Decoding the Egyptian Economy 1 August 2013 Edition. August 2013

Transcription

1 August 2013 Decoding the Egyptian Economy 1

2 Preface The profound and rapid developments in Egypt since the January 25 th revolution and the uncertainty of the new political landscape have triggered a need among businesses, organizations, and individuals to deepen their understanding of the Egyptian economy with its many variables. Decoding the Egyptian Economy is our attempt to address this need. Our goal is to highlight the main economic developments, offer insights and explanations, shed light on recent trends and linkages, and provide a forward-looking view of key economic drivers and indicators. Decoding the Egyptian Economy relies on official government statistics as well as data from other expert sources. International benchmarking is used appropriately to gauge Egypt s economic performance relative to peers and relevant markets. The report is produced by our finest team of economists who strive to present the key findings in a clear, illustrative fashion to help you base your decisions on reliable data and coherent interpretation. We are committed to making Decoding the Egyptian Economy the premier source of economic and financial intelligence on the Egyptian economy. We aim to provide judicious commentary and analysis on recent developments, as well as to incorporate all new areas and scopes of interest that may impact your actions. We welcome your feedback and will exert every effort to integrate and respond to your suggestions and requirements. Our ultimate goal is to decode economic uncertainty by providing relevant data, timely information and exclusive insights that will assist you, our partner, in making the best and most informed decisions. Dcode EFC Chairman & CEO Mohamed Farid Decoding the Egyptian Economy 2

3 Table of Contents Overall Macro Picture...7 I- Key Developments (Takeaways)...7 Overall Macro Picture...9 I- Dcode EFC s Assessment:...9 II- Dcode EFC s Outlook: News Highlights Macroscope: Productivity and Growth Macroscope: Government Finance Macroscope: Prices and Banking Macroscope: Capital Market and Investment Macroscope: Transactions with the Rest of the World Peer Countries Economic Review Simplified Definitions About Us Diclaimer Decoding the Egyptian Economy 3

4 Acronyms BFY Beginning of Fiscal Year BOP Balance of Payments CAPMAS Central Agency for Public Mobilization and Statistics CBE Central Bank of Egypt CMA Capital Market Authority CPI Consumer Price Index GPC Egyptian General Petroleum Corporation EGP Bn Egyptian Pound, In Billions EGX The Egyptian Stock Exchange FDI Foreign Direct Investment FYBT Full Year Budget Target GAFI General Authority for Investment and Free Zones GDP Gross Domestic Product IMF International Monetary Fund M2 Total (Domestic) Liquidity MoF Ministry of Finance MOPIC Ministry of Planning and International Cooperation NIR Net International Reserves Decoding the Egyptian Economy 4

5 Acronyms PPI Producer Price Index PPT Percentage Points SCA Suez Canal Authority USD United States Dollar MSCI Morgan Stanley Capital Index MoM Month on Month Change YoY Year on Year Change YTD Year to Date Decoding the Egyptian Economy 5

6 Decoding the Egyptian Economy Overall Macro Picture Decoding the Egyptian Economy 6

7 Overall Macro Picture I- Key Developments (Takeaways) Annual gross domestic product (GDP) grew by an average of 2.2% during Jan.-Mar. 2012/13, some 3 percentage points (PPT) below the annual growth rate achieved in Jan.-Mar. 2011/12. Consumption and Net Exports (Exports minus Imports) contributed positively to growth by 1.79 PPT and 1.45 PPT, respectively, whereas Investments contributed negatively by 1.05 The Economy expanded by 2.2% in Q3 12/13, yet far below potential PPT. On the sectorial level, most sectors contributed positively to GDP in Jan.-Mar. 2012/13 with the exception of Extractive Industries and Suez Canal. Tourism was the highest contributor to growth by 0.6 PPT, followed by Construction & Building with contribution worth 0.56 PPT. Agriculture and Manufacturing also contributed notably by 0.43 PPT and 0.41 PPT, respectively. However, the Egyptian economy is still operating far below potential for the eighth consecutive quarter, which is reflected in higher unemployment rate of 13.2% as of the end of Mar. 2013, which is around 4.3 PPT above the pre-revolution unemployment rate. This translates to a 50% increase in the number of unemployed, with the youth being the most affected group. Labor productivity in Egypt remains low relative to both peer and advanced countries, with the gap continuing to widen over time. The budget deficit widened notably during July-May 2012/13 to record EGP billion (11.8% of GDP), up from EGP billion a year earlier (8.8% of GDP). Revenues grew on annual basis by 4% (+11.6 billion), far below expenditures annual growth rate of 20% (+77.6 billion). The high and elevated expenditures are primarily driven by a growing interest bill that reflects high government borrowing needs and interest rates coupled with higher subsidies and wages to accommodate popular demands and high international commodity prices. On the revenues side, taxes (75% of Expenditure pressures are driving fiscal and debt ratios to GDP to escalate, despite good tax collection performance. total revenues) posted good performance during July- May 2012/13, growing on annual basis by 14%. This, however, was offset by annual declines of 13% and 49% in non-tax revenues and grants, respectively. The strong performance of non-governmental corporate income taxes (19.7% annual growth) indicates a partial rebound in economic activities and realized profits for selected sectors, as well as the enhanced efforts by the tax authority to increase tax collection. The current partial recovery in budget investments is also a healthy signal which can weight positively on Egypt s future growth prospects. Gross government domestic debt to GDP increased significantly to reach 80% as of end of March 2013 compared to 70.6% a year earlier, mainly reflecting higher deficit levels. Average interest rates on government bills and bonds decreased in July 2013 on the backdrop of improved sentiment among domestic banks following the toppling of President Morsi and swift financial support received from the UAE, KSA and Kuwait. Annual inflation declined in 2012 to post low single digit after 3 years of elevated price levels. However, annual headline inflation started to pick up in 2013, reaching 10.3% in July Core inflation also increased by 0.5 PPT during July 2013 to reach 9.06%. The rise in annual inflation in June 2013 was driven by Higher inflation pressures in July 2013 driven by accelerated food prices and weaker currency. accelerated inflation in the prices of food & beverages which increased by 13.9% compared to 12.7% in June 2013, hence contributing by 5.55 PPT to July headline Decoding the Egyptian Economy 7

