Egypt’s Economy Powers Ahead

 

With a government committed to following through with tough economic reforms and a population approaching 100 million people, Egypt is widely viewed as one of the Middle East and North Africa’s key markets to watch. The country appears to have fully shaken off the confidence-sapping events that followed the 2011 revolution, in large part due to the government of Abdel Fattah el-Sisi following an IMF-backed programme of economic reforms.

 

Recent economic figures certainly back this up. Real GDP growth has strengthened over the past four consecutive quarters, climbing to 5.3 percent year-on-year in the second quarter of 2018, according to figures quoted in a report from Emirates NBD.

 

“We expect that the expansion will remain robust, forecasting an annual 5.2 percent this year, and 5.5 percent in 2018/19, compared to an average of just 3.3 percent over the previous seven years,” stated Daniel Marc Richards, MENA Economist at Emirates NBD. “The country’s IMF-sponsored reform programme is progressing as planned, and with much of the short-term pain now in the base, Egypt is set to reap the reward.”

 

Richards added that the budget outlined for fiscal 2018/19 showed a commitment by the Egyptian government to economic reform and steady reduction of the budget deficit. However, he added that this process will be slow. Emirates NBD forecasted that the shortfall would be equivalent to 8.5 percent of GDP, compared to a projected 9.5 percent this year.

The re-election in late March of President Abdel-Fattah El-Sisi for a second term, albeit with little opposition, confirmed the country’s path of economic reform. As Emirates NBD pointed out in its report, the economic reforms were wide-ranging, consisting of the floatation of the Egyptian pound in 2016 in addition to subsidy cuts, tax rises and the removal of capital controls. While these measures re-energised foreign investment and helped Egypt win a $12 billion IMF loan, they also sent inflation soaring above 30 percent in 2017.

 

However, the government has no doubt taken comfort in recent data that shows inflationary pressure easing. Indeed, the annual inflation rate in urban parts of Egypt in May rose at its slowest pace in more than two years, giving the central bank some breathing room ahead of fuel subsidy cuts expected within weeks. Consumer prices were 11.4 percent higher, according to the state-run statistics agency, CAPMAS. Prices rose 0.2 percent month-on-month, compared with 1.5 percent in April, as food and beverage costs, the largest single component in the price basket, fell 0.3 percent.

 

The annual rate is now near the bottom of the central bank’s target range of 13 percent (+/-3 percentage points). The bank’s monetary policy committee is scheduled to meet toward the end of the month to discuss interest rates. Core inflation, the gauge measured by the central bank, was 11.09 percent in May, slowing from 11.62 percent the previous month to the lowest level since April 2016.

 

The reforms certainly have backing from financial institutions in the country, who appear upbeat about the impact of the policies and their effects. Angus Blair, COO of Pharos Holding, a Cairo-based investment bank, believes the changes taking place in Egypt should allow for the overall expansion in the financial services sector “in breadth and depth over many years”. This expansion of the financial services includes private equity, microfinance, insurance and funding for mergers and acquisitions, as well as trading in the stock market, according to Blair. “Stock market volumes have increased over the last year and we expect them to continue to do so, helped by the government’s IPO programme to sell down stakes in state-owned enterprises, as well as other new listings.”

 

Blair adds that while the overall reform programme has allowed for a backdrop to help transform business sentiment, more needs to be done to boost the private sector’s growth prospects further. “As a result of the reforms, many sectors offer good growth, although I remain most bullish about the consumer sector which is buoyed by strong consumer market liquidity, as well as Egypt’s demographics,” he says. “I am optimistic about the future since Egypt’s demographic structure means that it will put pressure on all the government’s decision makers to do the right thing and make the right reforms to grow the economy as fast as possible.”

 

After some years of volatility and the devaluation of the Egyptian pound in November 2016, which reset the Egypt investment risk matrix for the better, investors have been looking for companies offering a sustainable recovery in earnings and some smaller companies which have the potential to turnaround. The challenges for investors include the need to be more discerning than they were in the past and there is scope to improve transparency still further, even though Egypt is one of the most transparent markets in the region, according to Blair.

 

This has certainly helped to boost investment from around the world, including the Middle East where the UAE has been increasing its investments in the country.

