Economic Climate
Notation: Moody’s Caa1 / S&P B- / Fitch B-1
The economic climate since the July 2014 Presidential election looks optimistic. GDP is expected to grow by 3.8% in 2016 and 4.3% the following year, compared to 2.2% in 2014[1]. This continuing growth will be reinforced by prospects of political stability, initiation of the Suez Canal expansion and improved business sentiment resulting from major reforms. Yet economic recovery remains fragile due to:
Growth is being driven by the manufacturing sector, despite energy shortages and changes to the energy-subsidy scheme. The key development challenges facing the government will be: reducing high inflation, bringing down youth unemployment, improving energy management, dealing with a structural fiscal deficit and resolving other public debt issues that have not been successfully tackled despite an increase of the fiscal revenue from a widened tax base and subsidy reforms. Meanwhile, it is imperative to ensure that subsidy reforms do not hurt the lower-income segments of the population but are better targeted to ensure greater social justice.
Challenges at the macroeconomic level are also likely to affect spatial inclusion. Economic and social developments are highly concentrated in Cairo and Alexandria, as well as in the Canal governorates (Ismailia, Port Said and Suez), which are the main business and residential hubs. Rural Upper Egypt, however, is deprived. The government is taking steps to integrate remote areas like the Sinai Peninsula, while promoting investment and poverty alleviation in the Nile Delta and Upper Egypt through projects such as the development of the Golden Triangle in Upper Egypt. Internal migration is low in Egypt and is directed towards the Canal governorates and Cairo. The former are likely to remain attractive for internal migration; however, with the implementation of the Suez Canal Area Development Project, there are likely to be poles of growth around the expansion of existing ports and new industrial zones. In addition to the existing organic clusters mainly in Lower Egypt, the government is aiming at creating new non- organic clusters following the Smart Village model in Cairo.
Notation: Moody’s Caa1 / S&P B- / Fitch B-1
The economic climate since the July 2014 Presidential election looks optimistic. GDP is expected to grow by 3.8% in 2016 and 4.3% the following year, compared to 2.2% in 2014[1]. This continuing growth will be reinforced by prospects of political stability, initiation of the Suez Canal expansion and improved business sentiment resulting from major reforms. Yet economic recovery remains fragile due to:
- High inflation rate estimated at 10.1% 2014
- A budget balance still projected to show a deficit of 11% of GDP in 2015
- The country’s high outstanding public debt to GDP ratio, up to 97% in June 2014 from 94% a year earlier
- A rising unemployment rate reaching 13.3% in 2013 from 9% in June 2010[2]. The economic recovery will depend on continued reform efforts. The parliamentary elections have been delayed but the government is committed to complete this last step of the political roadmap.
Growth is being driven by the manufacturing sector, despite energy shortages and changes to the energy-subsidy scheme. The key development challenges facing the government will be: reducing high inflation, bringing down youth unemployment, improving energy management, dealing with a structural fiscal deficit and resolving other public debt issues that have not been successfully tackled despite an increase of the fiscal revenue from a widened tax base and subsidy reforms. Meanwhile, it is imperative to ensure that subsidy reforms do not hurt the lower-income segments of the population but are better targeted to ensure greater social justice.
Challenges at the macroeconomic level are also likely to affect spatial inclusion. Economic and social developments are highly concentrated in Cairo and Alexandria, as well as in the Canal governorates (Ismailia, Port Said and Suez), which are the main business and residential hubs. Rural Upper Egypt, however, is deprived. The government is taking steps to integrate remote areas like the Sinai Peninsula, while promoting investment and poverty alleviation in the Nile Delta and Upper Egypt through projects such as the development of the Golden Triangle in Upper Egypt. Internal migration is low in Egypt and is directed towards the Canal governorates and Cairo. The former are likely to remain attractive for internal migration; however, with the implementation of the Suez Canal Area Development Project, there are likely to be poles of growth around the expansion of existing ports and new industrial zones. In addition to the existing organic clusters mainly in Lower Egypt, the government is aiming at creating new non- organic clusters following the Smart Village model in Cairo.
source: tradingeconomics.com
Al- Sisi's Plan for Economy and Forecasts:
President Abdel Fattah al-Sisi committed to revive the Egyptian economy, which had been in the doldrums for the past several years, and set it on a path of sustained high growth and low unemployment. To achieve this objective he identified a mixture of populist and traditional free-market policies to address the challenges of massive youth unemployment, high internal and external debt, low foreign exchange reserves, and a serious energy crisis. The three main pillars of the Sisi economic plan were[3]:
The results were somehow here, growth in 2015 rose to 4.2 percent, almost twice the rate of 2.2 percent registered in 2014. However, this increase in the growth rate did not have much of an impact on the unemployment rate which remained close to 13 percent, with youth unemployment still hovering at almost 40 percent. Furthermore, inflation rose to 11 percent from 10 percent in 2014. A bold step was taken to reduce subsidies in 2014 and as a result, in combination with falling world oil prices, the subsidies bill for the government fell sharply from 14.2 percent in 2014 to 11.7 percent in 2015, bringing the overall fiscal deficit down from 13 percent of GDP in 2014 to 11.7 percent in 2015.
The main disappointment in 2015 was in the country’s external accounts. The external current account deficit increased from 0.8 percent in 2014 to 3.7 percent of GDP in 2015. Exports stagnated and workers remittances and tourism receipts did not increase sufficiently to cover the trade account deficit of close to $28 billion. Tourism revenues were on track to reach $7.5 billion, but the downing of the Russian airliner in October prompted the UK, Russia and other countries to suspend flights to Egypt. The number of tourists for the year fell by 6 percent to 9.3 million and tourism revenues reached only $6.1 billion. As a point of comparison, in 2010 the number of tourists reached its highest number historically of 14.7 million bringing in tourism revenues close to $12 billion. Foreign direct investment, which is the best indicator of a country’s economic prospects, rose by $2 billion in 2015 above the $4.1 billion figure in the previous year. This was, however, a far cry from the peak of $13.2 billion inflows in 2008.