8 inflation. Prices of non-food items, on the other hand, increased by 7.9% and contributed by 4.73 PPT to annual headline inflation. Headline inflation averaged 6.9% in FY 2012/13, compared to 8.7% and 11% in 2011/12 and 2010/11, respectively. Banks lending activities to the private sector remain weak, with almost 52.5% of total deposits directed to finance government borrowing needs as of end of Apr. Tight banks lending conditions reflect excessive government borrowing Foreign currency credit extended to the private sector recorded positive annual growth rate of 14.7% in Apr. 2013, for the seventh consecutive month, ending a protracted 17 consecutive month period of annual decline. Despite such partial improvement, the excessive government borrowing is constraining banking credit and hence making it increasingly difficult for companies to secure adequate financing, especially for their imports. The Egyptian pound appreciated slightly against the USD in July The official FX rate reached almost NIR levels are showing signs of resilience while the pound appreciated for the first time in July 2013 after months of sustained depreciation. EGP against the USD as of end July 2013, before further appreciating to EGP per USD on Aug. 14 th, The EGP depreciated significantly against the USD during the first half of 2013 which can be explained in light of the prolonged political instability, deteriorated confidence in the Egyptian economy, critically low levels of reserves, and more flexible FX management policy by the CBE. NIR shrank by USD 1.6 billion throughout Jan.-March 2013 to record a 10-year low of USD 13.4 billion as of end of March 2013, before increasing in April and May to reach USD 16 billion on the backdrop of Arab inflows in the form of deposits held at the CBE worth USD 5 billion from Libya (USD 2 billion) and Qatar (USD 3 billion). In June 2013, however, NIR decreased by USD 1.1 billion to level USD 14.9 billion mainly reflecting a USD 0.6 billion Gold revaluation losses. In July 2013, NIR increased to USD bn. Nevertheless, reserves adequacy ratios are still at critically low levels, with liquid NIR (net of gold) covering almost 3 months of commodity imports as of end of June The stock market recorded strong positive performance in July 2013, driven mainly by local investors over optimism regarding the potential outcomes of June 30 revolution that led to regime change in Egypt. EGX20 Capped, EGX30 (indices for large, liquid stocks) and EGX70 (index for small illiquid stocks) increased by 19.2%, 12.1% and 18.9% compared to a negative return of 15.1%, 12.6% and 18.3% in June, respectively. Measured by international indices Egypt ranked first with positive returns of The Egyptian stock market increased in July driven by local investors positive sentiment towards the potential positive outcomes associated with June 30 revolution. 12.1% in July compared to a negative return of 12.9% in June amongst selected developing and emerging markets. On the investment front, the number of newly established companies decreased by 30.2% from 752 in June to 525 in July while and the total issued capital decreased by only 5.7% from EGP 696 mn to EGP 656 mn. This uneven decline is mainly attributed to the establishment of new companies operating in the steel sector which is capital intensive. Qataris investors ranked first amongst foreign and Arab investors with an issued capital of EGP 147 mn while Syrian investors ranked second with a total issued capital of EGP 108 mn. The BOP recorded a slight deficit of USD 2.1 billion in July-Mar. 2012/13, compared to a large net outflow of USD 11.2 billion during the same period last year. This can be attributed to a more supportive domestic and global conditions affecting Egypt s main transactions Decoding the Egyptian Economy 8

9 The Balance of payments recorded smaller deficit in July-Mar. 2012/13 due to current account gains and lower capital outflows. with the rest of the world. The relatively smaller deficit recorded can be explained in light of continued robust performance of remittances transferred by the Egyptian workers abroad to support their families during the current hardship episode, rebound in tourism receipts, lower non oil trade balance and decelerated pace of portfolio investments outflows. Overall Macro Picture I- Dcode EFC s Assessment: Key Weaknesses/Threats: the protracted fragmented political scenery and higher violence (which is still sporadic) are weighting negatively on the economy after a short-lived partial rebound (during July-Oct. 2012/2013). The negative spillovers on the economy are manifested in weaker pound, higher interest rates, deteriorated confidence levels that hold back investment spending and growth prospects, and frequent delays in reaching a loan agreement with the IMF that blocks billions of associated foreign inflows. The elevated and growing fiscal deficit and debt levels accompanied by limited fiscal space (around 85% of government spending is mandatory and difficult to cut in the shortterm) are making it complex for any government to restore confidence in the sustainability of government finances (ability to repay future debt) while responding appropriately to an underperforming economy and elevated social demands. Moreover, with the government absorbing 52% of banks deposits, lending to the private sector remains inadequate, pushing up lending rates. Dcode believes that Egypt s key economic challenges over the transition period and beyond are political instability, deteriorated security conditions, and the need for an economic vision/strategy and corrective polices that structurally address the country s pressing economic problems, particularly job creation and social inclusion. Going forward, people s elevated expectations should be well managed by the government through transparently announcing economic difficulties and engaging the public in setting priorities and suggesting solutions. Policy reforms should be well framed to allow wider acceptance even among affected groups. Key Strengths: The diversity of the Egyptian economy, as reflected in the notable contribution to growth made by 6 to 8 leading sectors in the past few years, coupled with the current economic underutilization (low growth relative to potential) can allow a prolonged high growth path over the medium term without putting pressures on markets and prices. Growth prospects can benefit from a more competent, coherent and qualified interim cabinet, better sentiment among the business community, and supportive media. Banking sector earning indicators are still promising, with limited banks exposure/reliance on external financing. Thus, banks can withstand current short-lived pressures with minimal cost and with low defaulting probability. The diversity of Egypt s foreign currency receipts along with the government ability to leverage Egypt geopolitical and strategic influence to attract bilateral financial inflows has and can further act as a buffer during difficult times. However, the situation is still precarious: further deterioration in the political and security situations can have negative economic and financial repercussions. Decoding the Egyptian Economy 9

