Egypt

Market-friendly reforms, one step further

C2

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD235.369bn (World ranking 44, World Bank 2017)
Population 97.5mn (World ranking 14, World Bank 2017)
Form of state Republic
Head of government Mostafa Kemal Madbouly (PM)
Next elections 2022, presidential
  • Large domestic market (83mn) and a strategic position between Middle Eastern and African markets.
  • Relatively diversified economy. Sources of foreign exchange generation include oil and gas, tourism, Suez Canal revenues, workers’ remittances and a manufacturing base.
  • Financial reforms are implemented along with flexible exchange rate, partial unwinding of capital controls, and subsidies cuts.
  • External debt repayments are made even more comfortable, as the import cover of foreign reserves recovered to pre-crisis levels.
  • Uncertain political transition. In the short-term, stability appears to have improved, but longer-term issues (see below) persist. Elements within society feel marginalised and represent future stability risks in the absence of meaningful progress in relation to inclusivity.
  • Regional uncertainties: relationship with Israel, contagion risk from Syria and Iran’s nuclear programme.
  • Poverty and lack of job prospects, two underlying reasons behind pressures for regime change, have not been tackled effectively.
  • The difficult and protracted political transition has slowed the recovery in economic performance.

Reforming and rebalancing

Egypt entered in a new growth regime in November 2016, along with the implementation of significant reforms. These are aimed at switching from a rigid model with a fixed exchange rate, high subsidies, and capital controls to a more market-based one.

The trigger for this change was low liquidity and the need for financing from the International Monetary Fund. As the Egyptian government accepted the IMF’s conditions, the country made a quick comeback to financial markets.

The short-term cost was heavy, resulting in high inflation (+30% in 2017), but normalized since then. Yet this price shock helped to rebalance the economy by making imports costlier. This ongoing rebalancing is a pre-condition to making the most of the country’s business environment, which is one of the most favorable in the region, but not perceived as it is.

The World Bank Doing Business 2018 survey ranks Egypt 128 out of 190 countries (131 in 2016), below Ghana but above Lebanon and Mozambique. Business concerns include the difficulty to pay taxes, enforce contracts and barriers to trade across borders (including the impact of past capital controls on current transactions). These bottlenecks hide quite good perceptions on other aspects, like the ease of dealing with construction permits and the relative good access to electricity and credit. The cost in resolving bankruptcies is higher than the regional average.

Net short-term impact of economic tectonic shifts is positive

In early November 2016, the government announced the floating of the exchange rate. This put an end to the self-defeating peg to the USD which had sent foreign exchange reserves spiraling to below three months of import cover. As the EGP depreciated by about -50% the black market premium vanished overnight. In 2017 local currency experienced appreciation pressures. A second substantial measure was the large cuts in subsidies. While these were designed to take effect at a gradual pace, they do push prices up.

These measures helped to free an IMF loan package of USD12bn over three years. Egypt successfully returned to the bond market and has been the top African sovereign issuer since then. Foreign exchange reserves recovered to above 8 months of import cover, alleviating liquidity pressures. These developments also helped unwind some capital controls with lower barriers to foreign investment.

Such heavy measures had two impacts. First, by increasing import costs devaluation led to a sudden reduction in import volumes and closed the current account gap. Second, subsidies cuts reduced the country’s massive fiscal deficit (-11% of GDP in 2016, -8% of GDP in 2018).

…but more structural reforms are needed

The main risk to reform implementation is social discontent as a result of high inflation. Unemployment has started to decrease from 12% in 2016 to 10% in 2018, but remains quite high. This risk is intertwinned with security concerns which have weighed on political stability in recent years.

Product market regulation has not particularly improved. Egypt is still lagging in terms of business climate, including difficulty to pay taxes, enforce contracts, and barriers to trade across borders (including the impact of past capital controls on current transactions).

Reforming poor business climate items is not a precondition for genuine growth acceleration, as exchange rate reforms had a positive outcome (+5.2% of growth in 2018 after +4.2% in 2017). However, a better business climate is needed in order to sustain longer-run high growth rates. As the country aims at developing its manufacturing sector, more trade openness would be particularly fruitful. We have calculated that export gains stemming from the future African Continental Free Trade Area should imply +10bn of additional exports over the next decade.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United Arab Emirates 10%
1
13% China
Italy 7%
2
7% Germany
Saudi Arabia 7%
3
5% United States
United States 6%
4
5% Italy
Turkey 6%
5
5% Russian Federation

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 17%
1
8% Petroleum, petroleum products and related materials
Gold, non-monetary (excluding gold ores and concentrates) 11%
2
7% Road vehicles
Vegetables and fruits 11%
3
6% Iron and steel
Articles of apparel & clothing accessories 5%
4
5% Cereals and cereal preparations
Textile yarn and related products 5%
5
5% Gas, natural and manufactured

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Stéphane Colliac

Senior Economist for France and Africa

stephane.colliac@eulerhermes.com

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