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Egypt Country Risk Report Q1 2017

  • November 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

2017 will see moderate growth in the Egyptian economy, following five years of stagnation and volatility. We are significantly below consensus on growth for the next two years. The fiscal and net export position will improve slowly on the back of fuel subsidy reform. Subsidy cuts will likely be watered down if public unrest occurs on a significant scale, however, the bulk of reform will remain in place. Hikes to domestic energy prices will push consumer price inflation back into the double digits by the end of the year. Egypt’s geopolitical importance will ensure that an IMF agreement is reached in late-2016 or early-2017.

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, donations from the GCC have now ended. We expect relative stability in the EGP in 2017 following the devaluations in November 2016. Political risks in the country will worsen in the coming quarters.

Table Of Contents

Egypt Country Risk Report Q1 2017
Executive Summary 5
Core Views 5
Key Risks5
Chapter 1: Economic Outlook7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth To Remain Lacklustre 8
Egypt's economic growth will pick up marginally over the coming quarters; however, a beleaguered tourism sector and muted expansion
in fixed investment will mean growth is far below potential and has a minimal impact on unemployment We remain significantly below
Bloomberg consensus on growth in 2017
GDP By Expenditure Outlook 9
TABLE: COMPONENTS OF GDP (% OF TOTAL) 9
TABLE: PRIVATE CONSUMPTION FORECASTS 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS 10
TABLE: NET EXPORTS FORECASTS 10
Fiscal Policy And Public Debt Outlook11
Drastic Subsidy Cuts To Improve Dire Fiscal Position 11
Egypt will see a notable improvement in its dire fiscal position over the coming years, given the drastic subsidy cuts announced in
November and the USD12bn IMF loan deal The primary deficit will fall from 8 7% of GDP in FY2017 to 6 4% in FY2018, ensuring
continued reliance on domestic debt
TABLE: SUBSIDY CUTS ANNOUNCED IN NOVEMBER 2016 11
TABLE: FISCAL POLICY12
Monetary Policy 13
Major Rate Hike Coming In A Bid To Tame Inflation 13
Headline inflation in Egypt will rise notably in the coming months as the currency undergoes a large devaluation, commodity prices
continue to head higher and subsidies are reduced slightly We forecast inflation to reach 25% by end-2016 and average 22% in 2017
In response to the devaluation we expect interest rates to be hiked by 200bps in the coming quarter
TABLE: MONETARY POLICY 14
Currency Forecast 15
EGP: Massive Spike In Inflation Ahead, Following Free-Float 15
The 60% devaluation in the Egyptian pound will result in a substantial jump inflation over the coming months The central bank has
abandoned the peg to the US dollar and free-floated the currency We expect further downside in the coming months, but see a floor
around EGP16 5000/USD after which further depreciation will only be modest
TABLE: BMI CURRENCY FORECAST15
Chapter 2: 10-Year Forecast 17
The Egyptian Economy To 2025 17
Significant Reform Needed Before Potential Begins To Show 17
Egypt has many inherent advantages which make its long-term growth story compelling These include 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
uncertain political outlook and the desperate need for reform will prevent a rapid uptick in growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS 17
Contents
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index21
Domestic Politics22
Political Risks To Come To The Fore As Economy Falters 22
Political risks in Egypt will rise over the coming quarters as economic growth disappoints and inflation heads notably higher on the
back of devaluations in the pound Added to this, an unstable security situation in Sinai and rumoured disputes within the ruling elite
will ensure political stability remains tenuous At this stage, a repeat of the revolutions in 2011 and 2013 is unlikely given the army's
crackdown on protests
TABLE: POLITICAL OVERVIEW 22
Long-Term Political Outlook 24
Democracy Remains A Distant Prospect 24
Egypt's transition to a fully fledged democracy is unlikely over the coming decade as the military retains a substantial control over
the political system Another military intervention in the country similar to events in 2011 and 2013 is not off the cards, giving ongoing
tensions within the government and armed forces Prolonged uncertainty and instability would be negative for economic reform,
potentially undermining Egypt's appeal as an investment and tourism destination
Chapter 4: Operational Risk 27
Operational Risk 27
TABLE: OPERATIONAL RISK 27
Business Crime 28
TABLE: BUSINESSES RESPONSE TO RISK 29
TABLE: BUSINESSES RESPONSE TO RISK (CONT'D) 31
Government Intervention 33
TABLE: BUSINESS TAXES 34
TABLE: PERSONAL INCOME TAX35
Chapter 5: BMI Global Macro Outlook39
Global Macro Outlook 39
Austerity Has Peaked, But Populism Is Not Yet Policy 39
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 41
TABLE: MACROECONOMIC DATA and FORECASTS 43

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