10 II- Dcode EFC s Outlook: The current political instability and policy uncertainty induced Dcode to bring down its projected annual real growth rate for the Egyptian economy to 2% to 2.2% in 2012/13, far below potential (minimum rate of 5-5.5%). Our estimates assume a partial rebound in the manufacturing and construction sectors and the government s ability to execute public investments worth EGP bn in 2012/13 (still far below initial estimates of around EGP 107 bn). A high growth rate path cannot be sustained over the medium-term unless a higher investments are achieved. We may witness positive upside potential if the political setting and security situation improves, hence allowing for a smooth implementation of the roadmap outlined in the constitutional declaration issued in July This can accelerate external funding especially investment inflows. With regards to the IMF loan, we do not expect signing an agreement before the coming parliamentary elections and the formation of an elected government. However, we expect the interim government to resume its talks/ negotiations with the Fund in the coming months. In our view, fiscal deficit and debt to GDP ratios would remain at high levels over the medium-term unless an aggressive phasing out of energy subsides starts soon in conjunction with sustained pickup in economic activities and the taxation of specific exempted wealth and income flows, such as property and capital gains. We project fiscal deficit to reach 12.8% of GDP in 2012/13. We also think the Central Bank of Egypt will try to stabilize the FX market and eliminate the parallel market by utilizing sizeable inflows pledges from Gulf countries worth USD 12 billion. billion in 2012/13 in light of a weaker pound, lower nonoil trade balance, slight rebound in tourism receipts and more importantly exceptional borrowing from bilateral countries that is driving external debt upward. We expect annual inflation to fluctuate between 8% to 12% during the second half of 2013 with possible higher rates in case of sustained high global commodity prices, higher taxes, phasing-out of energy subsidies, and/or accelerated depreciation of the pound. Over the medium term, monetary policy is expected to focus on maintaining price stability to improve people s real incomes and to enhance Egypt s external competitiveness. We expect the BOP to record a minor deficit of around USD 1 Decoding the Egyptian Economy 10

11 Decoding the Egyptian Economy News Highlights Decoding the Egyptian Economy 11

12 News Highlights On July 16, 2013, Standard and Poor s kept Egypt s credit rating unchanged at CCC+ with a stable outlook. The affirmation of the rating, according to S&P, came in light of exceptional bi-lateral support packages pledged by Gulf countries with a total value of USD 12 billion, which reduce the risk that Egypt will face a Balance of Payments crisis. On July 24, 2013, Moody s maintained Egypt s credit rating at Caa1 with a negative outlook. The credit rating agency, however, warned that the country s rating could be downgraded if political unrest intensifies. These two credit rating affirmation follow an earlier downgrade by Fitch which downgraded Egypt s rating, on July 6, 2013, from B to B- maintain a negative outlook on the backdrop of the political turmoil following the June 30 demonstrations and the toppling of President Morsi. Part of the pledged USD 12 billion support packages from Arab countries materialized. On July 18, the Central Bank of Egypt (CBE) received a USD 3 billion deposit from the United Arab Emirates. This was followed on July 21 by a USD 2 billion deposit by Saudi Arabia. Egypt has also received shipments of energy products granted by Gulf countries to help it face the hike in local energy demand during the summer. On July 26, 2013, mass demonstrations took to the streets all over Egypt to delegate the military to counter terrorism. The demonstrations came in response to a call by the Minister of Defense Gen. Abdel-Fattah El-Sisi. The demonstrations were followed by violent clashes between the police forces and pro-morsi protests near Rabaa square, where the main pro-morsi sit-in was located. The clashes resulted in tens of deaths and scores of injuries. On August 1, 2013, the Central Bank of Egypt (CBE) cut the overnight lending and borrowing rates by 50 basis points for the first time in 4 years to stand at 10.25% and 9.25%. The discount rate and the rate for CBE s main operation had also been cut 50 basis points to stand at 9.75%. The interest rate cut comes despite increasing annual headline and core inflation figures to reach 10.3% and 9.06% in July, respectively. The cut signals an attempt by the CBE to stimulate economic growth using expansionary monetary policies, especially that inflation still remains under control. On August 14, 2013, the Egyptian security forces moved to disband the pro-morsi sit-ins in Cairo days after the government announced that foreign mediation efforts had failed. The violent clashes between the security forces and the protesters resulted in hundreds of deaths and thousands of injuries. Concurrently, violent protests and terrorist attacks erupted in greater Cairo and other governorates which obliged the government to declare the state of emergency for one month and enforce a 12-hour curfew starting 7 p.m. in 13 governorates. Decoding the Egyptian Economy 12

