It's been a while: how's Egypt's economy doing?

Looking ahead, the incumbent interim regime is planning to provide a fiscal stimulus focused on labour intensive housing, transport and utilities to the tune of EGP22 billion (just over USD3 billion, or a mere 1% of projected FY14 GDP). The government’s fiscal package is being aided by monetary policy, wherein the CBE has already started cutting rates. This could well continue at the next Monetary Policy Committee (MPC) meeting on September 19.

What this will amount to is difficult to say –economic agents may well want to wait till there is greater clarity and certainty on what the incumbent government’s transition process will bring. In our view, it is difficult to see any major improvement in headline indicators over the course of the current fiscal year (FY14) – growth is likely to remain anaemic (2-3% mark), inflation around current levels (9-10%), external financing needs significant (USD15-16 billion), the fiscal deficit elevated (10-11% of GDP) preventing any significant improvement in high government debt levels (80%+ of GDP).

That said, barring a major deterioration in the social situation, support from GCC countries will help the interim government meet financing needs till at least the end of the transition period next year. This easier financing picture, coupled with market appetite for laggards and the high yields on Egyptian assets, has likely been the driving force behind recent market price action. Perhaps there is also an element of the market getting used to the political noise out of Egypt, and an expectation that the interim government will be able to ‘manage’ the Muslim Brotherhood’s response to the on-going crackdown. Our view remains that more than anything else, political stability is the key to improving the outlook for the Egyptian economy. As things stand, such stability remains elusive.

Economic Growth

Data for Q1-2013 (Q3-FY13) suggests that headline growth slowed for the third consecutive quarter to 2.5% (YoY; 4 quarter average), from 2.5% in the last quarter and 2.9% over the comparable period last year, driven by continued contraction in mining (down 1.6% YoY in Q1-2013; share of 16.9% in real GDP). The picture beyond that was not much rosy either. Base effects helped across much of the economy, but particularly in agriculture, retail and wholesale trade, manufacturing, real estate and hotels/restaurants with a combined weight of ~50% in the real economy. Other sectors including transport, communication, information (share of 6.6% cumulatively) along with finance and insurance (6.8% share) displayed weaker growth.

These outcomes are not surprizing given that the politics was deteriorating for much of the first half of 2013 – just have a look at the Egypt 5Y CDS chart between Jan-Jun 2013, or the pace at which currency in circulation was growing or government indices of electricity consumption, cement production and cement/steel sales which were all contracting - while uncertainties over the IMF program were continuing to linger. Further, inflation had started to pick-up, while weakness in the EGP since the end of 2012 had not helped export growth; imports though actually contracted, perhaps reflecting the response of domestic demand to EGP weakness.