There was continuous pressure on foreign exchange reserves of the Central Bank of Egypt throughout the year. Simply to maintain the level of international reserves at a little over $16 billion, the government had to attract substantial external financing. Most of this financing came from the Gulf countries that were fulfilling their commitments made in 2013 and 2014, as well as the pledges they had made at the Economic Development Conference in Sharm al-Sheikh in March 2015. Egypt also tapped the international capital markets in mid-2015 and sold $1.5 billion Eurobonds with a 10-year maturity.
Based on all these indicators, 2016 will not be a breakout year for the Egyptian economy and will most likely turn out to be a mirror image of 2015, and quite possibly worse. It will take time for the megaprojects to yield positive results for energy, employment, and overall growth. The only way to get a quick growth spurt is through a fiscal stimulus. But given the state of the public finances, the government does not have the financing to engage in this policy. Therefore, barring any further domestic or external shocks, Egypt will have to focus on reducing the fiscal deficit by increasing tax revenues and reducing subsidies, encouraging foreign direct investment, and implementing the economic reforms to encourage the private sector to expand and invest. President Sisi recognized that it would take a while to transform the economy and warned that “…maybe a generation or two will not reap the benefits (of reform)”. The turnaround observed in 2015 will need to be maintained in 2016 and beyond, and the Egyptian people will have to be patient.[4]
[1] http://www.tradingeconomics.com/egypt/forecast
[2]World Bank Egypt
[3] Atlantic Council
[4] Mohsin Khan, Nonresident Senior Fellow at the Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa.
President Abdel Fattah al-Sisi committed to revive the Egyptian economy, which had been in the doldrums for the past several years, and set it on a path of sustained high growth and low unemployment. To achieve this objective he identified a mixture of populist and traditional free-market policies to address the challenges of massive youth unemployment, high internal and external debt, low foreign exchange reserves, and a serious energy crisis. The three main pillars of the Sisi economic plan were[3]:
- Reforming the generalized subsidy system and reducing the very high fiscal deficit.
- Launching a number of megaprojects mainly related to energy and infrastructure to spur growth and create employment.
- Generating foreign financing to fill an ongoing large external financing gap.
The results were somehow here, growth in 2015 rose to 4.2 percent, almost twice the rate of 2.2 percent registered in 2014. However, this increase in the growth rate did not have much of an impact on the unemployment rate which remained close to 13 percent, with youth unemployment still hovering at almost 40 percent. Furthermore, inflation rose to 11 percent from 10 percent in 2014. A bold step was taken to reduce subsidies in 2014 and as a result, in combination with falling world oil prices, the subsidies bill for the government fell sharply from 14.2 percent in 2014 to 11.7 percent in 2015, bringing the overall fiscal deficit down from 13 percent of GDP in 2014 to 11.7 percent in 2015.
The main disappointment in 2015 was in the country’s external accounts. The external current account deficit increased from 0.8 percent in 2014 to 3.7 percent of GDP in 2015. Exports stagnated and workers remittances and tourism receipts did not increase sufficiently to cover the trade account deficit of close to $28 billion. Tourism revenues were on track to reach $7.5 billion, but the downing of the Russian airliner in October prompted the UK, Russia and other countries to suspend flights to Egypt. The number of tourists for the year fell by 6 percent to 9.3 million and tourism revenues reached only $6.1 billion. As a point of comparison, in 2010 the number of tourists reached its highest number historically of 14.7 million bringing in tourism revenues close to $12 billion. Foreign direct investment, which is the best indicator of a country’s economic prospects, rose by $2 billion in 2015 above the $4.1 billion figure in the previous year. This was, however, a far cry from the peak of $13.2 billion inflows in 2008.
There was continuous pressure on foreign exchange reserves of the Central Bank of Egypt throughout the year. Simply to maintain the level of international reserves at a little over $16 billion, the government had to attract substantial external financing. Most of this financing came from the Gulf countries that were fulfilling their commitments made in 2013 and 2014, as well as the pledges they had made at the Economic Development Conference in Sharm al-Sheikh in March 2015. Egypt also tapped the international capital markets in mid-2015 and sold $1.5 billion Eurobonds with a 10-year maturity.
Based on all these indicators, 2016 will not be a breakout year for the Egyptian economy and will most likely turn out to be a mirror image of 2015, and quite possibly worse. It will take time for the megaprojects to yield positive results for energy, employment, and overall growth. The only way to get a quick growth spurt is through a fiscal stimulus. But given the state of the public finances, the government does not have the financing to engage in this policy. Therefore, barring any further domestic or external shocks, Egypt will have to focus on reducing the fiscal deficit by increasing tax revenues and reducing subsidies, encouraging foreign direct investment, and implementing the economic reforms to encourage the private sector to expand and invest. President Sisi recognized that it would take a while to transform the economy and warned that “…maybe a generation or two will not reap the benefits (of reform)”. The turnaround observed in 2015 will need to be maintained in 2016 and beyond, and the Egyptian people will have to be patient.[4]
[1] http://www.tradingeconomics.com/egypt/forecast
[2]World Bank Egypt
[3] Atlantic Council
[4] Mohsin Khan, Nonresident Senior Fellow at the Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa.
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DESTINATION
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Economic Complexity
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The economy of Egypt has an Economic Complexity Index (ECI) of -0.127 making it the 71st most complex country. Egypt exports 290 products with revealed comparative advantage (meaning that its share of global exports is larger than what would be expected from the size of its export economy and from the size of a product’s global market).
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