13 Decoding the Egyptian Economy Macroscope: I. Productivity and Growth Decoding the Egyptian Economy 13

14 Macroscope: Productivity and Growth revolution), which had its own toll on employment creation. Nevertheless, such economic under-utilization provides an opportunity for a possible robust and prolonged recovery over the near term, without pressuring markets and prices. Real GDP expanded by 2.2% y.o.y during Q3 2012/13 (Jan.-Mar.), the same rate recorded in the preceding quarter, yet down from 5.2% annual growth in Q3 2011/12. Consumption fueled growth during Q2, expanding in real terms by only 2%, compared to around 6.8% in Q3 2011/12. The slowdown in consumption annual growth rate relative to previous quarters might signal higher uncertainty which indicates that the prolonged weakened economic activity is starting to have its own effect on household consumption. It is noteworthy that GDP growth in 2011/12 reached 2.2%, some 0.4 PPT higher than the rate achieved in 2010/11, due to stronger real growth in private consumption (+6.5%) and a rebound in investment (+5.8%). In terms of economic sectors contribution to GDP growth, most sectors contributed positively in Q3 2012/13. Tourism was the highest contributor to growth by 0.6 PPT, followed by Construction & Building which contributed by 0.56 PPT. Agriculture and Manufacturing also contributed by 0.43 PPT and 0.41 PPT, respectively, compared to 0.38 PPT and 0.78 PPT, respectively, in Q3 2011/12. On the other hand, Extractive Industries and Suez Canal contributed negatively to annual GDP growth by PPT and PPT, respectively, compared to positive contributions by 0.14 PPT and 0.11 PPT, respectively, in Q3 2011/12. Despite the ongoing economic recovery, real economic activity remains below its potential level for the ninth consecutive quarter (since Q3 2010/11, the onset of the Decoding the Egyptian Economy 14

15 Preliminary data for Q3 2012/13 show that Consumption and Net Exports contributed positively to growth by 1.79 PPT and 1.45 PPT, respectively, whereas Investments contributed negatively by 1.05 PPT. While detailed figures for Q3 are not yet available, the latest figures for Q2 2012/13 show that private consumption was the main engine of real economic growth; contributing 3.6 PPT in Q2 compared to 3.4 PPT in Q2 2011/2012. On the other hand, Investments in Q2 2012/13 contributed negatively to growth by 0.2 PPT compared to a positive contribution worth 0.5 PPT in Q2 2011/2012. Net external trade continued to contribute negatively to growth for the 11 th quarter in a row by 1.9 PPT in Q2 compared to a higher negative contribution rate worth 3.8 PPT during the same quarter last year. Cross country comparison of average labor productivity reflects a notable negative and widening gap versus advanced and peer countries. For example, the average German labor is more than 8 times as productive as the average Egyptian worker. More importantly, Turkish labor is 3 times more productive than Egyptian labor, with the gap widening from only 2 folds in 2001/02. Similarly, South African average labor productivity widened relative to Egypt s mean from 2 folds in 2001/02 to 2.6 folds in 2011/12. The slowdown in economic activities throughout 2011 and the modest rebound in 2012, relative to Egypt s potential levels, pushed up official unemployment rates by 4.3 PPT (an additional 1.2 million unemployed or 50% increase in the number of unemployed) to reach 13.2% by March 2013, compared to 8.9% in Dec It is worth mentioning that 2012 witnessed positive employment expansion worth 43 thousands (y.o.y.), compared to employment loss worth 399 thousands in However, the relatively higher increase in the size of total labor force due to new entrants (those seeking employment opportunities) led to a higher number of unemployed people and higher unemployment rates. Decoding the Egyptian Economy 15

16 Decoding the Egyptian Economy Macroscope: II. Government Finance Decoding the Egyptian Economy 16

17 Macroscope: Government Finance The stock of domestic gross government debt increased as of the end of March 2013 to level 80% of GDP compared to 70.6% of GDP a year earlier, recording a notable increase of 9.4 PPT of GDP. These developments mainly reflect a higher fiscal deficit that is financed principally from domestic sources via the issuances of costly government securities (T-bills and T-bonds). Government foreign debt (11% of total debt) increased to around 10% of GDP as of the end of March 2012 up from nearly 8.9% of GDP in Sep. 2012, yet remains lower than the levels recorded before fiscal year 2011/12. The budget deficit notably widened during July-May 2012/13 to record EGP billion (11.8% of GDP), up from EGP billion a year earlier (8.8% of GDP). Revenues grew on annual basis by 4% (+11.6 billion), far lower than annual expenditures growth of 20% (+77.6 billion). The higher fiscal deficit was primarily driven by a growing interest bill induced by higher borrowing needs and interest rates, higher subsidies and wages to accommodate popular demands and high international commodity prices. On the revenues side, taxes (75% of total revenues) recorded good performance during July- May 2012/13 growing by 14% compared to receipts recorded last year. This, however, was diluted by annual declines worth 13% and 49% in non-tax revenues and grants, respectively. Latest fiscal indicators confirm the structural rigidity of public spending; with 84% of total expenditure considered mandatory (subsidies, wages and interest payments), leaving only 16% of spending partially under the current government discretion including spending on the Military. The ratio of mandatory spending to total expenditures was only 75% in 2010/11. On the other side, almost 75% of total revenues come from taxes, and the rest from non-tax receipts [dividends (profits) transferred by government entities, proceeds from sales of goods and services by government entities and foreign grants]. Decoding the Egyptian Economy 17