Jamal Saif Al Jarwan, Secretary-General of the UAE International Investors Council (UAEIIC), describes Egypt is an emerging market and “a very important partner” for the UAE, with a growing volume of bilateral investments between the countries. “A good number of the UAE national companies have made a significant investment into the Egyptian economy,” he says.

 

Emirati investment in Egypt has already crossed the $6.5 billion mark, according to figures quoted by Al Jarwan. He points out that five UAE banks are currently operating in Egypt with extensive coverage – Abu Dhabi Islamic Bank alone has more than 70 branches in Egypt. Meanwhile, three Egyptian banks are in the UAE.

 

“Nearly 900 UAE companies operate in Egypt and UAE nationals provide vital investment in several Egyptian sectors. Egyptians invested $826 million, excluding investment in real estate, in the UAE and many Egyptians work in the UAE,” Al Jarwan says.

 

The level of investment is likely to increase, with the investment climate in Egypt continuing to improve. “With the new foreign investment law passed recently that regulates foreign investment in Egypt, we see positive signs in the investment climate,” Jarwan adds.

 

A number of UAE businesses have invested in Egypt, including Emaar Properties, Majid Al Futtaim, Emirates, Etihad, Air Arabia, Etisalat, DP World, Dubai Investments and Emirates Petroleum to name just a few, according to UAEIIC. Many other companies are planning to invest in Egypt in the coming years, the organisation adds.

 

“Overall, we as UAEIIC are optimistic about the Egyptian economy and its prospects. We are witnessing good reform in the laws and regulations and committed leadership on various levels at the government level to speed up the execution of these reforms,” Al Jarwan says.

 

“The world has confidence in the Egyptian economy now due to the increasingly stable socioeconomic situation in the country. The World Bank continues to fund the government spending plan which is a very good sign for investors. Plus the central bank has secured a good level of hard currency in the country.”

 

Yet there remain some factors that, if not addressed, could continue to stymy growth in Egypt, and one of those factors is financial inclusion. Mohammed Assem, Country Manager, Egypt, Mastercard, is optimistic about the country’s growing potential, especially if a greater proportion of the population can be brought into the formal financial sector. “Recent World Bank reports found that Egypt has the potential to bring over 44 million adults into the formal financial sector,” Assem says.

 

Moreover, 85% of the population lacks access to formal banking. Due to this, the mobile phone has become the method of choice for making payments and managing money – a trend supported by the Central Bank of Egypt, which recently issued strict mobile payment regulations to guarantee safety and security for Egyptian users, according to Assem.

 

This has perhaps helped pave the way for a new generation of fintechs. Assem adds that digitisation presents a huge opportunity to drive sustainable and diversified economic development in the country, and fintech companies can be a driving force of this change. “In addition to the potential of generating significant financial returns, fintech companies can also help the economy become more inclusive and less cash-based, both of which are important objectives along the economic development journey,” he says.

 

The rise of fintechs, messaging apps and regulation technology in Egypt and other developing countries are generating “the next wave” of services, according to Assem. “Technology-led systems offer greater access, lowering costs, improving usage, and creating better service delivery for consumers,” he say

On the subject of the opportunity presented by Egypt, Assem adds that the country is the largest economy in North Africa with a GDP of $1 trillion and a 3.4% growth rate.  “Egypt has been ranked among the world’s 21 most powerful economies by 2030 in a study by PwC As a result of rising population, there is an increased demand for services across all sectors, which is enabling the government to look to new and innovative solutions that citizens can make use of anytime at their fingertips without having to make a trip to the bank or an office. Egypt’s National Council for Payments has already identified digital growth as its top priority, with the Central Bank of Egypt leading this digital transformation of electronic payments in the country. This promises to create a domino effect on the local e-commerce sector, which is already poised for tremendous growth, backed by strong enabling conditions,” he says.

 

“In light of this background, we are definitely optimistic about the country. Our commitment to develop a robust digital payments ecosystem in Egypt remains strong, as we continue to enable the people and businesses of the country to grow and prosper in an inclusive economy. There is no doubt that a thriving fintech ecosystem will help drive financial inclusion in Egypt, but as mentioned before, it will take cooperation and collaboration with partners from across and within industries to bring it to fruition.”