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Egypt Business Forecast Report Q3 2014

  • May 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views

One the whole, we expect 2014 will continue to be a relatively positive year for the Egyptian economy as the currency stabilises and investment returns to the county. Sporadic outbursts in public unrest and ongoing 'policy drift' will undermine a more pronounced economic recovery. Egypt will have little choice but to make more pronounced reforms to its domestic energy subsidy system. That said, we do not believe there will be any major reforms ahead of parliamentary elections, which we expect to take place in June 2014. Hikes to domestic energy prices will push consumer price inflation back into the double digits by the end of the year. We do not expect an IMF deal in 2014, as the economic rationale has waned somewhat since the influx of foreign aid, and it is politically unpalatable at present.

Egypt's geopolitical importance will ensure that even if an IMF agreement is delayed for longer than expected, further foreign aid commitments will materialise. Western powers such as the US and EU have an interest in ensuring the North African country does not experience a more pronounced economic and political crisis. However, it will be donations from the Gulf Cooperation Council that keep Egypt afloat this year.

Major Forecast Changes

Following an influx in foreign aid in 2013, it appears as though Egypt will be spared a balance of payments crisis. That said, as the aid inflows are likely to weaken the government's resolve to push ahead with necessary subsidy and tax reforms, we do not expect an IMF agreement to be signed in the near term. We are forecasting real GDP growth of 2.3% and 3.1% in FY2013/14 and FY2014/15 respectively.

Table Of Contents

Egypt Business Forecast Report Q3 2014
Executive Summary . 5
Core Views 5
Major Forecast Changes ..5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis .. 7
BMI Political Risk Ratings .. 7
Domestic Politics 8
Sisi To Win Presidential Bid ..8
Former military commander Abdel Fattah el-Sisi is an almost certainty for Egypt's next president after announcing he will run in
upcoming polls. However, the election could mark Sisi's zenith in popularity, as any new administration will need to make politically
unpopular decisions on subsidies and face significant security issues. That said, on the whole a Sisi victory will be positive for the
economy and herald a slight reduction in political risk.
Long-Term Political Outlook . 9
Four Scenarios For The Coming Decade ..9
Egypt's transition to a fully fledged democracy is likely to take several years at least, and there is no guarantee that it will achieve this
goal. Although the momentum for democratisation is strong, we cannot preclude a return to authoritarianism in some form. Prolonged
uncertainty and instability would be negative for economic reform, potentially undermining Egypt's appeal as an investment and tourism
Chapter 2: Economic Outlook . 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Economic Outlook Improving, Slowly ..14
We forecast a modest turnaround in Egyptian real GDP growth over the coming quarters on the back of the improved political situation
in the country. Our baseline scenario is for the economy to expand by 2.3% in FY2013/14 and 3.1% in FY2014/15 (fiscal year running
from July-June), up from 1.9% in FY2012/13. We expect real household consumption to be weighed down by elevated inflation and a
decline in tourism revenues, while fixed investment will pick up as a result of greater clarity on the economic policy front as well as low
base effects.
Table: GDP By Expenditure 14
Balance Of Payments . 16
Current Account To Return To Surplus In 2014 .16
We forecast Egypt's current account to come in at a surplus of 1.6% of GDP in 2014, the first surplus recorded since 2008. Much of this
is due to financial assistance given by the Gulf states, but we also expect a slight pickup in foreign direct investment inflows, exports
to Europe and tourism revenues after several quarters of contraction. However, there are some worrying signs regarding Egypt's
wheat and fuel trade position, particularly if subsidy reform is not enacted. In addition, given ongoing uncertainty surrounding the future
trajectory of economic policy, we expect capital inflows to remain muted.
table: Current Account ..16
Exchange Rate Policy 18
Depreciatory Pressure To Build 18
Monetary Policy . 19
Inflation To Ease In 2014 ..19
We believe Egypt headline consumer price inflation has peaked and forecast inflation to decline modestly over the coming months,
primarily on the back of lower food prices in H114. We expect the headline print to average 9.0% in 2014. Given falling inflation and
lacklustre economic growth, we expect a 25 basis point cut in interest rates to 9.00% this year.
table: Monetary Policy ..20
Banking Sector .. 21
Islamic Banking Growth To Slow, But New Markets To Surface .21
Islamic finance is set for continued growth as several countries vie to become global centres, although in our view expansion rates have
peaked. At present, we expect Malaysia to remain the global leader in Islamic banking, although there will be concerted competition
from Dubai. In addition, there is huge growth potential in India, Nigeria and Thailand.
Tab le: GCC Islamic Bonds (2014) .21
Chapter 3: 10-Year Forecast . 25
The Egyptian Economy To 2023 .. 25
Policy Uncertainty Weighs On Outlook 25
Egypt has a lot to look forward to given its many inherent advantages, including a strategic and cultural position in the world, a large and
growing population and an underdeveloped private sector providing ample room for expansion. However, the highly uncertain political
outlook poses a key downside risk to our long-term growth forecasts.
table: Long-Term Macroeconomic Forecasts 25
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings .. 27
Business Environment Outlook 28
Institutions . 28
Infrastructure .. 30
Market Orientation . 32
TABLE: Top Expo rt Destinations , 2001-2009 (USDMN) .33
Operational Risk 34
Chapter 5: Key Sectors 35
Defence 35
table: Defence Expenditure 2010-2018 36
Freight Transport 39
tab le: Air Freight - Cai ro Inte rnationa l Airpo rt .40
tab le: Rai l Freight .41
tab le: Maritime Freight 42
Other Key Sectors . 43
table: Oil and Gas Sector Key Indicators 43
tab le: Pha rma Secto r Key Indicato rs ..43
table: Autos Sector Key Indicators ..43
table: Telecoms Sector Key Indicators .44
table: Infrastructure Sector Key Indicators 44
table: Food and Drink Sector Key Indicators .44
Chapter 6: BMI Global Assumptions .. 45
Global Outlook . 45
Growth Increasingly Polarised ..45
Table: Global Assumptions ..45
Tab le: Developed States , Rea l GDP Growt H, % 46
Tab le: Eme rging Markets , Rea l GDP Growth , % ..47

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