EGYPT ECONOMIC
DEVELOPMENTS & OUTLOOK:
CAN EGYPT SEIZE THE MOMENT ?
APRIL 20, 2015
Ahmed Kouchouk, Senior Economist
Sara Al-Nashar, Economist
1
Macro Fiscal Management – Cairo office
Outline
1) Egypt’s Latest Economic Developments 3-11
2) Egypt’s Latest Social Developments 12-16
3) Egypt Economic Conference; polices and measures 17-18
4) Economic Outlook 19-20
5) Key Risks 21
2
Latest Economic Developments: Relatively strong
rebound, driven by consumption and investments
Growth reached 5.6% in first half of FY15 compared to 1.2% in the first half of last year
The pick-up in growth reflects: resilient private consumption and higher investments (private & public) for four quarter in a row, however net exports continue to be a drag
However, the trend of quarter-to-quarter improvement in growth that started in Q1-FY14 was reversed in Q2-FY15. Strong growth will need to be maintained in Q3 and Q4 in order to achieve healthy growth for the whole year.
-15%
-10%
-5%
0%
5%
10%
15%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
Contributions to GDP Growth
Private Consumption Public Consumption Investments Net Exports GDP Growth
1
3
Source: Ministry of Planning
Latest Economic Developments: The ongoing
economic recovery is broad-based
Growth has been broad based;
manufacturing & tourism sectors
contributed two third of growth
Other improving sectors are:
agriculture, construction, trade,
transportation, and Suez canal
Extractive industries continue to
be a major drag on growth
General Government is slowing
down as well as ITC 2.65%
1.22%
0.47%
0.43%
0.41%
0.36%
0.18%
0.14%
0.14%
0.11%
0.10% -0.98%
-1.5% -0.5% 0.5% 1.5% 2.5%
Manufacturing
Restaurants and Hotels
Agriculture & Fishery
Construction & Building
Whole sale and Trade
General Government
Transportation and Storage
Suez canal
Communication & Information
Social Insurance
Real Estate Activities
Extractive Industries
Contribution to Growth (in %-pts)
FY 15 - H1 FY 14 FY 11-13
1
4
Source: Ministry of Planning
Latest Economic Developments: Unemployment is
starting to slowly inch down, yet it remains elevated
Unemployment is starting to
decline but remains elevated
compared to 2010 levels
With recent measures aiming
to control/limit public sector
hiring, the private sector has
to led employment
generation
Challenge: can the private
sector fill the gap and create
adequate formal jobs ?
8.90%
13.41%
12.90%
8%
9%
10%
11%
12%
13%
14%
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2
FY10 FY11 FY12 FY13 FY14 FY15
Unemployment Rate (%)
1
5
Source: CAPMAS
Latest Economic Developments: Inflation remains
persistently high
After a short-lived period of declining prices in H1 of 2014, annual inflation started to
pick up in FY 2014/15 and remains in double digits
Recently the higher inflation reflects : weaker pound (starting Feb. 2015), pick-up in price of butane cylinders (supply shortages), and higher prices of cigarettes and tobacco
Food prices are quite volatile but remain in single digits (due to favorable external conditions)
0
5
10
15
20
25
Annual Headline and Food Inflation (%)
Headline CPI Inflation Food & Beverage Inflation
1
6
Source: CAPMAS
Latest Economic Developments: The fiscal situation
slightly tightens, yet the outlook remains worrisome
The deteriorated fiscal
aggregates in July-Feb. 2014/15
is worrisome
Cautious when analyzing fiscal
outturns? Do not yet reflect
petroleum settlement & impact of
a number of enacted tax reforms
Investments grew by 31% (y-o-y),
key social spending items
escalated
Key tax items recorded strong
performance (sign of improved
economic activities)
6.2%
1.4%
9.0% 8.0%
3.5%
8.4%
0%
2%
4%
6%
8%
10%
Overall Deficit Primary Deficit Structural Deficit(Excludes one off
receipts andPayments)
In % of GDP July-Feb 2013/14 July-Feb 2014/15
EGP Millions
