Global: Egypt – A successful reform story
"Reaping the fruits of the economic reform program" could be the title for the next phase of the Egyptian economy. The principal goal of the current cabinet, which was appointed in 2004 and headed by Dr. Ahmed Nazif, is to set in motion more economic reforms, thus transforming the country into a new business hub. This government has succeeded in turning around many critical issues concerning the Egyptian Economy. The results were significant during the period from 2004/05 to 2006/07. One of their main achievements was that they regained trust and credibility from the regional as well as the international investors and investment institutions.
The main new incentives put forward by the government during the period from 2004/05 to 2006/07 were:
• 50% cut in income and corporate taxes. Likewise, excise taxes and customs duties were also cut.
• Accelerating the privatization program by means of more liberal practices in asset valuation and outstanding debts and liabilities.
• Increasing the Foreign Direct Investment (FDI) levels, through paving the way for investment flow into the country by lessening the old bureaucratic procedures of investments.
• The Central Bank of Egypt (CBE) has approved the rescheduling of public sector enterprises debt and has cut the interest rate on their debts to 10%.
• Other developments on the economic front include the introduction of export development measures.
In 2006/07, the GDP grew by 7.1%, exceeding all expectations about growth. In 2005/06, the GDP growth was 6.8%, up from 4.5% in the year before. The development in the economy in recent years is attributed to stronger non-oil export growth, resurging tourism, rising Suez Canal receipts and better spending power and overall investment climate. The sectors like manufacturing, extractive industry (which includes petroleum & natural gas), agriculture & allied sectors, and wholesale & retail trade contribute significantly to GDP.
The sectors which have witnessed maximum growth during 2006/07 include tourism, personal services, construction and building, education as well as health. The contribution of tourism sector grew by 30.7% during 2006/07 to reach LE24.6bn. The contribution of tourism sector to GDP went up from 3.2% in 2005/06 to 3.6% in 2006/07. The tourism sector has grown at a CAGR of 30.6% during the five-year period from 2001/02 to 2006/07.
The overall fiscal deficit widened in 2006/07 as a result of the increase in interest payments and wages and salaries. Though the subsidies decreased during the year, the government is concerned about the transfer of the subsidies to the lower classes of the society. The cancellation of the energy subsidy for energy intensive industries was a bold move by the government in 2007. With the rising oil prices, the government's efforts on the economic front could be hindered by a continuously growing subsidy expenses.
In the past few years, Central Bank of Egypt (CBE) has introduced a range of more sophisticated policy instruments and has shifted its policy focus to target inflation. An increase in inflation in the second half of 2006 prompted the CBE to increase its key intervention rates. During December 2006, the CBE raised the overnight deposit and lending rates by 25 basis points to 8.75% and 10.75%, respectively. The inflation came down in later part of 2007, as the Consumer Price Index (CPI) inflation dropped from 12.8% in March 2007 to 8.4% in September 2007. Inflation still remains one of the challenges for the government. The liberalization of the energy prices for industrial uses will definitely exert upward pressure on prices, which will require close monitoring by the government in order to maintain the inflation in safe levels.
Foreign Direct Investment into Egypt is growing at a rapid pace. The total FDI more than doubled from US$4.1bn in 2004/05 to US$9.1bn in 2005/06 and it further increased by 44% in 2006/07 to reach US$13.1bn. Egypt has become an attractive FDI destination due to its strong growth prospects, privatization and economic reform. The government of Egypt remains committed to improving investment climate. The QIZ protocol, which comes in addition to Egypt’s duty free access to the EU, definitely enhances the attractiveness of Egypt as a location for FDI. Foreign exchange reserves began to rise in 2004/05, as confidence in the Egyptian Pound strengthened. Bolstered by strong capital inflows, Egypt’s foreign-exchange reserves continue to rise steadily. According to CBE, the net international reserves stood at US$28.6bn at the end of June 2007, an increase of 24.6% over the previous year.
In 2007, the Egyptian stock market, represented in the CASE 30 index, recorded a 51% return. This strong return came on the back of the positive outlook on the Egyptian economy in general with a GDP growth of 7.1% in 2006/07 and the buoyant corporate earnings. After a 17% increase between 2005 and 2006, the market capitalization surged by 44% at the end of 2007 compared to 2006. The main sectors contributing in this hike in market cap were the construction and materials, telecommunications and banking. The Egyptian stock market is still in the low range in terms of PE and high on the DY (dividend yield), when compared to other Middle Eastern and African markets. The attractiveness of the Egyptian market lies in its relatively cheap valuation, when compared to other stock markets in the Middle East, in addition to strong corporate fundamentals and high growth potential, as well as, the diversity of the traded stocks under different sectors.
Our outlook for Egypt continues to be positive. Growth in sectors like tourism, construction and real estate are driving fixed capital formation. We expect investment to continue at high rate in coming months, supported by buoyant business confidence. The efforts of the government to improve the business environment and privatization of smaller state-owned companies will keep the investment at a higher level. A number of large-scale infrastructure projects will also sustain investment, helped by oil-driven liquidity from the Gulf. However, factors like higher import growth and high inflation might prove to be the dampening factors.
© 2008 Al Bawaba (www.albawaba.com)