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Thu 3 May 2018 03:58 PM

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Egypt is set to reap the rewards of reform

Political stability, falling inflation, the Zohr gas field and increasing tourism numbers all help paint a more positive economic picture

Egypt is set to reap the rewards of reform

The Egyptian economy continues to improve. Real GDP growth has strengthened over the past four consecutive quarters, climbing to 5.3 percent year-on-year in Q2 2017/18, compared to an average of just 3.3 percent over the previous seven years.

The country’s IMF-sponsored reform programme is progressing as planned, and with much of the short-term pain now absorbed, Egypt is set to reap the rewards.

The re-election of President Abdel Fattah El Sisi in March is effectively a mandate for ongoing economic reform, meaning that the authorities will continue to work towards improving the country’s fundamentals and growth levels. Egypt’s GDP data for the past two quarters demonstrates the effect that the IMF reforms since November 2016 have had on the economy already; not only has growth been boosted, but the drivers of growth have changed as well.

A spoonful of medicine

The reforms have been wide-ranging, entailing subsidy cuts, tax hikes and the removal of capital controls, but it was the removal of the Egyptian pound’s peg to the dollar which has had the most marked effect. The sharp sell-off of the currency has boosted exports while curbing imports, and net exports have had a positive effect on Egypt’s real GDP growth over the past two quarters, for the first time since Q3 2013/14.

What the authorities are looking to ensure now is that growth will continue apace, and not only from a rebalancing of the external position but from greater private consumption and investment as well, which will be a more productive growth generator.

Egypt’s reform efforts should aim to enhance the business climate for private sector development”

The Central Bank of Egypt (CBE) has noted in its monetary policy statements that government demand and external rebalancing have driven the growth recovery to date, while private domestic demand has lagged behind.

The fact that the Emirates NBD Egypt Purchasing Managers’ Index (PMI) has remained largely in contractionary territory (just) also suggests that the private sector has not yet started meaningfully contributing to the growth story. This should start to change, as there are a number of positive factors at play in Egypt in 2018. The Purchasing Managers’ data supports this expectation, with new orders, new export orders, and optimism around future output all positive.

Growth drivers

Ongoing political stability after the March elections will encourage increased investment, both domestic and from overseas. Incumbent President Abdel Fattah El Sisi has returned for a second term with 97 percent of the vote on 41 percent turnout.

Falling inflation and an easing of the monetary policy should support greater household spending and private sector expansion – although further subsidy cuts will offset some of this and households will remain under pressure.

The reinstatement of direct flights between Moscow and Cairo bodes well for further easing on flight restrictions to Egypt. This would give the tourism sector a significant boost, further to the strong growth it is already enjoying (tourist arrivals were up 53.6 percent year-on-year in 2017). Tourism minister Rania Al Mashat also announced plans to reform the tourism sector in April in a bid to encourage greater investment.

Renewed energy

The Zohr gas field is helping Egypt’s self-sufficiency

Much of Egypt’s positive economic outlook is built on the development of the Zohr offshore gas field in the Mediterranean, first discovered in 2015. By mid-2019, it is believed it will produce 2.9 billion cubic feet per day.

Claudio Descalzi, CEO of Italian energy giant Eni, said the goal was to reach 1.8 billion cubic feet per day by the end of 2018. Egypt has been seeking to speed up production from the recently discovered fields, with an eye to halting imports by 2019 and achieving self-sufficiency.

Last month, Mubadala Investment Co agreed to pay Eni $934m for 10 percent of Egypt’s Shorouk concession, the Mediterranean area that contains the Zohr gas field.

Inward investment

Ongoing reforms will, it is hoped, also entice greater foreign direct investment (FDI). Ratings agencies Fitch and S&P have both upgraded their outlook for Egypt to positive in the past six months.

Egypt’s major new offshore gas fields like Zohr will bring a number of benefits to the Egyptian economy. Initial production at Zohr will be 350m cubic feet per day, rising to 1bn in June and 2.7bn by the end of next year. This will be bolstered by the North Alexandria and Nooros fields once launched. Plans to make Egypt a regional energy hub are also positive for growth. Petroleum minister Tarek El Molla said in April that Egypt was looking for $10bn of investment into the oil and gas sector in 2018/19, which would mark a 25 percent increase year on year.

With all of that being said, the real challenge will begin beyond the next two years. The “stroke of a pen” reforms have been done, and Egypt is enjoying the fruits of these, but in many ways the harder part of the reform process is yet to come. This will entail a fundamental overhaul of the Egyptian economy and the encouragement of greater private sector participation in key industries.

The IMF has highlighted this as a concern in its reports, stating in its second review that “Egypt’s reform efforts should aim to improve allocation of resources in the economy and enhance the business climate for private sector development”.

Tim Fox, Chief Economist and Head of Research, Emirates NBD

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