July-Feb
2013/14 July-Feb
2014/15 Annual %
change
Total Expenditures 373,316 385,157 3.2%
Wages and salaries 108,237 125,243 15.7%
Purchase of goods and services 14,047 16,159 15.0%
Interest Payments 95,379 105,877 11.0%
Subsidies, Grants & Social benefits 109,373 78,212 -28.5%
GASC (Food) 14,211 17,799 25.2%
Payment to pension Funds 21,900 24,909 13.7%
Social pension 3,315 4,452 34.3%
Other expenditures 23,800 30,149 26.7%
Investments 22,480 29,519 31.3%
1
7
Source: Ministry of Finance
Latest Economic Developments: Driven by lower grants, revenues
are underperforming despite green shoots in certain tax categories
Revenues Developments (EGP Millions, unless otherwise stated)
July-Feb
2013/14 July-Feb
2014/15 Annual percent
change
Total revenues 254224 208078 -18.2%
Taxes 148758 149780 0.7%
Taxes on wages and salaries (from employment) 14249 16552 16.2%
Taxes on incomes from industrial and commercial activities as well as
professionals income 3170 4560 43.8%
Taxes from CBE 2542 4003 57.5%
Taxes from Suez Canal 7100 7700 8.5%
Taxes from companies 10958 16462 50.2%
Taxes on securities interest payments 10480 10681 1.9%
Taxes and fees on cars 1398 1818 30.0%
GST on domestic goods 9431 11504 22.0%
GST on imported goods 17119 22356 30.6%
GST on services 5773 7450 29.0%
Excises on domestic commodities 15838 24038 51.8%
Taxes on valued customs 10599 11865 11.9%
Grants 51360 7874 -84.7%
Other Revenues 54105 50424 -6.8%
1
8
Source: Ministry of Finance
Latest Economic Developments: Early signals that the
banking sector is resuming its lending to non-gov. sectors
Banks are channeling additional credit to the private and households sectors, signaling improved confidence, slightly lower interest rates, and pick-up in credit demand by firms to resume their CAPEX and expansions
However, lending to government remains highly elevated (growing at double pace of private sector) due to high deficit and borrowing needs.
14.2%
30.1%
0%
10%
20%
30%
40%
50%
60%
Jan.
Feb
.M
arc
hA
pril
May
June
July
Aug
.Sep
.O
ct.
Nov.
Dec.
Jan.
Feb
.M
arc
hA
pril
May
June
July
Aug
.Sep
.O
ct.
Nov.
Dec.
Jan.
Feb
.M
arc
hA
pril
May
June
July
Aug
.Sep
.O
ct.
Nov.
Dec.
Jan.
Feb
.M
arc
hA
pril
May
June
July
Aug
.Sep
.O
ct.
Nov.
Dec.
Jan.
Feb
.
2011 2012 2013 2014Credit to the private sector Credit to the government
1
9
Source: Central Bank of Egypt
Latest Economic Developments: Limited availability
of forex through banks is a key concern
NIR stabilized at $16.8 bn.
during July-Oct 2014, before
dropping to $15.3 bn. by end-
Mar. 2015
Why the drop in NIR?
exceptional repayments of
Qatari deposits/bonds worth
$3.2 bn., and partial
repayment of oil arrears of
more than $2.8 bn.
The official exchange rate
depreciated in Feb. 2015 after
stabilizing for 7 months. It
reached LE 7.63/US$ in official
and parallel markets
1
0
5
10
15
20
25
30
35
40
5
5.5
6
6.5
7
7.5
8
Ja
n-1
1M
ar-
11
Ma
y-1
1Ju
l-1
1S
ep
-11
No
v-1
1Ja
n-1
2M
ar-
12
Ma
y-1
2Ju
l-1
2S
ep
-12
No
v-1
2Ja
n-1
3M
ar-
13
Ma
y-1
3Ju
l-1
3S
ep
-13
No
v-1
3Ja
n-1
4M
ar-
14
Ma
y-1
4Ju
l-1
4S
ep
-14
No
v-1
4Ja
n-1
5M
ar-
15
in B
illi
on
US
$
LE
/US
$
Exchange Rate (left axis) NIR (right axis)
10
Source: Central Bank of Egypt
Latest Economic Developments: External accounts
display mixed signals
BOP recorded US$1 billion deficit due to deteriorated current account and lower capital
account receipts (lower exceptional receipts)
Oil trade balance deteriorated, non oil imports widened (remain depressed and backlog
exists), exports were sluggish, and portfolio inflows did not resume yet
On the positive side: remittances inflows are resilient, tourism receipts are rebounding (albeit
from low depressed levels), and FDIs inflows are picking up
Exceptional Developments: Egypt paid Qatar $3.2 bn. due debt and oil companies $2.8 bn.
