Egypt – Economy Profile
Global Investment House - Egypt - Egypt Economic & Strategic Outlook – February 2009 – The Egyptian economy continued its robust growth for the third consecutive year, as reflected in the real GDP growth of 7.2% in FY2007/08, reaching LE798.1bn, following a growth of 7.1% and 6.8% in FY2006/07 and FY2005/06, respectively. This came on the back of the economic reforms adopted by the government since FY2003/04. The nominal GDP grew at a CAGR of 16.5% between FY2002/03 and FY2007/08, reaching LE896.5bn by the end of FY2007/08.
Egypt’s healthy economic growth, along with the implemented reforms, is believed to protect the country’s economic performance throughout the concurrent global crisis. Though the world’s financial crisis hit most of the world’s economies, the Egyptian economy has preserved its real GDP growth, which stood at 5.8% during the first quarter of FY2008/09 (from July to September 2008), compared to 6.5% achieved in the first quarter of FY2007/08. However, the Egyptian government has set a lower GDP growth target of 5.5% for FY2008/09, after realizing a growth of 7.2% in FY2007/08, reflecting the negative impacts of the world financial crisis. Moreover, the World Bank has forecasted a growth of 4.5% and 6.0% for Egypt’s GDP in FY2008/09 and FY2009/10, respectively.
Gross Domestic Product
2003/04 2004/05 2005/06 2006/07 2007/08 July/Sept
2007/08 July/Sept 2008/09
Nominal GDP (LE bn) 485.3 538.5 617.7 744.8 896.5 218.3 274.6
Nominal GDP (US$ bn) 78.7 89.7 107.5 130.3 162.6 38.6 51.3
Nominal GDP Growth Rate (%) 16.2% 11.0% 14.7% 20.6% 20.4% 17.4% 25.8%
Real GDP (LE bn) ^ 407.0 425.2 454.3 744.8 798.1 198.0 209.5
Real GDP Growth Rate (%) ^ 4.2% 4.5% 6.8% 63.9%# 7.2% 6.5% 5.8%
Per capita GDP (US$) 1,117 1,247 1,460 1,682 1,990 498 628
Consumer Price Index (%) 10.3% 11.4% 4.2% 11.0% 11.7% 8.4% 22.4%
^ Using 2001/02 prices for the period 2002/03 to 2005/06 and prices of 2006/07 for 2006/07 and 2007/08
#N.B. This significant growth is due to the change in the base year from 2001/02 to 2006/07, starting 2006/07, meanwhile the real growth was 7.1% in 2006/07.
Source: Central Bank of Egypt (CBE), US Census Bureau, Ministry of Finance and Global Research
In FY2007/08, the government's total revenues and grants surpassed the budget, where it stood at LE221.4bn compared to a budgeted figure of LE187.2bn, reporting an increase of 22.9%, compared to the budget growth of 3.9% over FY2006/07. The increase came on the back of the 20.0% growth witnessed in the tax revenues in FY2007/08. On the other hand, the government expenditure grew by 27.1% in FY2007/08, while it was projected to rise by only 9.9%, as a result of the hike of the subsidies, grants and social benefits, which soared by 58.1%. The subsidies, grants and social benefits, which constitutes 39.0% of the total expenditures, jumped from LE58.4bn to LE92.4bn in FY2007/08. The wages and salaries actual growth surpassed the budget figure, where it reached LE62.8bn, up by 4.1% than the projected figure and rising by 20.5% than the actual figure of FY2006/07.
