Egypt’s Economic & Investment profile

    

 Egypt’s Economic & Investment profile

  



i- Introduction:


⦁ Egypt is a central country in the Middle East. With more than 92 million inhabitants, Egypt represents 25% of the Arab population. Thirty percent (30%) of the population are among the age bracket of 15-24 years old. Throughout the last century Egypt has always enjoyed significant political, economic and cultural influence within its region. It has historically been the trend setter for the Arab region.


⦁ Located at a crossroads between Africa Asia and Europe, Egypt remains one of the strategically important countries as it has been for millennia. Egypt has the third largest GDP in the Middle East and among the top three economies in Africa. Egypt’s economy is considerably more diversified then most economies in the region with manufacturing and agriculture key contributors making up 16.6% and 11.2% of GDP respectively.



ii- Political overview:


⦁ Egypt is a presidential republic. The current president is Abdel Fattah El Sisi, who was elected to his first four-year term in May 2014. The head of state is elected by absolute majority, over two rounds. The current head of government is Prime Minister Sherif Ismail, who was appointed by President El Sisi and approved by the House of Representatives in September 2015.


⦁ The legislative branch is unicameral. The House of Representatives is a 596-seat body. The vast majority of representatives (448) are elected under an individual candidacy system, under which candidates can run as independents or through an affiliation with a party. A further 120 seats are filled through a vote using party list constituencies, while the remaining 28 representatives are appointed by the president. The last election was held in December 2015, with the majority of seats (351) filled by independent candidates.


iii- Economic  Overview:

⦁ Egypt’s economic advantage include its large domestic market, diversified economic base, favorable trade relations with major partners (EU Association Agreement-GAFTA-COMESA)* and geographic location. A process of fiscal reform is well under way following a 3 year plan with the IMF, a long-awaited legal framework aimed at attracting new investment is already in place, a Mediterranean gas finds promises to nearly double the nation’s gas reserves. 


⦁ Over the last 15 years, Egypt has been undergoing a transformation into an increasingly market-oriented economy. It currently holds lower-middle-income status. While there is substantial potential to push the country towards middle-income status, GDP growth rates were stalled – first by the global economic crisis and then by political instability. Nevertheless, the economy grew at a rate of about 4% in FY 2014/15 and FY 2015/16.


⦁ The economy has a significant degree of diversification. Manufacturing is the biggest industry, accounting for 16.6% in FY 2015/16. This is followed by wholesale and retail trade (12.9%) and the extractive industries (12.8%). While the country has limited arable land, agriculture still comprises a key part of Egypt’s economic make-up. In 2015 it accounted for 11.2% of GDP.


⦁ Other important contributors to the economy, beyond a public sector that accounts for approximately 11.2% of GDP, are construction (4.8%), and transportation and storage (4.3%). Tourism has traditionally played a significant role in the country’s economy.


⦁ Egypt is the third-most-populous country in Africa and the 15th worldwide (World Bank figures). As of 2017 the number of residents was estimated to have exceeded 92m. It is still a predominantly rural population, but this is changing. As of 2015, 43.1% of the population lived in urban areas, and the number of city and town dwellers is estimated to be growing at 1.68% per year. There is little sign of easing in the general demographic pressure that the country faces, with a population growth rate of 2.13%.


⦁ With a market of 92m consumers and growing, Egypt is a natural fit for manufacturing industries. The sector spans a diverse range of activities, largely led by the private sector, that range from building materials and downstream processing, to long-running textile factories, as well as competitive food and fast-moving consumer goods segments. Yet the government hopes to further expand, and its goals for the sector are ambitious.


⦁ Manufacturing accounted for approximately 16.6% of the country’s GDP in 2015, with medium-term plans to create 3m jobs and increase its share to 25% by 2020, in part through the development of new industrial zones. Egypt’s industrial sector features substantial attractions for long-term investment, including a large consumer base, low labor costs and a potential gateway to the growing middle class. Short-term obstacles remain, however, starting with the Egyptian pound’s struggle to stabilize against major international currencies and continued instability in gas supply; yet the goal of long-term growth remains the key priority. Egypt’s retail market is competitive and highly diversified. The maturing formal retail sector features a range of shopping malls, supermarkets, hypermarkets and smaller franchised competitors, as well as the more informal options that have traditionally served Egypt’s shopping needs, such as souqs, street vendors, independent high-street shops and neighborhood corner stores. 


⦁ As cranes tower over the skies of an ever-expanding Cairo and billboards advertising new housing developments, universities and malls proliferate throughout the city, it is clear that after several years of uncertainty, Egypt is in the midst of a construction boom. Large government priority projects, such as the New Administrative Capital, the expansion of the Cairo metro and water treatment projects in Upper Egypt continue to promote growth in the sector. The Ministry of Finance cites construction as one of the most important sectors in terms of its contribution to economic growth in the coming years. With strong demand for energy and infrastructure projects, as well as real estate, the sector is likely to see steady expansion. 