of arrears and in return received some $2.5 bn. of Gulf grants
1
-20000
-15000
-10000
-5000
0
5000
10000
Oil TradeBalance
Non Oil TradeBalance
Gulf grants(cash and
commodity)
FDI Tourist Recipts Remittances
USD
Millions
July-Dec 2013 July-Dec 2014
11
Source: Central Bank of Egypt
Latest Social Developments: High poverty rates,
with regional disparities.
Social indicators in Egypt point to dismal conditions:
- High Poverty Rates (Latest official estimate by CAPMAS 26.3%; with poverty
rates reaching 50% in rural Upper Egypt)
- Inequality is not very high (Gini of 0.30). However, this mainly reflects the
dampened welfare of the highest income brackets, rather than improved
prosperity amongst the less privileged
- More recent poverty data are not yet available, however following are the
upside/downside factors to the poverty outlook
2
Note: Figures here are based on CAPMAS data for FY13; not necessarily comparable to previous
years’ estimates.
12
Latest Social Developments: High poverty rates,
with regional disparities.
2
Upside Factors:
- Recent economic uptick.
- Contained international prices (in light
of lower international oil and grain
prices)
- Populous measures (min. wage, special
cadre.)
- Constitutional stipulations that
mandate an increase of health and
education allocations.
Downside Factors:
- Gradually streamlining energy subsidies
(direct and indirect impact)
- Tax reforms may translate into higher
consumer prices
- Prolonged instability in the region, and
lower international oil prices may mean
loss of remittances
- If labor market conditions did not improve,
high unemployment and poor job quality
may lead to rising poverty.
13
Latest Social Developments: Zooming into
unemployment developments
The Male-Female difference
remains above 15 percentage
points
Unemployment rates indeed
started to decline, but this was
partially explained by “drop-
outs” from the labor force,
primarily amongst men.
(Male LFP 4%-points
between Q2-FY11 and Q2-
FY15).
2
49.2% 47.0%
0%
20%
40%
60%
80%
Oct-DecFY11
Oct-DecFY12
Oct-DecFY13
Oct-DecFY14
Oct-DecFY15
Labor Force Participation (% of population)
Male LFP Female LFP LFP
0%
5%
10%
15%
20%
25%
30%
Oct-DecFY11
Oct-DecFY12
Oct-DecFY13
Oct-DecFY14
Oct-DecFY15
Unemployment (% of labor force)
Male Female Unemployment, total
Source: CAPMAS
14
Latest Social Developments: Well targeted cash
transfer programs are finally starting to roll out
The government, with the Bank’s support, is launching a new conditional and
unconditional cash transfer programs (Takaful and Karmah). The Government plans to
roll out the Takaful and Karama program in three phases, covering in total 1.5m
families/beneficiaries by end 2017
Phase-1 will cover 500,000 families in 2015 in the poorest 19 districts in 6 upper
Egypt governorates (with poverty rate of 60% or above) as determined according
to the poverty map using 2012/13 HIECS. A Proxy Means Testing (PMT) will be
applied to all applicants
Conditionality under the Takaful program will comprise semi-annual health growth
monitoring of children under 5 and participation in health/nutrition awareness
events for families with children under 6; and 80% school attendance for families
with children aged 6-18
2
15
Latest Social Developments: Reforming food subsidies to
reduce leakages and enhance consumer choice
Old Ration System:
The government subsidized
commodities
Each citizen was allowed a specific
monthly quantity of subsidized basic
food commodities (cooking oil,
sugar, rice, Macaroni).