18 Tax receipts grew annually by 14% (+ EGP 25 Bn) in July- May 2012/13, with annual growth recorded by most key tax items yet with varying degrees. Taxes on interest income (6% of taxes) grew by 31.4% during the period of study on the backdrop of soaring interest payments. In addition, income taxes on non-government corporate sector (11.3% of taxes) increased by 19.7%, indicating a partial economic rebound in selected sectors and in profit margins recorded by big corporates as well as higher efforts by the tax authority to enhance tax collection. In addition, taxes on salaries expanded strongly by 26.4% given the higher public wage bill. Sales tax receipts increased on annual basis by 13.2% mainly due to higher excise taxes from cigarettes and petroleum products which grew Y.o.Y. by 16% and 146%, respectively. Sales tax on services and imported goods increased by 6.2% and 16.6%, respectively, whereas sales taxes on domestic goods decreased 10.8% (indicating a slowdown in consumption). Taxes on international trade (customs) increased by 8.6%, as the weaker Pound is fueling a higher imports bill denominated in domestic currency. On the expenditure side, interest bill (26% of expenditures) grew annually by 31% due to sizeable increase in the average cost and size of government borrowing. Wages and salaries (26% of expenditures) increased by EGP 21.5 Bn or by 21% y.o.y. to accommodate labor s exceptional demands, to partially finance implementation of the minimum wage scheme and to enact special increases for various groups. Subsidies (one third of total expenditures) increased by 14% on annual basis in light of soaring fuel and food subsidies, while government purchases of goods and services increased by EGP 2.1 Bn, or 11.4% y.o.y. Investments on the other hand (5.8% of expenditures) increased by 16.2% y.o.y (compared to 11% in July-Mar.), signaling a partial rebound in the government ability to implement new capital projects, which is a key determinant of Egypt s future growth. Domestic liquidity pressures eased in July after intensifying over the first half of 2013 with 1-year treasury bill rates decreasing to an average of 14.2% in July 2013 down from 15% in June 2012 and up from 13% in Nov In addition, 91-days treasury bill rates decreased to average 13.1% in July 2013 down from 14.1% in June 2013 and up from 12.4% in Nov Dcode perceives the pick up in interest rates to reflect deteriorated market liquidity conditions and weakened investors sentiment particularly with the protracted delay of a loan agreement between the GoE Decoding the Egyptian Economy 18

19 Decoding the Egyptian Economy Macroscope: III. Prices and Banking Decoding the Egyptian Economy 19

20 Macroscope: Prices and Banking compared to 7.6% and 8.6% in 2011/12 and 2010/11, respectively. Analysis of key inflation drivers reveals that food items had higher contribution to June 2013 headline inflation (54%) compared to non-food items (46%), for the second consecutive month since January Annual Headline inflation recorded 10.3% in July 2013, compared to 9.75% and 8.2% in June and May 2013, respectively. The pick up in annual inflation rate reflects primarily a rise in the annual inflation of food and beverages items to record 13.9% compared to 12.7% in June Annual price increases were uniformly recorded by many sectors such as alcoholic beverages and tobacco (7.7%), restaurants and hotels (21.7%), healthcare (12.5%), education (11.4%), recreation and culture (7.6%) and housing and utilities (5%). Average headline inflation in 2012/13 recorded 6.9%, compared to 8.7% and 11% in 2011/12 and 2010/11, respectively. Likewise, the Central Bank of Egypt s computed annual Core inflation increased by 0.5 PPT in July 2013 to reach 9.06%. In 2012/13, core inflation averaged 6.1% Egypt s average annual urban inflation for 2012 declined to record 7.1% compared to an average of 10.1% in A group of selected peer countries (see corresponding chart) recorded an average inflation rate of 6.7% during 2012, implying a shrinking inflation gap between Egypt and its peers of around 0.4% in 2012, relative to a wider gaps of 4.1% and 9.1% in 2011 and 2008, respectively. The gap reached almost 2% during the first half of 2013 and is expected to continue to widen in the coming months as domestic inflation picks up. Banking sector lending continued its underperformance with only 40% of banks deposits channeled to the private sector. This principally reflects excessive borrowing by the government from banks (in the form of credit and purchases of government securities) which partially crowds out private sector borrowing (government utilizes 52.5% of banks deposits). It also reflects the risk aversion of the Egyptian bankers who favor safer, yet less productive, lending to the government. These factors curtail the banks capacity to extend appropriate credit to the private sector, which in turn limits the ability of the Decoding the Egyptian Economy 20

21 Apr Despite such partial improvement, banks excessive government lending and their cautious lending decisions are still constraining the private sector ability to finance its foreign operations, particularly importing needed inputs and capital goods. private sector to stimulate demand and uplift strong private-led economic recovery. Non-Government deposits grew on annual basis by 17% during Apr compared to 7% in Apr. 2012, a sign of improved incomes and sentiment by households and the business sectors as well as induced by higher interest rates. After a sustained period of declining dollarization ratios in both total liquidity and total deposits, a reverse in trend began with the inception of January 25 th revolution, and have stabilized at higher levels since then. Dollarization in total liquidity increased from 16.2% in Dec to almost 18.2% in April 2011, before receding to 16.6% in Oct and increasing once again to record 17.8% in Apr Similarly, dollarization in total deposits increased from 21.9% in Dec to a high of 24.7% in April 2011, before receding to 23.4% in Oct. 2012, and increasing again to record 24.6% by Apr Annual growth rate of banks domestic currency credit to the private sector slowed down to score 9.2% in Apr. 2013, compared to 10.3% in Apr However, foreign currency credit extended to the private sector recorded annual growth of 14.7% in Apr. 2013, the seventh consecutive month of positive growth, following 17 consecutive months of annual contraction. This brings annual growth in total credit to the private sector to 10.5% during the year ending Apr. 2013, up from 6.3% in Decoding the Egyptian Economy 21

