THE WEEKLY Annual Isuue 2016 2016: The Year In Review 1
2016: A YEAR OF FISCAL AND MONETARY REFORMS Egypt witnessed a series of landmark events during 2016 on key political and economic fronts. In early 2016, Egypt s House of Representatives reconvened its first session after more than three years of suspension since the parliament was dissolved in 2013. On the economic level, there were several milestones for the Egyptian economy during 2016 such as the long awaited flotation of the Egyptian Pound which was bundled with the acquiring of the first tranche of the IMF three-year USD12 billion loan. The loan aims to improve Egypt s ailing economy and boost growth in the long run by improving the country s macroeconomic fundamentals and ensuring the implementation of much-needed structural reforms. While the business environment was impacted last year due to the foreign currency crisis that hindered investors from securing their FX requirements and pushed FDIs to step back, in addition to energy supply shortages that hit the industrial sector. GDP growth rate slightly moved up to 4.3% compared to 4.2% a year earlier, supported by private and government consumption. Trade imbalance aggravated in 2016, where export revenues shrank while the import bill kept increasing, feeding the growing FX black market. This critical situation required the adoption of a coordinated policy between the Central Bank of Egypt and the government, reflected in a number of monetary and fiscal regulations. These regulations started with imposing restrictions on non-essential imports, cutting fuel subsidies, applying the Value Added Tax, and liberalizing the local currency by the end of the year. As a result, the annual inflation rate notably increased in November 2016 to record 19.4% which is considered the highest level in eight years. In 2016, Eni and BP announced on the 9 th of June a significant new gas discovery in the Baltim South West exploration prospect, located in the conventional waters of Nile Delta, offshore Egypt. Key international credit rating agencies praised the Egyptian Pound floatation, expecting the economy to start recovering in 2018 and 2019 due to anticipated FDI inflows. Moody s sees the IMF loan as credit-supportive because it will relieve some of Egypt s external financing requirements. 2
COORDINATED APPROACHES FOR TACKLING ECONOMIC CHALLENGES MON- ETARY POLICY 2016 WAS CONSIDERED A TURNING POINT TOWARDS ADOPTING A MORE COORDINATED APPROACH BETWEEN THE EGYPTIAN GOVERNMENT AND THE CENTRAL BANK OF EGYPT (CBE), AIMING AT RESTORING PRE-2011 GROWTH LEVELS, RATIONALIZING IMPORTS, SUPPORTING INVESTMENT AND TACKLING THE FX SHORTAGE THAT AFFECTED THE BUSINESS CLIMATE AND PRODUCTION. MONETARY POLICY REVOLUTION The CBE issued a number of regulations during 2016, directing banks to: Support Small and Medium Enterprises (SMEs) through decreasing interest rates of finance to be 5% for Very Small and Small Enterprises, and increasing the share of SMEs finance to 20% of banks total loan portfolios by 2019. Allocate EGP5 billion to medium-sized industrial and agricultural companies (whose annual revenues range from EGP20 million to less than EGP100 million) at a reduced interest rate of 7% over a period of up to 10 years, to finance the purchase of new machinery, equipment, or production lines. Decrease the maximum value of loans directed to one client- with no related parties- from 20% to 15% of the bank s Tier 1 capital, and from 25% to 20% of Tier 2 capital for a client and its related parties. Oblige banks whose total credit facilities provided to their 50 largest clients and their related parties exceed 50% to 70% of their total loan portfolio to increase the risk - weighting for these assets to 200% when calculating the capital to risk weighted assets ratio and to 300% for amounts exceeding 70%. Limit the aggregate monthly installments of any retail client at 35% of his/her net monthly income. ENCOURAGING MORTGAGE FINANCE In March 2016, the CBE allowed those with a monthly income of less than EGP1,400 to benefit from its 2014 Mortgage initiative at an interest rate of 5% instead of 7% previously. The CBE also introduced new segments for above average income earners, whose maximum monthly income does not exceed EGP15,000 per person and EGP20,000 per family, to obtain loans at an interest rate of 10.5% and maximum unit price of EGP950,000. SUPPORTING TOURISM An EGP5 billion fund was lauched to help investors develop and upgrade tourist facilities including hotels, resorts and Nile boats nationwide. The finance will be in the form of loans with a 10% interest rate, where the fund will provide 75% of the required funding for the development of facilities, while investors will pay the remaining 25%. 3
