With investor confidence growing, Egypt is looking forward to a sizeable boost to its economic performance in 2015.
A peaceful conclusion to presidential elections in June, along with slowing inflationary pressures, a slew of crucial fiscal reforms and rallies on both the EGX and in the tourism sector, have helped pave the way for reasonably robust expansion over the coming 12 months.
Signs of recovery
Egypt posted growth of 2.2% for the fiscal year ending June 2014, in line with tepid activity following the Islamic-led revolution in 2011. However year-on-year growth rose to a provisional 6.8% in the first quarter of the 2014/15 fiscal year, from 3.7% in the previous quarter. The increase in economic activity is expected to continue, with the IMF and the government forecasting 3.8% growth in this fiscal year.
The outlook has helped sustain the stock market with share prices rallying 32% during the year, making the Egyptian Exchange (EGX) the top Arab stock market in 2014, albeit from a low base.
The encouraging forecast for GDP has also come about from improved budgetary indicators. Moody’s changed its outlook to stable from negative in October, though refrained from upgrading the credit rating, citing still-weak government finances.
The more positive outlook on Egypt is closely connected with, among other things, the government's push to pay back debts owed to international oil and gas companies, an issue that had constrained upstream investment in a crucial revenue-generating industry. Egypt's fuel bill rocketed in the wake of the 2011 revolution due to oil being purchased from IOCs and then sold to its own domestic market at subsidized rates, with the bill hitting nearly $7bn at its peak. By November, the outstanding debt was already down to $4.9bn and the government has assured investors the remaining portion will be repaid within six months, with two additional payments totaling more than $400m being made more recently.
Egypt’s efforts to make good on outstanding oil debts have helped thaw the investment freeze. In early December, BP announced that it planned to invest $12bn over the next five years and to double its gas supplies to the domestic market in the next decade.
Subsidies in check
Another source of relief for the economy is the reduction in huge energy subsidies, the Achilles heel of the economy that has been driving up government deficit and debt, as well as draining foreign currency reserves. Energy subsidies reached LE128bn ($17.9bn) in 2013/14 – representing about 7% of GDP – from a targeted LE99bn and equal to over 22% of the government’s budget, according to the Minister of Petroleum Sherif Ismail speaking in November.
The government took the first substantive step in July to rein in subsidy spending with an across-the-board fuel price hike with energy subsidies slashed by about a third, sending a signal to investors that it is serious about structural reform.
Subsidy cuts are also set to become easier in the coming months, thanks to plummeting global oil prices. With Brent crude trading at 5.5-year lows, Egypt stands to save LE30bn ($4.2bn), or 30% of its fuel subsidy bill originally planned for the 2014/15 fiscal year, provided prices remain at current levels, according to a statement from Ismail at the end of December.
Suez Canal project
Central to the government's plan to kick-start the economy and stimulate growth in labor-intensive sectors – as well as lower the unemployment rate of 13.1% − is an $8bn project to widen and deepen the Suez Canal. The enlarged transit route is part of a development plan for the whole Suez Canal Zone (SCZ), which comprises 75,000 sq km of land on either side of the canal that is earmarked for industry.
The project, launched in August and to be completed in just one year, aims to cut average transit times from 18 to 11 hours while quadrupling traffic. The government estimates the improvements in the canal will more than double annual revenues, which currently stand at more than $5bn.
The Suez project, together with a string of related projects in technology, infrastructure, commerce, tourism and agriculture, is set to improve Egypt’s position as an industrial and logistics center. Egypt is also aiming to attract investments worth $10-$12bn over the next four years at a major economic summit in March in areas such as energy, transport, water, grain storage.
The Minister of Tourism, Hisham Zaazou, has also embarked on an aggressive campaign to revive tourism and expects the sector to return to its pre-revolutionary levels by April 2015. Between July and September, tourism revenues surged 112% year-on-year (y-o-y) to $2bn, while October data showed this upward trend continuing with a 79.5% y-o-y increase in tourist arrivals according to official data. Projections for 2014 put tourism revenues at $7bn, catering to 10m tourists.
Despite challenges on the horizon, such as energy shortages, red tape and a lack of visibility over economic plans tabled by the government, political risks appear to be diminishing. Investors have also been encouraged by the government’s infrastructure stimulus funded by Gulf money that will help stimulate the economy and boost employment.
Oxford Business Group
20 January
