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Resilient economy gains significant traction

Article - February 20, 2016

IMF praise “positive economic developments” as GDP growth rebounds and rating agencies upgrade Egypt’s outlook


Sounds simple, does it not? Investment means growth, growth means development and development means Egypt has the resources to provide its surging population with jobs, housing and essential social services. And that means the Arab world’s most populous country will remain an anchor of political stability in the tumultuous Middle East. Of course, the reality of Egypt is anything but simple, given the complicated nature of the challenges facing President Abdel Fattah El Sisi just over a year into his term of office.

But in just about every instance, the government has implemented a coherent strategy for meeting them.  That willingness to deal with  hard truths and make hard choices in the country’s long-term interests is one reason why ratings agencies like Moody’s upgraded Egyptian bonds from Caa1 to B3  this year, with a “stable” outlook (as did Standard and Poor with its equivalent B-grade).

What did President El Sisi do to deserve a pat on the back? The International Monetary Fund summarised the conclusions it reached following a September 2014 visit by a survey team confirming “there have been positive economic developments since the mission’s last visit” although much still needs to be done.

“Egypt is progressing with a well-structured programme to address macroeconomic imbalances, promote social inclusion, and achieve high, sustainable and diversified growth.”

Hani Qadri Youssef Demian, Minister of Finance

“Some of the pledges made at the Egypt Economic Development Conference in March are already in the implementation phase,” the report acknowledged. “In August, the parallel Suez Canal was opened after just one year of work; and a major gas find in Egyptian waters bodes well for the country’s outlook in the medium term.

Macroeconomic figures also point to some improvement, with growth rebounding to 4.2 per cent in 2014/15, and inflation has declined.”

The IMF analysts go on to acknowledge that “Financial soundness indicators point to the continued resilience of the banking sector, and the authorities are making efforts to deepen financial inclusion. The authorities succeeded in significantly reducing the underlying budget deficit despite a decline in foreign grants, thanks to a wide-ranging set of reforms including energy subsidy reforms, and progress in containing the wage bill and increasing tax revenues. The government’s plan is designed to balance fiscal consolidation with increased spending on social programmes and infrastructure investment.”

Finance Minister Hani Qadri Youssef Demian couldn’t agree more with the IMF assessment. “Egypt is progressing with a home-grown, well-structured programme to address macroeconomic imbalances, promote social inclusion priorities, and achieve high, sustainable and well-diversified growth,” he says. “Increased investor confidence enabled Egypt to successfully return to the international bond markets last June through a 10-year $1.5bn bond issue that was three times oversubscribed.

“Going forward, I expect Egypt’s ratings to continue to improve,” adds the minister, “as the government proceeds with the implementation of further reforms in order to hit its announced targets of raising growth to 6 per cent and bringing the deficit and debt down to 8.5 per cent and 85 per cent of GDP, respectively, over the coming four years.”

Obstacles remain, and many are formidable. Perhaps the most intractable are a result of the government’s own tight monetary policy. The Egyptian pound is overvalued and seems likely to stay that way in a bid to keep inflation at a manageable level. Currency controls act as a chokehold on the economy. As a result, foreign currency reserves dried up fast over the summer of 2015 and at one point there was only enough in the kitty to cover three months of imports.

The trouble is that Egypt has a high amount of liquidity with nowhere in particular where it can be put to good use.  Banks employ that excess to acquire short-term government debt, exacerbating the deficit. As a result Egypt has a public debt to GDP ratio that is expected to end the current year at 94.5 per cent. Another complication is that low oil prices have impacted the flow of investment and aid from Gulf Cooperation Council countries.

“Large-scale, state-run projects will modernise the economy, increase employment and provide vital infrastructure and services,” President El Sisi maintains. He has good reason to think so after the success of his New Suez Canal project, from which revenues are expected to triple by 2032. Other such projects include the $140 billion development corridor on the western side of the Nile extending 1200 km from the Mediterranean to the Sudanese border. It is to be structured along a combination eight-lane highway and rail axis seeded with affordable housing for two million people constructed around industrial and service-based “development nodes”.

Mr Demian assures that none of these mega-projects will be a budget breaker. “In line with the government’s policy of fiscal consolidation, the government is clear that the budget will not be the main source of financing for the national mega projects. Public funding will be relatively limited within the context of the medium-term fiscal consolidation targets.”

“The idea of all these reforms was and is to make Egypt more of an attractive platform for FDI and to increase the ease of doing business here, which is critical.” 

Karim Awad, CEO, EFG Hermes

Planning Minister  Dr Ashraf El-Araby clarifies that “We need to focus on the megaprojects of course, but also promote the smaller projects for SMEs which are equally important to the country’s sustainable development. This is why we launched a new initiative called “Ayadi” with a venture capital of $1.5bn whose main goal is to support initiatives with good potential. We expect this initiative to have a great impact in local development in different governorates and generate job opportunity.”

The banks too, of course, play an integral part in financing projects and stimulating SMEs - none more so than the National Bank of Egypt (NBE). “As the leading syndicating bank, we play a major role in large projects, in bringing in other banks as one team,” says chairman, Hisham Okasha. “At the same time, we have a very important role in financing SMEs. And that is the major part. We are very proud that our growth in SMEs has grown from EGP 3.5 billion (£283 million) up to EGP 16 billion Egyptian pounds in six years. That is a huge growth. That is very important for two reasons: servicing major projects and absorbing part of unemployment.”

As  Mr Okasha suggests, it is only through creating jobs and greater economic inclusiveness which will see the country sprint ahead with its economic recovery. Egypt is at the photo finish of its race with South Africa as they contend for Africa’s highest GDP, around 315 billion in dollar terms. In the wake of the Economic Development Conference, Foreign Direct Investment (FDI) climbed to $5.7 billion from the previous year’s $3.1 billion. Revenues from tourism were up 27% between January and September, as confidence in Egypt’s political stability and security situation returned.

“The really important thing is that for the first time we have a unified plan rather than several independent ones,” concludes  Dr El-Araby. “We have identified specific targets for each and every one of the pillars and this will help us to follow up on each one, both individually and the whole plan. And of course, the goal is to align these pillars with the United Nations sustainable development goals."