Egypt’s Economic Turnaround

Courtesy of The Financial Times, a report on Egypt’s economy:

Three years ago, Egypt’s economy was teetering on the abyss, as entrepreneurs scoured the black market for dollars and foreign investors shunned the country. Now it is being hailed as one of the region’s fastest-growing economies, favoured by international bond investors seeking high yields in an increasingly uncertain global environment.

The turnround represents an important success for the authoritarian regime of President Abdel Fattah al-Sisi. His government has been widely criticised by human rights groups for a severe crackdown on freedoms, but investors have praised its implementation of bold and politically sensitive reforms that previous administrations balked at.

The challenge for Mr Sisi, a former general who ousted his elected predecessor in 2013, is to turn the country’s macroeconomic improvements into prosperity for its 100m people. Poverty has been rising, official statistics say, and foreign direct investment is paltry outside the oil and gas sector.

“The best reform story in the Middle East, perhaps in any emerging market,” Ruchir Sharma, Morgan Stanley chief global strategist, wrote this month, referring to Egypt’s economic gains. “Egypt is on track to become a breakout nation,” he concluded in an upbeat note about the country.

With the completion in July of a programme of tough reforms agreed with the IMF under a $12bn loan deal, Egyptian officials boast that they have staved off collapse and set the economy on a more sustainable path. 

Economic growth accelerated to 5.6 per cent in the fiscal year that ended in June, the highest level since 2010. Debt and the budget deficit, though still hefty, have been on a downward trend. The deficit fell to 8.2 per cent of gross domestic product this June down from 12.2 per cent three years ago. 

Even so, economists and businessmen argue that Egypt has to unshackle the private sector if it wants to wean itself off debt and speed up job creation. This requires reforms ranging from cutting the country’s notorious bureaucracy, to improving access to industrial land and reassuring investors about the role and limits of the involvement of the military in the economy.

Under the IMF deal, Cairo pushed through a steep currency devaluation, slashed energy subsidies and imposed a value added tax. Attracted by yields hovering above 17 per cent, foreign debt investors flocked to the country. “Given the scale of the devaluation of the currency in late 2016 they are not afraid of another one imminently creating low currency risk plus high interest rates,” said David Cowan, Africa economist at Citibank. 

But a World Bank report in July warned that “non-oil private sector activity continues to be stifled by a challenging business environment”. It said that future reforms “should put larger emphasis on levelling the playing field to allow for more private sector participation in the economy, based on fair and transparent rules of competition and economic empowerment”.

Mohamed Abou Basha, head of macro analysis at EFG-Hermes, a regional investment bank, said multinationals had shown an appetite for investment in Egypt, but the sums committed are still modest because public consumption has yet to rebound to pre-2016 levels. Inflation, which averaged 21 per cent in the fiscal year to June, had cut deeply into the purchasing power of families, hurting demand. Inflation fell to 8.7 per cent in July, its lowest level in four years.

Official figures also show the impact of the austerity measures on poverty rates. The number of Egyptians who slipped under a poverty line of $1.45 a day rose to 32.5 per cent of the population in 2018, from 27.8 per cent in 2015, according to Egyptian government figures. This translates to more than 4m people added to the ranks of the poor. 

Despite the harshness of the economic measures, there has been no popular backlash because protests are banned and dissent is not tolerated. Even so, the authorities have accepted that economic growth and job creation are their greatest challenges. Egypt has to find employment for 700,000 new labour market entrants every year.

Cairo has insisted that it is committed to improving the atmosphere for the private sector, but diplomats and businessmen voice concerns about the widening involvement of the state in the form of the military and security agencies in the economy. 

A western diplomat, who warned against “confusion and distortion in competition”, pointed to the struggling cement sector, which was already oversupplied before military plants brought in extra capacity last year by launching the largest cement factory in the country.

Since coming to office in 2014, Mr Sisi has turned to the army to revive the faltering economy in the absence of private sector investment since the 2011 revolution that deposed the longtime leader Hosni Mubarak.

The military has also helped preserve social peace by providing cheap food in poor areas where families have been battered by price increases. In recent years they have expanded in sectors including cement, steel, pharmaceutical, fish farming, medical supplies and real estate.

“Companies are confused about what kind of an economy the state wants,” said one local businessman. “Are we going to the Chinese model where state-owned enterprises are big players? The private sector wants clarity. In China, entrepreneurs know that in some sectors you have to partner with the state, and that others are off limits.”

This entry was posted on Saturday, August 31st, 2019 at 6:08 am and is filed under Egypt.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

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