Government Finances (Budget Sector)
In LE mn 2003/04 2004/05 2005/06 2006/07 2007/08 2007/08 2008/09
Actual Actual Actual Actual Budget Actual Budget
Total Revenues and Grants 101,881 110,865 151,266 180,215 187,239 221,404 276,795
Tax Revenues 67,147 75,760 97,779 114,326 120,824 137,195 166,569
Grants 5,051 2,853 2,379 3,886 3,166 1,463 5,557
Other Revenues 29,683 32,252 51,108 62,003 63,249 82,746 104669
Total Expenditures 145,987 161,610 207,811 222,030 244,061 282,291 343,913
Wages and Salaries 37,266 41,546 46,719 52,153 60,344 62,839 79,039
Purchases of Goods and Services 9,340 12,612 14,428 17,028 16,944 18,470 23,833
Interest Payments 30,704 32,780 36,815 47,700 51,979 50,528 52,930
Subsidies, Grants & Social Benefits 24,746 29,705 68,897 58,442 64,280 92,371 134,062
Other Expenditures 21,080 21,692 19,740 21,209 22,864 23,892 25,788
Purchases of Non-Financial assets 22,851 23,275 21,212 25,498 27,650 34,191 28,261
Cash Surplus/(Deficit) (44,106) (50,745) (56,545) (41,815) (56,822) (60,887) (67,118)
Less: Net Acquisition of Financial Assets 1,770 897 (6,159) 12,883 1,947 236 2,674
Overall Fiscal Surplus/(Deficit) (45,876) (51,642) (50,386) (54,698) (58,769) (61,123) (69,792)
Source: Central Bank of Egypt (CBE) and Ministry of Finance
During the FY2007/08, the overall deficit grew by 11.7%, exceeding the projected 7.4%. As a matter of fact, the actual cash deficit reached 7.6% of GDP in FY2007/08, up from 5.6% of GDP in FY2006/07. The cash deficit and the overall fiscal deficit are expected to rise again in FY2008/09, by 10.2% and 14.2%, respectively.
The preliminary indicators for the 5-month period of FY2008/09 (from July to November 2008) has shown a mount in the total revenues and grants by 75.4%, compared to the same period the year before, to reach LE93.7bn. The total expenditure grew by 53.0% during the same period, reaching LE124.4bn, while the overall cash deficit increased by 10.5%, during the 5-month period of FY2008/09, to attain LE30.8bn.
In June 2008, the gross domestic public debt reached LE536.6bn, where it increased by 8.7% during the year and it reported a CAGR of 10.7% during the period from June 2003 to June 2008. This increase came as a result of the 12.7% growth in the economic authorities’ domestic debt, which stood at LE90.8bn, along with the 5.3% rise in the gross general government domestic debt.
Public Debt (End of Period)
June 2003 June 2004 June 2005 June 2006 June 2007 June 2008
Gross Domestic Public Debt (LE mn) 323,197 388,377 469,039 470,264 493,879 536,627
Gross External Debt (US$ mn) 29,396 29,872 28,949 29,593 29,898 33,893
Source: Ministry of Finance
Though the gross external debt grew at a CAGR of 2.9% during the period from June 2003 and June 2008, it increased significantly by 13.4% in June 2008, as opposed to the year before, where it reached US$33.9bn. Both the government and non government external debt increased during the last year by 11.0% and 17.7%, respectively.
The current account surplus reached US$888mn in 2007/08, representing a decline of 60.9% over the previous year. This was mainly due to the 43.7% increase in the trade deficit, which reached US$23.4bn, compared to US$16.3bn in 2006/07. The export proceeds rose by 33.3%, from US$22.0bn to US$29.4bn, which was due to the 43.2% acceleration in the petroleum exports, contributing to 49.3% of the total exports. Nevertheless, the soaring international food and energy prices over the year pushed the import payments up by 37.8%, reaching US$52.8bn, compared to US$38.3bn in 2006/07, and offsetting the increase realized in the exports proceeds.
