Slow Growth in Egypt Until Structural Adjustment Bears Fruit


Wednesday, July 05, 2017 12:55 PM / BMI

BMI View: Egypt will see only lacklustre real GDP growth in 2017 and 2018 as it undergoes a difficult structural adjustment. Rising investment will not be sufficient to offset the negative impact of high inflation on private consumption.

We forecast sluggish real GDP growth of 2.8% in Egypt in the current fiscal year (ending June 2017), as the impact of major structural reforms hit private and government consumption.

Growth will increase moderately in 2018, but with further reforms likely to keep consumption subdued, we expect that it will remain weak even as private investment enjoys significant gains.

Thereafter we anticipate that headline growth will accelerate, rising to 4.1% in 2019 and 4.2% in 2020, as declining inflation enables a recovery in private consumption, and ongoing investment and reforms begin to bear fruit.

However, the expansion will remain off pre-2011 levels over the course of our 10-year forecast period as security concerns and poor logistics will continue to exert a dampener on growth.

Painful Economic Adjustments Will Curtail Private Consumption

The Egyptian government has so far ploughed ahead with the reforms stipulated under the IMF programme, and we expect that it will continue to move ahead with painful structural adjustments over the months ahead.

The emergency powers introduced by the government following a series of Islamist terror attacks in April will help it quell any protests over the deterioration in living conditions prompted by the reforms (see 'Emergency Powers Will Help Push Through Reforms', April 27).

The IMF arrived in Egypt to conduct its first review of the programme so far on April 30, and we believe that given the strong progress made so far the country will be passed, meaning that the IMF will release the second tranche – worth USD1.25bn – of the USD12bn loan agreed with the Fund in May or June.

As a part of the deal, Egypt has removed a host of subsidies on food and fuel, introduced a value added tax and allowed its currency to float, all of which have resulted in inflation skyrocketing to 30.9% y-o-y in April.

Although we think that inflation has now peaked, with further cuts to food subsidies expected later in the year, it will remain well within double digits; we forecast an average inflation rate of 23.6% over the year, falling to 15.5% in December.

This will keep private consumption severely constrained, and businesses will also struggle with greater input costs for the next several months; NBD Emirates' purchasing managers index (PMI) for Egypt has remained well below the expansionary 50 benchmark level in the wake of the devaluation.

Government consumption will also be fairly weak as efforts are made to shrink the fiscal deficit (see 'Structural Adjustment Will See Borrowing Costs Fall', April 3).Ordinarily, currency weakness could be expected to boost goods and services exports, but structural issues in the manufacturing sector (mainly relating to electricity supply) and security concerns that will keep tourist numbers low, will prevent the country's trade dynamics from substantially improving.

Investment Rebound Will Make Current Pain Worthwhile

While consumption levels will remain weak over the next couple of years, we see a far more positive story emerging in the wake of the structural adjustments taking place in Egypt.

Investor interest in the country is picking up, and we believe sentiment is far more positive than at any time since the 2011 revolution.

A new investment law is scheduled for May which will reassure foreign firms looking to enter Egypt, and according to the central bank, the financial sector has attracted USD19.2bn of inflows since the float took place in November.

Efforts at import substitution have also picked up pace since the devaluation and this will further support headline GDP growth.

Mars Inc is pushing ahead with efforts to increase local packaging, looking to boost it from the current 70% to 100% by 2018, while juice producer Juhayna Food Industries now uses exclusively Egyptian fruit in its mango juice, compared to 50% prior to the devaluation.

Mars is also looking to increase the proportion of its Egyptian-manufactured goods it exports and other companies will also be looking to use the currency devaluation to their advantage.

As the negative impact of the structural adjustment on the Egyptian consumer fades, the positives for trade and investment will see real GDP growth strengthen from 2019 onwards.

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