The past year has been another challenging 12 months for Egypt, but going into 2014, the outlook is more bullish for a country that still offers attractive long-term fundamentals. One of the reasons that the second-largest economy in the Arab world, with a population of around 85m and a geographical position on major trade routes, has gained so much attention over the past three turbulent years is its global importance.
The year was coloured by unrest, with widespread protests against President Mohammed Morsi followed by his removal and the installation of a new interim government, which subsequently saw additional demonstrations. But towards the end of the year, the economy appeared to have stabilised, and funding packages from Egypt’s Gulf allies have substantially bolstered confidence and brightened the economic outlook.
The government optimistically forecasts 3.5% GDP growth for fiscal year 2013/14, although given the still challenging domestic and international circumstances it is an ambitious target. A Reuters poll of economists found an average expectation of 2.6%, while the IMF projected 2.8% for 2013 in its latest World Economic Outlook, published in October. These figures are fair when compared against the still moribund rates in advanced economies, but they represent sluggish growth for Egypt, which needs a much higher rate of economic expansion to generate meaningful jobs for its young and growing population.
Unemployment officially reached 13.4% in the third quarter of 2013, with 70.8% of the unemployed between the ages of 15 and 29. Labour force participation was 47.7% for those aged 15 and over and 21.9% among women, according to a report from the Central Agency for Public Mobilisation and Statistics, published in November.
Support from abroad
Along with ensuring stability and a smooth process of elections, the government’s overriding priority in 2014 will be to get the economy growing more quickly. In this, it will be greatly helped by funds from Saudi Arabia, Kuwait and the UAE, which in July respectively promised to extend $5bn, $4bn and $3bn to Egypt in cash, low-cost loans, oil and oil products – the $12bn total of the packages is equivalent to 4.4% of GDP.
The cash will be used to pay back $3bn in loans from Qatar but more importantly will bolster fiscal reserves and go towards a large stimulus package worth $8.5bn, the second phase of which is due to be launched in January. Investments in infrastructure as part of the programme should stand Egypt in good stead in the future if they are well-planned and executed. However, there are concerns about the effect of public sector wage rises on inflation, which is nearing 10% year-on-year. There is also a need to accelerate subsidy reforms, such as the new smartcard system for accessing subsidised fuel prices, which will help ensure more targeted benefits, as well as limit smuggling and other fiscal leakage.
Gulf support has played an important role in lifting investor confidence. On December 18, the Egyptian Stock Exchange’s key index hit the highest level since the 2011 revolution, as investors respond to the funding packages, looser monetary policy and an easing of capital restrictions.
Confidence has also been reflected in the decision of ratings agency Standard & Poor’s to upgrade Egypt’s long-term foreign and local currency credit rating to 'B-/B' from 'CCC+/C', with stable outlook, on the basis that Egypt now has enough foreign currency to meet its short-term fiscal and external financing needs.
Mixed outlook across sectors
Even during the difficult months of 2013, progress was made on some major investment projects. In September, German firm RWE Dea launched gas production at the Disouq concession in the Nile Delta. Output was expected to hit 1.4m cu metres per day during the commissioning period, rising to 4.5m cu metres per day by mid-2014, with the bulk of production headed towards addressing local consumption. The additional output will certainly help, although a broader push to increase upstream exploration elsewhere in the country has been constrained by investor unease at the unrest.
One of the sectors most affected has been tourism. Arrivals declined 45% in July and August, following the change in governments, according to Tourism Minister Hisham Zaazou. The aim of attracting 13.5m visitors driving $11bn in revenues in 2014 will be highly dependent on the security situation improving, despite the fact that many resorts on the Red Sea have remained safe over the past three years. The sector is a major earner of foreign exchange and contributed upwards of 10% of GDP prior to the revolution; getting it moving again will be an important step in economic recovery. The country has already seen some encouraging steps, with an easing of travel restrictions in recent weeks from key source markets, which augurs well for a more positive next 12 months.