Business challenges in the political transition are compounded by global headwinds, including weak oil prices that reduce earning capacity from Suez Canal and Sumed pipeline revenues and a weak recovery in Europe that slows inward investment and tourism flows. In response, policy options have caused further uncertainties at the corporate level.
Policy switchback ride
In mid-March 2016, the Central Bank devalued the EGP by 13% and announced that it will adopt a "more flexible exchange rate" to bolster the country's foreign reserves (see below) and resolve market imbalances. Despite an overvalued EGP the authorities had preferred to use a patchwork of policy measures, including import restrictions. More clarity and transparency of policy is welcome but the new flexibility suggests that further depreciation may be implemented later this year (the exchange rate is now USD1:EGP8.85, compared with the previous rate of USD1:EGP7.73). Moreover, devaluation will increase inflationary pressures (already double-digit levels) at a time when the government is seeking to limit fuel and food subsidy provision and social tensions may increase if countervailing social safety nets are not also increased.
Foreign exchange reserve depletion has stabilised, but FX levels remain fragile
Net international reserves fell sharply from their peak of over USD36bn pre-2011. Currently, they stand at USD16.5bn (February 2016, providing import cover of around three months). However, official foreign currency reserves (excluding gold and SDRs) are currently only USD12.8bn. Recent relative stability in reserves reflects large inflows of aid from the GCC states, including, Saudi Arabia, that pledged USD12bn in loans, grants and oil concessions. In contrast, the domestic economic activities that should be responsible for reserve accumulation (including the tourist sector, associated and other service sectors and the manufacturing industry) remain relatively weak and subject to periodic negative influences, including terrorist attacks. Accordingly, and in the absence of a financial support package from the IMF, Egypt will remain dependent on support from bilateral sources.
Not all bad news
Despite economic headwinds and security concerns, positive developments include: (i) the “New Suez Canal” was officially inaugurated in August 2015 and enables two-way traffic through a new 35-km parallel channel of the existing 190km waterway and (ii) discovery of a “supergiant” offshore gas field, potentially the largest in the Mediterranean.