22 The Egyptian pound appreciated against the USD in July by 0.5% during July 2013 for the first time since May 2011 to reach EGP per USD before further appreciating to EGP per USD by Aug. 14 th, The depreciation of the pound over the first half of 2013 can be explained in light of: (1) the ongoing political instability and deteriorated confidence in the Egyptian economy, (2) higher demand on foreign currency as a store of value and the low levels of reserves relative to earlier figures, (3) and a more flexible policy by CBE to allow the pound to gradually depreciate. The Egyptian pound weakened against the Euro by 1.5% in July 2013 before slightly appreciating by 0.02% in the first two weeks of August, largely due to the EUR/USD exchange rate movements. It is noteworthy that throughout 2011 and during the first half of 2012, the CBE used foreign currency reserves extensively to support the EGP through large purchases of the pound leading to a reduction in NIR by USD 21 Bn between Dec and June period Sep.-Dec on the backdrop of exceptional bilateral financial support inflows from Qatar & Turkey. NIR, witnessed its lowest level of USD 13.4 Bn by end of March 2013 due to (1) higher dollarization ratio, (2) CBE s exceptional supply of over USD 1 Bn through the foreign exchange auctions, (3) payment of USD Exceptional/One off Items affecting the stock of NIR Month Value (In USD Billion) Details May Payment of due remittances by the Iraqi government in compensation for lost assets by Egyptians during the conflict Saudi Arabia purchase of a USD 7 year bond 0.5 Jun-12 with a 5% coupon 1.0 Saudi Arabia deposit at CBE Jul-12 Aug Debt Repayment of maturing local currency denominated Euro bond -0.6 Paris Club due debt payments 0.5 1st tranche of Qatar deposit at CBE Foreigners purchase (20%) of 1st one year T- bill issued in Euro Oct nd tranche of Qatar deposit at CBE Nov rd tranche of Qatar deposit at CBE 0.5 1st tranche of Turkish loan to Egypt Dec th tranche of Qatar deposit at CBE Jan nd tranche of Turkish loan to Egypt Apr Libya deposit at CBE May Qatar new Deposit at CBE. It was agreed that such deposits will be used to purchase government securities Jun Turkey third tranche of loan to Egypt 3.0 UAE deposit at CBE Jul Saudi Arabia deposit at CBE Source: Dcode compilation of news and verification with authorities. NIR increased in April and May 2013 to reach USD 16 Bn thanks to new deposits by Libya & Qatar (USD 5 Bn), before decreasing to USD 14.9 Bn by end of June In July 2013, NIR increased to USD 18.9 Bn after the CBE received deposits worth USD 5 Bn from UAE and Saudi Arabia. Liquid NIR (net of gold reserves) declined from USD 21.3 Bn in Sep to USD Bn in June 2013, covering almost 3 months of commodity imports. It is worthy of mention that the NIR witnessed 15 months of successive erosion in 2011 and first half of 2012 then stabilized starting May 2012 at USD 15 Bn during the NIR level will increase significantly with the realization of the support packages from Gulf countries with a total value of USD 12 billion. However the sustainability of the reserves will still be dependent on the government ability to restore growth in foreign currency generating activities like tourism, exports and foreign investments. Decoding the Egyptian Economy 22

23 Decoding the Egyptian Economy Macroscope: IV. Capital Market and Investment Decoding the Egyptian Economy 23

24 Macroscope: Capital Market and Investment being down by 17.8%, 13% and 24.5%, respectively, during Jan-Jun Despite the adverse economic conditions, all stock market indices performed positively during July This performance was driven by the over-optimism about June 30 demonstrations economic repercussions and the swift aid received from the UAE, KSA and Kuwait. This generous bilateral inflows outweighed Fitch Ratings downgrade of Egypt's credit rating for the long-term foreign and local currency issuer default ratings to B-from B. The outlooks are negative. Measured by international indices (MSCI Barra) tracking the performance of emerging and developing countries stock markets, Egypt ranked first with positive return of 12.1% in July compared to a negative return of 12.9% in June. Turkey ranked last with a negative return of 5% in July compared to a negative return of 13.7% in June. On a YTD basis Egypt ranked sixth during Jan-July 2013 with a negative return of 11.5% compared to a negative return of 21% during Jan-Jun. This return is more negative compared to domestic indices (EGX30 index recorded a negative return of 2.5%) due to the devaluation of the EGP versus the USD as MSCI Barra is measured in dollar terms. EGX20 Capped, EGX30 (indices for large, liquid stocks) and EGX70 (index for small illiquid stocks) increased by 19.2%, 12.1% and 18.9% compared to a negative return of 15.1%, 12.6% and 18.3% in June, respectively. On a YTD basis, all market indices remain in the negative territory during Jan-Jul. EGX20, EGX30 and EGX70 are down by 2.1%, 2.5% and 10.3%, respectively, compared to Basic Resources sector ranked first with a positive performance of 32.2% in July compared to a negative performance of 19.1% in June, (Ezz Steel increased by 32.6% to contribute by 28.1% in index increase). Travel & Leisure ranked second with a positive performance of 29.9% in July compared to a negative performance of 17.7% in June, (Egyptian Resorts increased by 31.9% to contribute by 23.5% in index increase). Chemical sector ranked third with a positive performance of 23.3% in July compared to a negative performance of Decoding the Egyptian Economy 24

