PricewaterhouseCoopers (PwC), one of the four biggest accounting firms in the world, has acknowledged the turnaround in the economy of Egypt, and the crucial role played by the UAE government in the process.
In its monthly Middle East Economy Watch report, PwC said: “A standout development is Egypt’s economic turnaround, supported by a $35 billion investment from the UAE.
“This has driven key reforms, including currency liberalisation, helping to reduce inflation and unlock international support. Despite ongoing challenges, Egypt’s recovery signals a brighter economic outlook.”
As a result of UAE’s support, Egypt has unlocked additional funding support from multilateral institutions such as the International Monetary Fund (IMF), World Bank and the European Union (EU), and a more positive view from the market, leading to lower government debt yields.
PwC pointed out the UAE’s $35 billion investments in the northern coastal city of Ras El Hekma earlier this year in February – the largest investment in Egypt – as a turning point in its economy.
An Abu Dhabi Developments Holding Company (ADQ) led consortium acquired the rights to develop the 170 million square metres area for $24 billion. Another $11 billion of UAE deposits in Egypt’s central bank was relinquished to allow for investment in projects across Egypt to support its economic growth and development. Egypt’s government has a 35 per cent stake in the development.
UAE President Sheikh Mohamed bin Zayed Al Nahyan visited Egypt last week to formally announce the city’s development plan. The masterplan includes housing for up to two million people, investments of up to $110 billion by the end of 2025 and the creation of 750,000 new jobs.
The challenge of funding
Egypt has relied on external financing for decades due to sizeable budget deficits. The current account has also been in deficit since 2009. Its external debt has risen dramatically, quadrupling between 2015 and 2023, and the cost of debt service has been draining foreign exchange reserves.
The country’s economic turmoil deepened in 2022, triggered by the ongoing war in Ukraine, which caused commodity prices to soar and sharply increased the cost of imported wheat and fuel. This led to a mass exodus of bond investors, who withdrew about $20 billion from the country. The situation in Gaza added to Egypt’s woes, as the currency devalued to almost half.
Egypt agreed to carry out significant economic reforms, including privatising assets to raise capital and foreign exchange, after entering into an Extended Fund Facility with the IMF in December 2022.
UAE’s support
The privatisation agenda had some successes last year, but Egypt only managed to sell a fraction of the 32 assets on its initial list. The largest deals were with the UAE, including $800 million of investments by ADQ in three industrial companies and a $625 million investment in Eastern Tobacco by Global Investment Holding.
The PwC report said the UAE’s decision to invest $35 billion “provided an immediate boost in foreign reserves, public finances and international confidence in Egypt. Moreover, it is envisaged that the development of Ras El Hekma, set to begin next year, is expected to attract as much as $150 billion in investments, including building a new airport and tourist resorts, and in turn create significant employment and revenue for Egypt, as well as for ADQ”.
The report added: “The momentum of the deal enabled Egypt to go ahead and liberalise its currency in March, with the pound immediately dropping by over a third. Significantly the central bank did not then resume its intervention to establish a new de facto peg rate against the dollar, as it had after previous devaluations. This, along with other reforms, was welcomed by the IMF which enabled it to complete the stalled reviews of the Extended Fund Facility and boost the funding arrangement from $3 billion to $8 billion.
Additional funding includes $8 billion from the EU and $6 billion from the World Bank.
This has led to macroeconomic indicators improving with the primary fiscal surplus more than tripling to $18 billion (about 6 per cent of GDP) for the fiscal year that ended in June. Inflation has also declined every month since the deal was announced, and foreign exchange reserves have increased to $46 billion in July, a record level and nearly a third more than in February.
Challenges remain
While this has provided some breathing space and there has been a short-term improvement in various economic and market metrics, Egypt still faces significant long-term challenges, warned PwC.
“Significant challenges remain, including the ongoing disruption to trade through the Suez Canal and persistent challenges with poverty and underemployment,” the report added.
“Even with the rising primary surplus, the interest bill is still nearly 10 per cent of GDP. Although the official unemployment rate has declined, underemployment and poverty levels remain high.
“In the short-term, Houthi attacks on shipping in the Red Sea have diverted traffic away from the Suez Canal, causing traffic and revenue to drop by about half in the first half of 2024.”
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