By Neil Halligan
Egypt has been walking a tightrope since 2011, with two revolutions and continued security concerns testing what was once a stalwart economy. Fed up, Egyptians are again becoming restless as they await the impact of an imminent $12bn loan from the IMF
Egypt appears to be reaching yet another crisis point in its recent turbulent history.
Desperately in need of economic reforms and tough austerity measures, the country looks to be bracing itself for yet another mass protest, if local media reports are true.
It’s a country that’s hasn’t been too far away from turmoil in recent decades. And at the heart of every protest has been social justice for tens of millions of people who quite literally are living close to the breadline on a daily basis.
The Egyptian revolution of 2011 brought an end to the 30-year rule of Hosni Mubarak following the mass uprising over rising poverty and unemployment, as well as government corruption.
His successor Mohamed Morsi, and his Muslim Brotherhood party, barely lasted two years until he was also ousted in 2013, during widespread protests after he presided over a year of power cuts, petrol shortages and economic turmoil.
That revolution was led by the then head of the Egyptian Armed Forces, General Abdel Fattah El Sisi, who promised to solve the country’s economic crisis when he assumed the presidency in 2014.
While some measures have been introduced to stimulate growth in the economy, inflation in the country has reached a seven-year high at 14 percent. Egypt also has a foreign currency shortage and has increased import duties on a wide range of household and luxury goods.
Austerity measures introduced by the government have also proven to be deeply unpopular. These include raising prices by 25 to 40 percent in August, as well as the gradual introduction of a 13 percent value-added tax in the same month.
They are part of the reforms that are deemed necessary in order for Egypt to secure a $12bn International Monetary Fund (IMF) loan, which is looking increasingly likely to be approved. Prime Minister Sherif Ismail announced recently the country had secured 60 percent of the $6bn Egypt requires to secure the three-year loan facility.
While the IMF programme will give structure to Egypt’s economic issues, there are fears that time will not be on El Sisi’s side, with swelling rumours of a repeat of the mass street protests that drove his two immediate predecessors from power.
“The current situation is tense, economically,” Economist Intelligence Unit’s Egypt lead analyst Mohamed Abdelmeguid says. “You have a huge budget deficit and there’s a weak currency [and] a dual exchange rate: an official rate and a black market rate. It’s a difficult situation to be in right now.”
The dual currency exchange rate (vastly different official and unofficial rates for the Egyptian pound against the dollar) is problematic for the central bank, which controls the currency. On October 27, the difference between the official and unofficial rates widened to unprecedented levels, with a dollar selling for almost twice as much on the black market as it costs at the bank. Central to the issue is a foreign currency shortage that has made it difficult for companies based in Egypt to import and for foreign investors to repatriate profits. After nearly two years of capital and import/export controls, some have opted to leave the country.
Many of those that have stayed have looked to the black market for currency, where the mark-up can be almost 40 percent higher, due to the control on dollars at banks.
The IMF deal has signalled the strong possibility of an imminent currency devaluation, with some predicting a sharp cut.
Emirates NBD, in its third-quarter report published recently, says “the biggest question confronting the outlook for the Egyptian economy remains the timing and magnitude of a potential devaluation of the EGP”.
With a budget deficit close to 10 percent of national output, the economy itself is likely to grow 3.5 percent in the 2016-17 fiscal year, the bank says. While the introduction of “some major policy changes” were welcome, including a value-added tax (VAT), Emirates NBD said “given the extent to which ongoing [foreign exchange] restrictions are undermining activity across the private sector and limiting foreign investment, discussions over Egypt’s recovery cannot take place before a devaluation occurs”.
“The economy has certainly seen better days,” admits Emirates NBD senior economist Jean Paul Pigat.
“[There’s a] combination of weak growth, no job creation and high inflation. Combine this with an increasingly weak currency and shortages of imported goods, and it becomes apparent that there are some fundamental problems that need to get addressed.”
Pigat says the IMF programme has the potential to be a major catalyst for Egypt’s economy, not only for the financial boost but because it would anchor government economic policy.
“That is crucial because there are a lot of difficult reforms that need to be pushed through, and an IMF programme will be contingent on those policies getting implemented. Signing onto an IMF programme also sends a good signal to foreign investors that the economy will be heading in the right direction.”
Abdelmeguid says while Egypt’s economy is currently in difficult waters, there are positive signs, with El Sisi appearing to have finally taken hold of the crisis.
“I think what we’re seeing right now is the worst; I think Egypt is bottoming out at the moment,” he says. “The IMF programme is what the country needs right now. The reforms were going to take place with or without the IMF on board. The government has delayed them for a long time but they had to be taken.
“This is what is needed to boost investor confidence. We will see the impact of that over the next two or three years. You should see a return of consumer and investment confidence.”
Abdelmeguid says foreign companies that have entered Egypt will still see the economic potential of a market with 80 million people.
“Foreign investors have said time and again, they don’t regret being there; they see Egypt as a long-term investment, rather than a short-term gain,” he says.
Restoring foreign investor confidence will be helped by the IMF deal, but more measures are required, including the recently drafted investment law that will focus on the diversification of incentives and guarantees for investors.
It’s the second attempt at encouraging investment, following a 2015 law that was aimed at eliminating bureaucracy and easing the procedures to obtain licences for projects.
“The investment law has been on the table for a long time. If there’s one thing that worries me, it’s that the fiscal reforms will not be accompanied by sufficient structural adjustments, meaning business-related reforms that need to be undertaken in order for investors to feel confident when they’re putting their money in Egypt,” Abdelmeguid says.
“This is not first time the government is revisiting the investment law. Around March last year they passed one and it was done in a rush, almost overnight, right before the economic conference that Egypt hosted in Sharm El Sheikh to showcase a whole bunch of large-scale infrastructure projects.”