25 YTD positive performance of 18.7% in Jan Jul, compared to 10% in Jan Jun. Telecommunication sector ranked second to witness a positive YTD performance of 10.4% in Jan Jul up from a negative YTD of 5.1% in Jan Jun. this was mainly driven by Orascom Telecom s (ORTE) positive YTD performance of 10.7% in Jan Jul. Chemical Sector ranked third to witness a positive YTD performance of 10.3% in Jan Jul up from a negative YTD performance of 10.5% in Jan June. This is mainly driven by Sidi Kerir Petrochemicals s positive YTD performance of 12.2% in Jan Jul. Financial sector (Excluding Banks) ranked last with a negative YTD performance of 28% in Jan Jul compared to a negative YTD performance of 38.5% in Jan-Jun. 9.1% in June, (Sidi Kerir Petrochemicals increased by 19.2% to contribute by 13.3% in index increase). Foreign and Arab investors were net sellers in July by EGP 706mn and 24mn compared to 251mn and 170mn in June, respectively. Egyptian investors, on the other hand, were net buyers by EGP 729mn in July compared to EGP 420mn in June. Foreign and Arab investors started offloading their investments during July while the Egyptian Investors started the month with significant buying activities. This selling activity by foreigners indicate their negative outlook regarding the Egyptian economy and stock market in specific and their opting for a profit taking behavior capitalizing on July s price increases. On a YTD basis, only five sectors witnessed a positive YTD performance. Food & Beverage sector ranked first with Decoding the Egyptian Economy 25

26 points. It is expected that the market will lose momentum in breaking the resistance level according to weak momentum in the majority of the index constituents. Should EGX30 index break the upper boundary of downward channel, this may generate more purchasing activity potentially targeting 6,000 points followed by 6150 points. In the mid of July, EGX30 index broke the downward sloping trend line upwards at the level of 5,330 5,350 points, driven by purchasing activities to switch this level into support level for any declining prices. In addition prices broke the former resistance level of 5,450 points creating an initial support level with a projected target of 5,600 points. Should the EGX30 index reach the level of 5,600 points, the EGX30 index could witness profit taking activities which may lead it to re-test the support area of 5,450 5,400 points before continuing the current uptrend direction to potentially target the major resistance level of 6,000 points, That scenario will be materialized the index holds above the 5,120 points. Dcode projected that, EGX30 could witness profit taking activities which may lead the index to decrease in an attempt to re-test the support area of points, holding the price decline, before continuing the current uptrend in the short term to potentially target the level of 6000 points to 6150 point during August. The number of newly established companies decreased by 30.2% to stand at 525 in July, compared to 752 in June and the issued capital decreased by 5.7% to reach EGP 656 mn in July compared to EGP 696 mn in June. On the intermediate term, EGX30 index reached the upper boundary of the downward sloping channel, which acts as a resistance level for rising prices, at the level of 5,600 Decoding the Egyptian Economy 26

27 The Manufacturing sector increased by 3.9% and continues to have the largest issued capital with EGP 332.2mn in July compared to 319.5mn in June, out of which EGP 138mn were in the Mining sector (National Steel for Steel Factories Management; EGP 125mn), and EGP 77.2mn in the Spinning and weaving (Buffy for Spinning, Weaving, Dyeing and Finishing; EGP 30mn). Qataris, for the first time, came on top of the list of foreign investors with total issued capital of EGP 147.2mn, while, Syrians come in the second place with an increase of 54% in total issued capital of EGP 108mn in July compared to EGP 70mn in June. The Services sector ranked second and its issued capital increased by 13.7% to reach EGP 223.3mn in July compared to 196.4mn in June, out of which EGP 131.9mn were in the Trade sector (United Steel for Steel Factories Management; EGP 100mn), and EGP 27.1mn in Transportation sector (Refrigeration Logistics Portal; EGP 16mn). The Construction sector ranked third in total issued capital however with a decline of 45.6% in total issued capital to reach EGP 46.1mn in July compared to 84.8mn in June, out of which EGP 39.6mn were in Urban Development and Real Estate (Paradise Reef Resort real estate; EGP 10mn). Both the Agriculture and Tourism sectors witnessed a decline by 46.7% and 81% in total issued capital to reach EGP 25.2mn and EGP 2.3mn in July compared to EGP 47.3mn and EGP 12.3mn in June, respectively. Egyptian and Foreigner investors contribution in total issued capital decreased in July to reach 49.6% and 6.4% from 76% and 11% in June, respectively. Arab Investors contribution increased to 44% in July from 13% in June. Decoding the Egyptian Economy 27