Current Account
In US$ mn 2003/04 2004/05 2005/06 2006/07 2007/08* Q1 2007/08 Q1 2008/09*
1. Trade Balance (7,834) (10,359) (11,986) (16,291) (23,415) (5,201) (7,000)
Export Proceeds 10,453 13,833 18,455 22,018 29,356 5,990 8,163
Petroleum 3,910 5,299 10,222 10,108 14,473 2,523 4,109
Non Oil Exports 6,542 8,534 8,233 11,910 14,883 3,467 4,054
Import Payments (18,286) (24,193) (30,441) (38,308) (52,771) (11,191) (15,163)
Petroleum (2,550) (3,975) (5,359) (4,128) (9,561) (1,809) (2,268)
Non Oil Imports (15,737) (20,218) (25,082) (34,180) (43,210) (9,382) (12,895)
2. Services (net) 7,318 7,842 8,191 11,498 14,966 3,021 4,060
Receipts 12,981 15,030 17,438 20,456 27,211 6,043 7,410
Transportation 3,755 4,260 4,947 6,371 7,560 1,716 2,230
Of which : Suez Canal 2,848 3,307 3,559 4,170 5,155 1,213 1,456
Travel 5,475 6,430 7,235 8,183 10,827 2,848 3,281
Investment Income 485 911 2,002 3,045 3,289 807 734
Government Services 179 157 358 254 188 41 56
Other Receipts 3,086 3,272 2,896 2,603 5,347 631 1,110
Payments 5,663 7,187 9,247 8,957 12,245 3,023 3,350
Transportation 668 902 1,215 1,273 1,620 444 562
Travel 1,315 1,438 1,620 1,918 2,895 610 791
Investment Income 692 1,164 1,471 1,868 1,930 540 501
of which : Interest Paid 586 584 587 608 675 230 220
Government Expenditures 489 657 1,320 1,196 1,314 317 367
Other Payments 2,499 3,026 3,621 2,703 4,486 1,112 1,129
A. Goods & Services (Net) (1+2) (516) (2,517) (3,795) (4,792) (8,449) (2,180) (2,940)
B. Transfers (Net) 3,934 5,428 5,547 7,061 9,338 2,049 1,974
Official (net) 888 1,056 572 800 961 113 78
Private (net) 3,046 4,372 4,975 6,261 8,377 1,936 1,897
Current Account (A+B) 3,418 2,911 1,752 2,269 888 (131) (966)
*Provisional
Source: CBE
The balance of payment witnessed a slight incline of 2.6% in its overall balance, implying a surplus of US$5.4bn in 2007/08, compared to US$5.3bn realized in 2006/07. This was a result of the drop in the current account, which was compensated by the surge in the financial account by 7 folds, from US$892mn in 2006/07 to US$7.1bn in 2007/08. The major contributor to such surge was the 19.8% rise in net direct investment in Egypt.
The slump of the current account in the 1st quarter of 2008/09 resulted in a decline in the surplus of the balance of payment by around 60%, as it reached US$459mn, compared to US$1.2bn, realized over the same period in the previous year. It is worthy to mention that the capital and financial account grew by 32.0%, reaching US$2.2bn, compared to US$1.7bn over Q1 2007/08.
Balance of Payment
In US$ mn 2003/04 2004/05 2005/06 2006/07 2007/08* Q1 2007/08 Q1 2008/09*
Current Account 3,418 2,911 1,752 2,269 888 (131) (966)
Capital & Financial Account (5,016) 3,378 3,511 853 7,137 1,656 2,186
Capital Account - - (38) (39) 2 1 1
Financial Account (5,016) 3,378 3,549 892 7,134 1,655 2,186
Direct Investment Abroad (156) (39) (145) (536) (1,113) 131 (700)
Direct Investment in Egypt (net) 407 3,902 6,111 11,053 13,237 2,969 1,655
Portfolio Investments Abroad 113 541 (729) (558) (960) (360) (132)
Portfolio Investments In Egypt (net) (226) 831 2,764 (937) (1,374) (1,430) (3,485)
of which: Bonds (148) 26 2,690 (551) 775 997 (92)
Net errors & omissions 1,440 (1,811) (2,010) 2,160 (2,605) (374) (761)
Overall Balance (158) 4,478 3,253 5,282 5,420 1,150 459
*Provisional
Source: CBE
The year 2008 witnessed skyrocketing rates of inflation. The accelerated money supply in the market, resulting from the encouraging investment climate, led to an increase in consumption, which was not met by sufficient production levels, resulting in higher local prices. Inflation rate reached its peak in August 2008, as it reached 23.6%, compared to 6.9% in December 2007. It is worth mentioning that the latest inflation figures reflect a decline that began since September 2008, as inflation rate stood at 18.3% in December 2008. This came as a result of the drops in international food and energy prices, due to the slowdown in the world economy.
