Population 82.008 million
GDP 255.001 US$ billion
@rating
country
Business climate
assessment
| 2009/10* | 2010/11 | 2011/12(e) | 2012/13(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
5.1 |
1.3 |
2.2 |
3 |
|
Inflation (yearly average) (%)
|
11.7 |
11.3 |
8.6 |
9.5 |
|
Budget balance (% GDP) **
|
-8.1 |
-9.5 |
-11 |
-10.5 |
|
Current account balance (% GDP) **
|
-2 |
-2.6 |
-3.1 |
-3.2 |
|
Public debt (% GDP)
|
78 |
80 |
81 |
83.5 |
|
(e) Estimate (f) Forecast |
||||
STRENGTHS
- Diversified foreign currency resources (Suez Canal, gas, tourism, transfers)
- Moderate external debt
- Political and financial support of the Gulf monarchies and Western countries
WEAKNESSES
- Sharp political and social tensions
- Strong demographic growth, poverty (40% of the population) and high unemployment
- Deteriorating public finances
- Very low level of foreign exchange reserves
- Weak banking system
- Unstable geopolitical environment
Risk assessment
Political transition still uncertain
Elected president at the end of June 2012, Mohamed Morsi, from the conservative Islamist Muslim Brotherhood movement, proceeded in mid-August 2012 to dismiss the senior officers of the military council who had led the country after the forced resignation of President Mubarak in February 2011. Since then, the key powers that the president arrogated to himself have aroused concern and provoked big demonstrations since late 2012. The protests are also motivated by the controversial approval, by referendum at the end of 2012, of the new constitution, drawn up by an assembly dominated by the Islamists: the legislative elections in early 2012 were won the Islamists of the Freedom and Justice Party (affiliated to the Muslim Brotherhood) and the Salafi fundamentalists of the Al Nour party. Uncertainty will continue, at least until new legislative elections are held, initially planned from end April 2013 but currently suspended. These elections, due among other things to their boycott by the opposition, could cement the control of power by the Islamists in a more authoritarian direction.
Meanwhile, the direction of economic policy is also uncertain, although the Islamist government’s economic programme is liberal in inspiration, while seeming to emphasise better distribution of growth and a bigger role for SMEs.
Slight downturn expected in economic growth
Activity could slightly decline in 2013, due to the deterioration in the political situation and in investor confidence. Nonetheless, despite a still unfavourable international economic situation, growth is expected to remain sustained by the high level of public spending and its effect on private consumption.
In this uncertain environment, pressures on prices, exacerbated by the depreciation of the Egyptian pound, will remain high.
Continued slippage in public finances
The budget deficit for fiscal year 2012-2013 is set to increase further compared with the previous year. Strong revenues are expected from the Suez Canal, but corporation tax is expected to suffer from mediocre business results, following the disruption to economic activity. Spending is expected to continue to rise, due to the enormous burden of public sector wages and subsidies (over a quarter of total spending and nearly 10% of GDP), with on top of it the higher cost of servicing the public debt.
Traditionally the fiscal deficit is mainly funded by the local market, but it is proving more difficult and costly. Besides benefiting from grants and loans from Arab countries and institutions, Egypt has again turned to the IMF, whereas mid 2011, it refused its aid provided by the G8, claiming that it did not want to increase its already high public (domestic) debt. The conditional $4.8bn IMF loan, having already been repeatedly postponed, is unlikely to be concluded before the outcome of the legislative elections is known, the date of which is uncertain. Intervention by the IMF could spur further bi and multi-lateral aid and help restore operators’ confidence. In the meantime, the IMF might consider a bridge loan estimated at $700mn, as an emergency credit line, which would not be subject to the strict conditionality normally attached to IMF interventions.
Continuous pressure on the external accounts and on the pound
Hydrocarbon exports are expected to benefit from still sustained prices, but the unfavourable economic situation in the euro zone (with the EU accounting for about 40% of exports of goods and 60% of tourists) and the problematic political situation will dampen other exports and revenues from tourism. At the same time, Egypt will remain the world’s largest importer of cereals. However, revenues from the Suez Canal are expected to be resilient and workers’ remittances will benefit from the growth in the Gulf and from the reconstruction of the Libyan economy, regions employing a large number of Egyptians. Overall, the current account deficit could improve very slightly.
Whatever happens, this deficit is expected to be only partly covered by the predicted foreign aid. Moreover, foreign direct investment flows are adversely affected by the unrest except those intended for the hydrocarbon sector. However, external debt is expected to remain manageable (20% of GDP).
In this context, maintaining the pound’s informal peg to the dollar is a challenge. The currency is expected to continue to depreciate in 2013, despite the interventions of the Central Bank, whose reserves have plummeted and which represent less than 3 months of imports, a critical threshold and particularly low level for a country which covers a large part of its food needs through purchases abroad.
Vulnerable banking sector
Dominated by inefficient state-owned banks, the banking sector remains poorly capitalised, weakened by a high proportion of non-performing loans (11% of loans) and scarcely profitable. Moreover, the banks, forced to participate in financing the fiscal deficit, are overexposed to Egyptian sovereign risk.