28 Decoding the Egyptian Economy Macroscope: V. Transactions with the Rest of the World Decoding the Egyptian Economy 28

29 Macroscope: Transactions with the Rest of the World The political instability, lack of appropriate and timely economic policies, and unfavorable global economic conditions (particularly weak growth in the Euro zone and high fuel and commodity prices), added pressure on Egypt s transactions with the external world and the Egyptian pound since July Accordingly, the Balance of Payments recorded net outflows of USD 11.3 Bn in 2011/12, higher than the outflows recorded in the previous year worth USD 9.8 Bn. Most recent data indicate that balance of payment recorded a slight deficit worth USD 2.1 Bn during July-Mar. 2012/13, compared to a net outflow of USD 11.2 Bn in July-Mar. 2011/12. The slight deficit recorded by the balance of payments during July-Mar. 2012/13 was principally due to continued robust performance of remittances transferred by the Egyptian workers abroad, improvement in tourism receipts, improvement in non-oil trade balance, decelerated pace of portfolio investments outflows, and remarkable increase in net other investment receipts in light of exceptional financing received from Qatar and Turkey. With regard to foreign currency receipts in July-Mar. 2012/13, workers remittances inflows increased on annual basis by 7.9% (transfers made by Egyptians living abroad) to reach USD 13.8 Bn. In addition, tourism receipts increased by 14%, compared to receipts recorded during the same period last year, thanks to an 14.1% increase in the number of tourist nights. Suez canal receipts, however, decreased by 3.9% to reach USD 3.8 Bn in light of a weak global economy and international trade. As for commodity exports, petroleum exports increased by 6.7% to level USD 9.4 Bn, whereas, non-petroleum exports increased by 1% to reach USD 10.4 billion. With regard to foreign payments in July-Mar. 2012, oil imports increased remarkably by 16.2% to level USD 9.6 Bn, whereas, non oil imports decreased by 3.7% to reach USD 34 billion, a reflection of higher imports bill and a slowdown in domestic consumption of durable and investment goods. At the same time, the amount of Decoding the Egyptian Economy 29

30 money spent on traveling abroad by Egyptians increased by 10% to level USD 2.1 Bn Bn compared to net outflows worth USD 4.57 Bn in July-Mar. 2011/12, largely reflecting investors notable pull out of the Egyptian market last year by repatriating realized profits and earned incomes. Egypt s overall trade deficit improved by 2.7% during July- Mar. 2012/13 primarily in light of improved non-oil balance. The non-oil trade deficit improved by 5.6% (or by USD 1.4 Bn) to reach USD 23.7 billion while the net oil trade balance changed from recording a surplus of USD 0.6 billion last year to a deficit of USD 0.15 billion. Oil exports increased by 6.7% annually in July-Mar. 2012/13, whereas oil import bill increased remarkably by 16% over the same period, in light of the growing domestic consumption, rendering Egypt as a net oil importer. Non oil exports, on the other hand, witnessed a slight increase by 1% to reach USD 9.6 billion, despite a sluggish global economic performance (particularly in Europe which imports around 40% of Egypt's exports), while non-oil imports decreased by 3.7% to reach USD billion. The ongoing political instability, the lack of clarity regarding the economic doctrine and reforms to be pursued, and accumulation of arrears due on the government to investors took an ample toll on foreign investment decisions. The latest figures indicate that net FDIs recorded inflows in July-Mar. 2012/13 worth USD 1.4 Bn, compared to inflows worth USD 1.2 billion a year earlier. On the other hand, the pace of net portfolio investments outflows (investment in shares and securities such as bonds and bills) decelerated significantly during the July-Mar. 2012/13) to record net outflows worth USD Gross external debt indicators deteriorated in Q2 and Q3 2012/13, after a slight improvement in Q1, to record USD 38.6 Bn (14.9% of GDP) by Mar compared to USD 34.7 Bn (12.2% of GDP) as of end Sep Likewise, per capita share of gross external debt increased y.o.y to reach USD 459 in Mar up from USD 409 a year earlier. Furthermore, the ratio of external debt coverage to foreign currency receipts deteriorated to reach 234% in Mar relative to a lower ratio of 204% a year earlier. Decoding the Egyptian Economy 30

31 Decoding the Egyptian Economy Peer Countries Economic Review Decoding the Egyptian Economy 31

32 Peer Countries Economic Review Comparative Macroeconomic Indicators: Egypt versus Peer Countries * Nominal GDP ( US$ Bn ) GDP per Capita ( US$ ) Real GDP growth (%) Real GDP per Capita growth (%) Inflation rate (Consumer Prices, average, % ) Total Investments (% of GDP) Unemployment rate (%) (a) Budget Deficit (% of GDP) (b) Total Debt (% of GDP) (c) Total Liquidity growth (%) Current Account Balance (% of GDP) FDI, net (US$ Bn) SAUDI ARABIA , , , , f , n/a n/a f , n/a n/a JORDAN , , , , f , f , n/a SOUTH AFRICA , , , , n/a 2012 f , n/a 2013 f , n/a -6.4 n/a 1/ 2/ EGYPT , , , , f , f , n/a -2.1 n/a Turkey , , , , n/a f , n/a f , n/a MALAYSIA , , , , , n/a f , n/a 6.0 n/a Sources: International Monetary Fund, World Economic Outlook Database (April 2013); Individual country Article IV Consultation Reports with the IMF, and individual country official statistics. n/a = data not available. f = forecast. * Country peers - except Jordan and Turkey - chosen according to Global GDP Rankings in 2011 ( PPP US$ terms - International Monetary Fund). Individual country GDP figures are presented in current US$ terms. Negative figures are shown in Red font for added clarification. 1/ Fiscal Year data for Egypt : 2011 = 2010/11 and 2012 = 2011/12 2/ Data for Egypt is obtained from the same sources as peer country data, and may differ slightly from official statistics published by Egyptian Authorities. (a) Percent of Total labor force. (b) General Government Cash deficit. Negative figures indicate a budget surplus. (c) General Government Gross Debt. Decoding the Egyptian Economy 32

33 Decoding the Egyptian Economy Simplified Definitions Decoding the Egyptian Economy 33