The Central Bank of Egypt (CBE) adopts a tight monetary policy since 2005, with the main aim being targeting inflation. The CBE established the Monetary Policy Committee (MPC), which is scheduled to meet each 6 weeks to set the corridor range. The MPC kept modifying the corridor range along with the changes in inflation, which reached its peak level in August 2008 at 23.6%, setting overnight deposit and lending rates at 11.0% and 13.0%, respectively. An additional 50bp were added to the corridor range in September 2008, where inflation rate was 21.5%. In December 2008, the MPC preferred to keep rates at the CBE at their same level. Although the inflation declined to 18.3%, it is still considered a high rate.
The Egyptian government realized significant improvements in various business segments, on the back of the reform program, initiated in 2004. Such improvements created a better investment climate, attracting foreign investors to engage in various projects, looking for lucrative margins realized from vast available investment opportunities. This was reflected by the incline of inflows from Foreign Direct Investment (FDI), as they jumped from US$4,134.5mn in 2004/05 to US$9,097.9mn in 2005/06, realizing a growth of 120.0%. FDI continued rising until they reached US$17,802.2mn in 2007/08, a y-o-y increase of 36.1% over the previous year.
The privatization of state owned enterprises was one of the actions taken by the government within its reform program. In 2007/08, the government generated LE3,983mn, as proceeds from 36 privatization deals. Over the period from July to September 2008, 7 privatization transactions were executed, generating LE1,081mn.
The net international reserve reached US$34.6bn in 2007/08, compared to US$28.6bn, a year before, representing an incline of 21.1%. Afterwards, reserves declined by 1.3%, as they reached US$34.1bn as of December 2008. This could be attributed to the effects of the global financial crisis on capital inflows. Foreign currencies were the major contributor to gross official reserves, as they represented a share of around 95%, while the rest of reserves came from gold, Special Drawing Rights (SDRs) and loans to IMF.
On November 2008, the Minister of Finance announced that the government has taken some procedures to support the Egyptian economy to lessen the impact of financial crisis and the expected contraction in investments. The government will inject new investments amounting to LE30bn, where LE15bn will be invested in the Public Private Partnership (PPP) program and the remaining amount will be used to finance infrastructure projects. The Minister added that these funds will be financed through the expected savings in the subsidy, on the back of declining food and energy prices, and partially through increasing the budget deficit. The plan also includes supporting the Egyptian exports to increase its competitiveness in the international markets.
Consequently, we believe that the government’s stimulus plan, coupled with cutting customs on intermediary and capital goods, in order to encounter the global financial crisis, is expected to induce consumption, which will in turn spur investments and support the country’s economic growth.
Egypt’s Real GDP Growth Vs. World’s and Emerging and Developing Economies’ Real GDP Growth
Source: International Monetary Fund (IMF), World Economic Outlook Database, October 2008
Moreover, the International Monetary Fund (IMF) forecasted that Egypt will maintain a strong real GDP growth in 2009 and 2010, at an annual average of 6%, compared to the world’s average real GDP growth of 1.9% in 2009 and 3.2% in 2010. It is worth mentioning that the IMF has issued a note in mid January 2009 revising Egypt’s projected GDP growth for the FY2008/09 and setting it at an average of 5% to 5.5%. The note also praised the government of Egypt’s efforts of reform, which resulted in the sustainability of the Egyptian economy against global economic shocks.
In general, Egypt’s medium term outlook remains sound. We believe that the Egyptian economy is capable of surpassing the current storm that hit the world economy, thanks to the reforms implemented since 2004. Most likely, the government will work on curbing inflation, maintaining economic growth and balance of payments stability, throughout 2009.
