No Signs Of Slowing

Egypt’s expanding economy and population are bolstering an ambitious drive to create a more aggressive, investor-friendly economy.

Egypt expects to post robust growth numbers in the current fiscal year, thanks in part to a boom in natural gas. The government of President Abdel Fattah el-Sisi is taking the opportunity a buoyant economy affords to complete an ambitious reform program geared toward firming up the banking sector, attracting foreign capital and generally making the country an easier place to do business.

The confluence of economic expansion and a legislative program geared for growth has laid the groundwork for a new wave of investment, especially in less-developed corners of the economy, a recent report by Oxford Business Group concluded. The World Bank expects Egypt’s economy to grow 5.8% in the fiscal year ending June 30 and 6% in fiscal 2021. These forecasts likely will be downgraded, however, as a result of the effects of the coronavirus.

The Egyptian pound was one of the best-performing emerging market currencies last year. Although with support from high interest rates likely to fade, analysts expect the currency to give up some of its gains over the remainder of 2020.

“After rising 11% against the dollar in 2019, the Egyptian currency is now close to its strongest level since the devaluation in 2016,” says Jason Tuvey, senior emerging markets economist at Capital Economics. “The 50% drop of the pound versus the dollar in 2016 boosted Egypt’s external competitiveness, supporting exports and encouraging firms and households to shift their consumption to domestically produced goods.”

More recently, Egypt benefited from natural gas production, Tuvey says. Energy exports have more than doubled since 2016, and Egypt was a net gas exporter for the first time in six years in 2019.

All of this helped Egypt’s current account deficit narrow from a peak of 6.6% of GDP in the fourth quarter of 2016 to about 2.5% in the third quarter of last year. Meanwhile, the devaluation and higher interest rates have supported a pickup in foreign inflows into the bond market. Egypt’s 10-year government bond yields are now at their lowest level since 2011. On the back of the influx of foreign direct investment, the central bank has rebuilt its foreign exchange reserves to more than $45 billion.

“Despite a sharp drop in inflation over the past few years, the Central Bank of Egypt has taken a cautious approach with monetary easing,” Tuvey says. “This has left real interest rates among the highest in the emerging world.”

Capital Economics forecasts a further modest depreciation in the Egyptian pound to 17 to the dollar by the end of this year and to 18 to the dollar by the end of 2021. “We fear that the pound is becoming overvalued,” Tuvey says. “The real effective exchange rate has risen and is back in line with its 10-year average. The deterioration in Egypt’s external competitiveness has already started to weigh on Egypt’s non-hydrocarbon exports.”

Next Up: Structural Reforms

Further reforms may be on the way. The International Monetary Fund  (IMF) recommended in February that Egypt adopt a new package aimed at supporting and expanding the private sector, creating new job opportunities. Egypt recently completed the final stage of its previous IMF-backed economic reform program, which began in 2016 and provided a total of $12 billion in loans. Changes included devaluing the pound, introducing a value-added tax, easing capital controls, ending energy subsidies, reforming public enterprises and overhauling monetary policy.

“Now that the fiscal and monetary reform has been done, we’re talking about structural reforms,” Central Bank Governor Tarek Amer told a recent energy conference in Cairo. This would mean “trying to overcome the bureaucracy, which we do have and many other countries have, and which we really want to streamline over time.” Egypt currently ranks 114th on the World Bank’s Ease of Doing Business index.

Egypt was able to turn down an IMF offer of a new loan in February because it no longer needs funding, Amer says; in February, the central bank sold $985 million of one-year, dollar-denominated Treasury bills with an average yield of 3.49%.

Several other legislative reforms have had notable effects, according to the Oxford Business Group report, including revenue-boosting changes to the income tax law, amendments to the investment law and implementation of a new competition law.

Helping to buy more time for the reform drive are last year’s oil and gas discoveries in the eastern Mediterranean. The Oxford Business Group report says the additional reserves will reduce the import burden on the chemical and plastics industries through the development of downstream segments. However, there are concerns that the discoveries could also aggravate the predominance of hydrocarbons in the economy, the report added.

Oxford Business Group expects the government to continue moving ahead with plans to boost its renewable energy capacity in 2020, led by the development of a major solar power station in Aswan that has attracted some $2 billion in investment. The 1.4 gigawatt Benban Solar Park will free up oil and gas supplies to be used either for export or in other valued-added industries.

“Alongside this,” the report adds, “the greater emphasis on industries that are not as reliant on imported materials should accelerate growth in various manufacturing segments, among them ready-made garments and food and beverage manufacturing. Tourism is also set for further expansion.”

Banking Reform, Part Two

Egypt has one of the region’s most stable banking sectors, which is also expected to contribute significantly to future growth. The cabinet approved new banking legislation in October, forwarded to Parliament in January, which would increase minimum capital requirements and grant the central bank increased oversight of the banking sector. A proposed industry development tax, which was unpopular with investors and the banking community, has been set aside in favor of a 1% industry-wide levy on profits to finance a bailout fund that would help banks avoid bankruptcy. The act would also establish procedures for banks filing for bankruptcy protection.

If passed in its current form, the act would introduce measures for licensing electronic payments and fintech businesses and explicitly authorize the central bank to regulate cryptocurrencies. It would introduce measures to ensure data protection and customer privacy, including requiring banks to obtain written consent for data dissemination. Banks would have up to three years to comply with the provisions of the new law.

The central bank has not issued a banking license to any entity for the past 20 years, restricting engagement in banking activities to institutions already licensed and operating in the country. But with the introduction of the new banking law, the central bank is expected to begin issuing new licenses, particularly to foreign institutions.

Another magnet for foreign investment is the Suez Canal Economic Zone, which Egypt launched in 2015 to create an industrial and logistics hub around the canal. Among other developments, the new zone has made it easier for China to integrate the canal into its Belt and Road Initiative. A memorandum of understanding between the port city of Tianjin and the Suez Canal Economic Zone was signed last year to develop the second stage of the Tianjin Economic-Technological Development Area, with development projects totaling $5 billion. Negotiations are continuing with Chinese companies. The second phase is expected to attract about 150 companies and to provide some 40,000 jobs. The government has also signed agreements with Japan’s Toyota and Dubai World to develop port areas within the zone.

Given a wobbly global economy and the immediate threat of the coronavirus outbreak, the short-term prospects for Egypt’s ambitious plans are uncertain. But with a youthful population and a focus on private sector development, many global investors are likely to conclude that the government is moving in the right direction.