FLOATATION OF THE EGYPTIAN POUND On the 14 th of March 2016, the CBE devaluated the Egyptian Pound by 14.5% against the Dollar from, EGP7.73 to EGP8.85, to eliminate the expanding black market. With the continuing FX shortage and rising speculations, the CBE adopted a free-float exchange rate regime on the 3 rd of November, where banks were able to freely trade and price the Dollar based on supply and demand guidelines. The decision was followed by: Raising core interest rates by 3% to 14.75%,15.75% and 15.25% for overnight deposit and lending rates and discount rates respectively, to contain the expected inflationary pressures. Easing restrictions set earlier on using Credit and Debit Cards abroad. 24 22 20 18 16 14 12 10 8 6 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 EGP per USD EGP per Euro EGP per Pound Sterling Offering 18-months and 3-year investment certificates at 20% and 16% interest rate respectively by state-owned banks. Raising yields on the five-year Suez Canal Investment Certificates, issued in September 2014 at 12% interest rates, to reach 15.5%. EGX30, the Egyptian Stock Market main index, rose notably by about 40% after floating the Egyptian Pound, reaching 12,344.89 points on the 29 th of December 2016. By the end of 2016, the exchange rate hovered around EGP19 per US Dollar on average. Egypt s headline inflation recorded its highest level in eight years reaching 19.43% in November 2016. FISCAL REFORMS On the 8 th of August, the government increased electricity prices as a part of its reform program, launched in 2014, aiming to gradually eliminate electricity subsidies over five years to be fully removed by 2018. The increase in prices ranged from 25% to 40%. On the 9 th of September 2016, the Value Added Tax (VAT) was officially applied at a rate of 13% for FY 2016/17 and 14% for FY 2017/18. On the 4 th of November, Egypt raised fuel prices by a range of 20%-47% to adjust prices after the Egyptian Pound floatation. The move also was a part of the government s plan to trim the petroleum subsidy bill. FIXING TRADE IMBALANCE MEASURES On the 31 st of January 2016, President Abdel-Fattah Al-Sisi issued a decree raising customs tariffs imposed on some non-essential imports to range between 20%-40% instead of the previous range from 10%-30%. The Ministry of Trade & Industry announced that starting February 2016, 23 categories of finished goods that are exported to Egypt have to be registered at the General Organization for Export & Import Control. Al-Sisi issued another decree, on the 2 nd of December, to raise tariffs on 320 different goods to 40%-60%, aiming at decreasing imports and protecting the local industrial sector. 4
MAIN FEATURES OF FY 2016/2017 STATE BUDGET In May, the Ministry of Finance released the draft budget for the FY 2016/2017 that aims to: Achieve an economic growth rate of 5.2% which requires increasing revenues and minimizing expenses to reduce the budget deficit. Decrease the overall deficit to 9.8% of GDP in FY 2016/2017 from 12.3% in FY 2015/2016. This will decrease public debt (domestic and external) to 97% of GDP in FY 2016/2017. Boost public investments by 50% to reach EGP107 billion. SUPPORTING EXPORTS AND LOCAL INDUSTRIES Egypt s Trade and Industry Ministry announced key measures to boost local industries and exports proceeds, including: Developing Upper Egypt and border areas by granting an additional 50% of the basic export support to factories located in these areas. Supporting Small Enterprises exports by granting small-scale exporters an additional 2% on the basic support fund, 60% off on the cost of specialized quality certificates, and 80% off on costs in foreign exhibitions. Providing an additional 2% on the basic support fund to Egyptian companies exporting to Africa and bearing 50% of transportation cost. Launching an initiative called Your Factory is Ready with its Licenses, where investors were invited to buy factories in licensed industrial compounds for different fields, such as engineering, food, and pharmaceutical industries. BUNDLE OF MEASURES TO BOOST INVESTMENT Egypt s Supreme Investment Council, headed by President Al Sisi, approved on the 1 st of November 2016 several investment incentives, including: Extending the freeze of the 10% capital gains tax to three years. Applying wide-ranging tax exemptions for farmers and a five-year tax exemption for manufacturers who produce strategic crops and goods that are imported or exported. Introducing new ways to settle tax disputes and remove bureaucratic barriers. Taking all legal measures to reconcile with SMEs that don t have tax records. Forming a National Payments Council that will work on restricting money circulation outside the banking sector. REGIONAL AND INTERNATIONAL ALLIES SUPPORT EGYPT S ECONOMY In April 2016, Egypt signed a loan agreement with Saudi Arabia worth USD1.5 billion and a grant worth USD200 million from the Saudi Fund for Development (SFD). On the 21 st of April, the United Arab Emirates (UAE) pledged USD4 billion to Egypt of which USD2 billion will be invested in developmental projects and another USD2 billion to be deposited in the CBE to support foreign reserves. In March 2016, Egypt signed a loan agreement with the Kuwait Fund For Economic and Social Development worth USD108 million to be repaid over 25 years at an interest rate of 2.5% with a 5 year grace period. 5