Outcomes: This has led to poor quality
products and opened doors for black
market
2
New Subsidy System:
The government moved from subsidizing
commodities to an allowance based
system
Each citizen is entitled to a monthly
allowance of EGP15, and is free to buy
any product from a basket of 20 food
commodities. The plan is to enhance the
list to include 40 products by end of
2015
There are tremendous leakages from the food subsidy system, estimated at 29
percent prior recent reform process (73% of non-poor Egyptian households have
access to food ration cards.)
Nevertheless, food subsidies are key to protecting the poor. (It is estimated that
removing food subsidies would increase the national poverty rate by 9%-points
16
Egypt Economic Conference: Recently announced tax
measures to support a more conducive business environment
Tax Measures:
1. Reduced and unified highest income tax rate on individuals and corporates at 22.5% down from 25% and 30% for individuals and corporates respectively
2. Intend to maintain the new tax rates for the coming 10 years; to ensure stability after 4 years of frequent changes.
3. Apply the new tax rate uniformly on all activities and establishments in Egypt (including economic zones)
3
22.5%
30.0%
10%
15%
20%
25%
30%
35%
40%
Highest Corporate tax rate (Egypt vs. Peers)
Source: Egypt Ministry of Finance and KPMG-2014 report
17
Egypt Economic Conference: Other recent measures by the
government to create a more conducive business environment
Investment Promotion: a new investment law was ratified in March
2015 with the following key features:
1. The General Authority for Investments (GAFI) is authorized -in certain sectors
and activities- to go through all the procedures and to obtain all needed
licenses on behalf of the investor
2. A new legal framework for dispute resolution was introduced that sets
standard and clear procedures for addressing future disputes
3. Sales tax on capital goods and machinery was cut down from 10% to 5%, and
also process of refunding taxes paid on inputs and capital goods was simplified
and speed up
3
18
Egypt Economic Outlook: Indicators are likely to
improve, yet the high fiscal imbalances remain worrying
19
Economic Outlook
Real growth is expected to pick up to reach 4.3 % in FY15, 4.7% in FY16, and 5.2% in FY18; growth can pick higher if foreign investment strengthened
Prices projected to remain at high single digits (mixed forces: price adjustments and demand pull factors vs. proactive monetary policy & lower bottlenecks)
Overall deficit would remain high despite following a gradual declining path over the MT to reach 9.4% of GDP in FY18
Higher BoP. surplus, yet the current account would remain in deficit due to widening trade deficit
Challenges
Steadfast reform implementation and building efficient SSNs
Availability of the currency
High financing needs on the fiscal sides as economic conference produced good results for external financing tide to projects, and some support for reserves build up at the Central Bank but no budget support.
4
Egypt Economic Outlook: Indicators are likely to
improve, yet the high fiscal imbalance remain worrying
4
1.8 2.2 2.1 2.2
4.3 4.7 5.0
5.2
1.0
2.0
3.0
4.0
5.0
6.0
2011 2012 2013 2014 2015 2016 2017 2018
Real GDP growth rate (y/y)
10.7
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
2011 2012 2013 2014 2015 2016 2017 2018
Unemployment Rate (%)
1.0 1.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2011 2012 2013 2014 2015 2016 2017 2018
Overall BoP. (% of GDP)
4.6
2.5
3.5
4.5
5.5
6.5
2011 2012 2013 2014 2015 2016 2017 2018
NIR commodity imports coverage (months)
20
Source: Authors compilations
Key Risks: The outlook remains clouded by the uncertain
global & regional conditions and the need to maintain reform
21
On the upside: if the economic conference deals materializes, growth could
be higher mainly through higher stimulated domestic demand. However, one
will need to pay attention to the productivity of these investments in the
long term, as well as their contribution to long term/quality job creation
On the downside:
1. Security situation at home and in the region can cloud the forecast.
2. The strength, breadth, and depth of global recovery is uncertain (given
EU economic performance which is Egypt main trade partner)
3. Also, financing costs on capital markets can worsen (e.g. by Greece-EU
debt/default talks, interest increases in the US) at a time when Egypt
borrowing needs may be high.
5