⦁ Egypt is continuing its program of fiscal consolidation, exchange rate liberalization and pro-investment reform, with the country expected to receive another multibillion-dollar tranche of funds from creditors following periodic reviews from the IMF which has  released recently a report stating that Egypt had made a “good start” to its $12bn loan deal, with the fund noting that reforms had helped boost growth, rein in the budget deficit and eliminate foreign currency shortages that were previously putting pressure on many businesses.


⦁ The three-year program, signed in November 2016, includes a series of tax increases and spending cuts, and is designed to help stimulate the economy, which has suffered from a shortage of foreign currency and investment since the 2011 revolution. The IMF has already disbursed $4bn of the package, followed by another $2bn tranche released following a year-end assessment of the economy.


⦁ Chief among these reforms was the floating of the Egyptian pound by the Central Bank of Egypt (CBE) in November last year, ending years of CBE management of the exchange rate. The float is designed to strengthen the economy’s competitiveness in the long term. In addition, the government has introduced a value-added tax and cut energy subsidies, part of efforts to reign in its deficit and promote investor activity.


⦁ Furthermore, the ministry of finance  plans to sell bonds worth between $3bn and $4bn in the first quarter of 2018, which comes after Egypt raised $7bn in five-, 10- and 15-year bonds in the 2016/17 fiscal year ending in June.


⦁ Institutional partners and the markets alike have been largely positive about the economic progress; Credit agency Fitch expects Egypt’s fiscal deficit to drop to 9.3% of GDP in FY 2017/18, down from 10.9% a year earlier, while it also forecasts the government’s debt-to-GDP ratio, which is predicted to have risen over 100% throughout 2017, to drop to 87.9% in FY 2018/19.


⦁ The government projects GDP growth of between 5-5.25% by the end of the current fiscal year, with IMF predicting slightly lower growth at 4.5%. A recently discovered gas field in Egypt – one of the world’s largest – is on track to begin production by the start of next year, which should quickly ease the country’s reliance on energy imports.


⦁ Egypt enjoys several free trade agreements including with the European Union, the Common Market for Eastern and Sothern Africa (COMESA) which allows products manufactured in Egypt to be exported to 20 African states with zero customs, the Grater Arab Free Trade Agreement (GAFTA), the Agadir Agreement which allows products manufactured in Egypt with 40% Egyptian input to be exported to Tunisia, Morocco, and Jordan with zero customs. 


⦁ During the last 3 years, and despite the political change, American and European firms operating in Egypt has in fact increased their investments in Egypt in particular in energy sector and food industry. Large multinational companies like Kraft, Coca-Cola, Pepsi Co., Mars, and Nestle all have increased their capital investments in Egypt.


⦁ Doing business in Egypt continues to be highly profitable for foreign corporates.  With the underway reform of political and economic environment, the potential will be even greater.  In view of the current reforms towards increased transparency and more streamlining of bureaucracy, the chances of doing business in Egypt will certainly increase steadily in the coming few years. This is why financial institutions such as Goldman Sachs, have for years, classified Egypt among the NEXT11 and CEVETS grouping emerging markets with the highest potential.


⦁ The medium size market in Egypt consists of a young dynamic population comfortable with foreign languages and decent work skills. These makes Egypt a serious competitor in markets such as outsourcing, call centers, and has created a home for many global IT and technology firms including IBM, Cisco, Google, Microsoft, and many others.


⦁ In terms of labour force, Egypt ranks as the 22nd largest labor force with more than 27 million workers, distributed between the three main economic sectors with services empolying roughly 47.8%, agriculture 31.2%, and industry 22% .


⦁ Manufacturing output growth is forecasted to be higher than GDP growth over the next decade. Manufacturing output has expanded by 4.8% in 2013.  Over the next 10 years to 2021, manufacturing output is expected to grow on average by 5.4% a year. The share of manufacturing output in GDP is projected to rise from 17.0% in 2011 to 17.9% by 2016 and increase to 18.4% by 2021.  Over the same period, the share of service sector output in GDP is expected to expand from 49.3% in 2011 to 50.9% in 2016 and would rise to 54.1% during 2021.



⦁ The new government has initiated work in a mega industrial project on the northern eastern bank of the Suez Canal.  China, India, Russia, and Arab Gulf States have all pledged to inject significant capital needed to transform the area into a world class logistic center and industrial zone.  Ambitious plans by both national and Arab countries will certainly represent a window of opportunity for engineering, heavy equipment firms, energy and those in the service sector.  In addition, the government will continue to invest heavily in infrastructure, housing and food industry.