Bahraini King, Hamad Bin Issa Al-Khalifa, signed 11 Memorandums Of Understanding, on the 26 th of April, with total expected investments worth USD2.7 billion. Also in May, President Abdel-Fattah Al-Sisi approved a Russian loan agreement worth USD25 billion to establish a nuclear power plant in Al-Dabaa. The loan has a 22-year maturity at an interest rate of 3% and will cover 85% of the project s cost. In September, Egypt received USD1 billion, the first tranche of the World Bank s (WB) three-year loan worth USD3 billion. The second tranche, worth USD 1 billion, was signed on the 22 nd of December and is expected to be received in 2017. On the 19 th of December, Egypt and the African Development Bank (ADB) signed the second tranche worth USD500 million under the USD1.5 billion funds provided by the bank over three years to support the country s economic and development program. IMF LOAN AGREEMENT After Egypt was able to secure USD6 billion in bilateral financing, the International Monetary Fund (IMF) approved, on the 11 th of November, a threeyear USD12 billion loan agreement with Egypt, to support the country s reform program. The first tranche of the loan, worth USD2.75 billion, was received by the CBE following the IMF board s approval. The loan s second tranche (USD1.25 billion) is expected to be received in April or May 2017, and it will be directed to finance the budget deficit. EGYPT S OUTLOOK IS STABLE FITCH On the 30 th of May, Fitch Ratings Agency affirmed Egypt s rating at B with a stable outlook. On the 9 th of November, Fitch stated that the free floatation of the Egyptian Pound is positive for the country s sovereign credit profile as it is a major step in Egypt s external, monetary and fiscal adjustment. However, this move puts social and political risks in an already challenging policy environment. MOODY S On the 19 th of August, Moody s affirmed Egypt s credit ratings at B3 while it kept the outlook stable unchanged. Moody s view that the B3 rating appropriately captures Egypt s credit risk profile, which faces a number of deep structural challenges reflected in very weak government finances, a fragile external payments position, and continued security risks. STANDARD AND POOR S (S&P) Standard and Poor s (S&P) agency revised its outlook, on the 11 th of November, to stable from negative and affirmed the B- credit rating on Egypt. The outlook upgrading was based on the IMF s support to the government s economic reform program. 6
EGYPT AT GLANCE EXCHANGE RATE 24 22 20 18 16 14 11.57 12.02 12 10 8.53 9.84 8 6 7.81 8.85 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 22.24 18.97 18.18 EGP per USD EGP per Euro EGP per Pound Sterling EGX 30 14,000 12,345 12,000 10,000 8,000 6,000 7,006 6,943 4,000 2,000 0 0 TB S AUCTION INTEREST RATES Maturity Dec 2015* Dec 2016* Dec 15 Mar 16 Jun 16 Nov 16 91 Days 11.336% 19.155% Overnight Deposit Rate 9.25% 10.75% 11.75% 14.75% 182 Days 11.577% 19.720% Overnight Lending Rate 10.25% 11.75% 12.75% 15.75% 357 Days 11.824% 19.829% Corridor Rate 9.75% 11.25% 12.25% 15.25% * End of period GLOBAL COMMODITY PRICES 25 Dec 15 30 Jun 16 BRENT CRUDE* 37.89 49.68 GOLD** 1,076.10 1,321.90 WHEAT*** 467.50 445.50 30 Dec 16 56.82 1,147.50 408 * USD/Barell ** USD/Ounce *** USD/BU Source: Bloomberg 7
Aswan, Egypt T : +2 02 2399 2000 E : research@alexbank.com Head of Research Emil Eskander emil.eskander@alexbank.com Research Manager Hemat El Masry hemat.elmasry@alexbank.com Senior Associate: Sahar Ezz El Arab sahar.ezzelarab@alexbank.com Researchers: Mariam Massoud mariam.massoud@alexbank.com Mirna Mohsen mirna.aziz@alexbank.com Copyright Notice. The Weekly is a publication of ALEXBANK. No part of this publication may be reproduced or duplicated without the prior consent of ALEXBANK.This publication constitutes a summary of published news, quotes and economic indicators. This material does not constitute analytical economic research nor should be treated as such. All charts and graphs are from publicly available sources or proprietary data. Any views expressed in this publication do not necessarily reflect the opinion of ALEXBANK. The news, views and quotes within this publication are gathered from sources deemed to be reliable but which have not been independently verified. ALEXBANK does not make any guarantee to the accuracy or reliability of such information. AlexBank shall not be liable for any losses or damages incurred or suffered as a result of using its publications in part or in their entirety. 8