Egypt GDP growth seen at 4.4% in 2015-2016

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Monday - 16 November 2015

After being hit by social unrest and violence in 2011, Egypt’s economy is getting back on track, thanks to improved political stability, economic reforms and foreign investments, said Coface Group, a global credit insurance firm. 

The authorities recently announced a real growth rate of 4.1 per cent for 2014/2015 (the fiscal year running from July to June), compared to 2.2 per cent for 2013/2014 – which in turn was slightly up from the average growth of 2 per cent between 2011 and 2013. 

These latest results have been driven by growth in manufacturing, higher tourism revenues (after a decline following the unrest) and a favourable base effect. On the demand side, the main growth driver was private consumption. Coface estimates that growth will accelerate to 4.4 per cent for 2015/2016.

Recovery still fragile, challenged by twin deficits and security issues 

Although growth in public and private consumption should continue, its pace will remain subdued, due to high unemployment and subsidy reforms aimed at reducing the budget deficit, says Coface. 

Despite the improvement in Egypt’s fiscal situation, the budget deficit remains well above 10 per cent of GDP. In addition, Egypt is still suffering from a wide external gap, weak infrastructure, microeconomic distortions and low competitiveness. 

In the 2014/2015 fiscal year, the current account deficit jumped to $12.2 billion, up from $2.7 billion the year before, mainly due to the enlarged trade deficit. If oil prices remain low, this may cause a fall in FDI, grants and remittances from Gulf countries – who are amongst the biggest contributors to Egypt’s growth. This would restrict the funds for much-needed investments in Egypt’s infrastructure.

Regional and domestic security risks are weighing on the business environment, as well as on the recovery of tourism (which accounts for around 20 per cent of the country’s foreign exchange earnings). 

Capital outflow due to security issues and political uncertainties pulled down foreign reserves, from 7.6 months’ of imports in 2010, to as low as 2.4 months in 2014. There is continued shortage of foreign exchange in the banking system. This is hitting small and medium-sized manufacturers especially hard, as they do not have the dollars they need to import machinery and raw materials.

“Improved political stability and the authorities’ commitment to structural reforms are supporting economic performance in Egypt,” said Seltem Iyigun, Coface Economist for Middle East and North Africa. “International financial assistance constitutes an important pillar of the country’s growth. In the future, economic recovery is also expected to benefit from the acceleration in fixed investments. Economic recovery and political stability are contributing to the redress of fiscal imbalances.” 

“Nevertheless, sustainable growth will depend on continued progress in economic reforms and greater political stability,” added Iyigun. “Despite all the improvements cited above, structural weaknesses are still present in Egypt’s economy and are continuing to weigh on private sector growth. Tough challenges remain - including vulnerable external accounts, low competitiveness and security risks.”

Cautious sectoral recovery

Tourism: After suffering from civil unrest and political uncertainty in 2011, tourism has made a slight recovery, mainly due to improved political stability. In the first half of 2015, the number of tourists visiting Egypt increased by 8.2 per cent from a year earlier, to reach 4.8 million.

The government expects to attract 10 million tourists in 2015, with total tourism receipts of between $7.5 billion and $8 billion. The number of hotels and accommodation establishments are expected to rise slightly above the 2012 level, to 1,140 in 2015. Despite all these improvements, the return of Egypt’s tourism sector to its pre-turmoil levels will take time, as there are still security issues.

Automotive: The automotive sector is also benefitting from economic recovery since the Arab Spring period caused a drop in demand. Passenger car sales rose sharply in 2014, increasing by 55.5 per cent compared to 2013. 

Economic recovery and higher political stability should support sales over the upcoming period. Nevertheless, constraints are weighing on the sector. Some companies are being driven into exiting Egypt, due to dollar scarcity, unclear industrial strategy andstrengthening of the automotive sector in neighbouring countries.