, especially among the young, remains a stubborn challenge. To generate higher growth the Government will need to press ahead with further reforms whilst improving the security situation.
0.3 Detail
2014, a better year…
The economy in 2014 saw some modest improvements. After the hit to tourism and investment following the change of government in summer 2013, the partial rebound has been spurred by massive Gulf support, decreasing street violence and greater predictability in the political situation.. Albeit from a low baseline, FDI rose by 9.7% in 2014 and private investment by 13%. A new set of economic Ministers was appointed, bolstered by teams of UAE-funded international consultants.
…but still a long way to go
Improving growth rates, inflation falling by 3% to 9.1% and marginal falls in unemployment (in part due to major infrastructure spending) are being much lauded but most Egyptians are still to feel any benefit. In a more positive, medium term move, the long-overdue reform has started of the food subsidy regime and other ineffective social protection measures.
Prospects for the short-medium term
Finance Minister Dimian expects that his austerity measures should see the fiscal deficit fall from 14% in 2012/13 to 11% in 2014/15. The fall in global oil prices will be beneficial, cutting as much as 20% of the budgeted subsidy costs. Foreign reserves have remained stable at just under 3 months of import cover ($16bn), despite Egypt repaying some outstanding international dues. These included repayments of $2.5bn to Qatar in Nov, as well as a total of $4bn in arrears, almost half the total, to international oil companies (including BP and BG) late in 2014. Reflecting the positive trend, Fitch increased its rating from B- to B (stable) and the IMF is expected to publish a positive Article IV report this month.
Major headwinds remain
Egypt still relies heavily on rents and external support. The IMF estimates Egypt will need $7-10bn of external financing in the next fiscal year. With so much of its own budget (75%) tied up with subsidies, salaries and debt servicing, there is little left for anything else. Gulf support is shifting to project financing rather than budget support and while some tourists from Europe are coming back, numbers from Russia, the biggest source country, are dwindling. Without a major increase in tax revenues, unlikely in the short term, recourse to the IMF looks likely.
Risks on the horizon include the long hot summer months (including Ramadan) which have seen widespread and lengthy blackouts over the past two years. Combined with inflation, lack of jobs and subsidy cuts, there is a risk of rising level of economic discontent..
0.4 Disclaimer
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