He adds that there is a worry that reform is again being rushed, which he says could be another blow to investor confidence.
“Is it going to streamline the process, or simplify the bureaucracy? This involves a lot of political will to stand up to the interest groups inside the government who benefit from the bureaucracy and often oppose the reforms that could affect them in any way,” he says.
Tourism, one of the key economic drivers for Egypt, as well as an important source of hard currency, has struggled to rebound since the uprising in 2011. Conditions worsened after the suspected bombing of a Russian plane carrying 224 people from a Red Sea resort in October 2015.
In response to the attack, Russia halted all flights to Egypt and Britain has since suspended flights to Sharm El Sheikh, a resort on the Red Sea.
Egypt’s tourism receipts, as a result, halved in the 2015-16 fiscal year to $3.77bn. They were already well below their 2010 peak.
Further airline incidents since then have done little to improve matters. An EgyptAir flight from Paris to Cairo crashed in May this year, killing 66 people on board. The cause remains unknown. In March, an EgyptAir plane was hijacked by a man wearing a fake suicide belt. While no one was hurt, it raised questions over security.
In addition, Egyptian warplanes fired on a group of picnicking tourists last year, claiming they thought they were militants, killing eight Mexicans and four Egyptians. Tourism Minister Yehia Rashed told media last month he hoped to encourage tourists from new markets like China, Japan and Ukraine, after he insisted that the country has made significant efforts to improve airport security and persuade the world it was safe.
“Security issues are one concern that haven’t gone away,” says Pigat.
“I think there is hope that the worst is over, particularly if Russia ends its ban on flights to the country, and if UK airlines follow suit. [But] I don't think it will be a quick turnaround.
“It affects the broader economy because this is one of the major sectors for hard currency generation.”
While the country’s banking sector has been significantly more resilient ever since the revolt, there are two main risks, Abdelmeguid says.
“One is the exposure to the sovereign debt. The government borrows a lot from the local banks and the government’s financial position is very weak, which means that the banks are also exposed to that. If the government defaults, then it really affects the banks,” he says.
“The other thing is the net foreign asset position of the banks. It’s in a negative position and has been that way for a long time. It’s growing increasingly negative. Can the banks cover all their liabilities at the moment? No they can’t, and that can affect the bank’s balance sheets and confidence in the Egyptian pound.”
Abdelmeguid says the IMF deal will mean the government will be able to borrow less, thereby easing pressure on local banks.
Arab banks also have a relatively strong presence in the country.
“The banking sector has also been doing quite well, despite the economic situation,” Pigat says. “I think this industry has a lot of potential, as only 10 percent of Egyptians have accounts, and areas like mortgage finance are still basically non-existent.”
The one positive sector in Egypt’s economy is construction. When El Sisi came to power he undertook multiple infrastructure projects, including a new administrative and financial capital city.
“Construction is the one thing that is keeping the economy going and providing it with a very good boost. It’s actually the major driver right now,” Abdelmeguid says.
The UAE was due to be involved in a project to build 1 million homes — later scaled back to 100,000 — but developer Arabtec says it still does not know when the project will begin.
“The UAE was interested at the beginning, but because of the government bureaucracy and the disappointing investment law, the UAE started scaling back on its involvement in this project,” Abdelmeguid says.
“It all ties back into the reforms that they’re undertaking now. The structural reforms and the investment-related reforms are what really puts the economy on a sustainable footing and this investment in construction hinges on what the government is going to announce in the next month about investment procedures.”
Pigat agrees, and says the outlook for Egypt, with the new policies in place, remains positive, with infrastructure set to be the next area of growth.
“Ultimately this economy still has a lot of potential, so it is just a matter of getting the policy mix right,” he says. “We’re still looking at a market of over 80 million people that is under-banked, under-housed, and where there are massive needs to upgrade basic infrastructure. So when you take a much longer-term view of the economy, you’re looking at growth areas around sectors like power, transport and housing.
“I can’t stress enough how important it is to start increasing levels of fixed investment across the economy. This is where the real economic growth comes from for emerging markets. We’re talking about investments in the basics, like roads and electricity and airports and communications.”
Abdelmeguid adds that the scarcity in hard currency has pushed the government to act on the reforms that it had delayed for a long time.
“Once the IMF programme begins, there will be pain in the immediate aftermath. When you start floating the currency, prices go up and it eats the purchasing power of the low income consumers. There will be pain in the short term but the boost to investor confidence is what will help the economy get back on sustainable factor,” Abdelmeguid says.
Italian oil major Eni also could plough money into Egypt after it made the largest gas field discovery in the Mediterranean Zohr field in 2015, with an estimated 30 trillion cubic feet of gas. The field is due to come on stream from the end of next year, which will boost production of natural gas to 5 billion cubic feet per day in the 2017-2018 fiscal year.
Egypt’s Oil Ministry is aiming to reverse a trend in recent years that has seen the country become a net importer of oil, squeezed by declining production and increasing consumption. The goal is to achieve energy self-sufficiency by 2020-21.
“The way this provides a boost to hard currency is going to be very positive for Egypt because you start importing less fuel, start saving hard currency,” says Abdelmeguid. “Al Zohr is potentially enough to meet all of Egypt’s energy demands. This could really provide a boost to the economy. It can also provide a cheap gas feedstocks for the industry.”
He says the outlook for the country is brighter than it appears right now.
“There are factors that I think are positive and it will be up to the government to capitalise on those and I think they will. This administration is more serious than its predecessors about reform.”
But there remains a job in convincing the population. That will require more than a billboard campaign and media blitz propagating the benefits of austerity measures.