Egypt Outlook

Egypt’s Leap of Faith:Will the bold reforms pay off?

Economic Outlook, Quarterly Report

Published: July 2014

  • 30 Pages
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“Egypt’s Economic Outlook” is a quarterly publication that summarizes Dcode EFC’s view of the most likely economic scenarios over the short and medium terms, along with the prospects of key macroeconomic indicators. The projected economic figures are driven in light of (i) Dcode EFC’s consistent and detailed macroeconomic framework, (ii) a thorough follow up and assessment of the most recent announced policies, news and economic trends, and (iii) an intelligent analysis of the latest published official statistics and indicators. The views and insights provided in this report are based on our experts’ technical knowledge and local insights, coupled with an objective assessment of the entire economic and political picture, and any developments at the time of the report’s publication. Our ultimate goal is to provide a reliable forward-looking view of key economic indicators and trends and to present our core findings in a clear, illustrative fashion to support our clients and partners in making the most informed decisions. In addition, the report highlights some of the key economic risks facing Egypt and businesses operating within the country over the short and medium terms.

In this Issue:

At Dcode EFC, we believe that this issue of Egypt’s Economic Outlook is unique in many ways. Not only does it present our projections for Egypt’s key macroeconomic indicators over the medium-term, but also provides a comprehensive assessment of the new political economy setup that is developing in Egypt. Indeed, the new administration has brought along a new philosophy to the forefront of macro-fiscal policy making. This had been verified by the bold measures undertaken by President El-Sisi and the current Cabinet to partially restructure government finances, mobilize new revenues, partly control unproductive spending and allocate more resources to social programs and public services. The most important of the aforementioned measures was the expedited streamlining of energy subsidies by increasing the official retail prices of many fuel products along with passing a decree specifying the change in electricity prices for the different users over the coming five years. The latter represents a leap in transparency and communication between the government and the different stakeholders.

On the revenues front, important amendments to the income tax law had already been passed which included a 5% additional tax on incomes above EGP 1 mn, a 10% tax on net annual profits realized by investors trading listed stocks (capital gains tax) on the Egyptian Exchange and a 10% tax on dividends distributed by listed and non-listed companies in Egypt. These are expected to be complemented by other measures in the pipeline that include replacing the current General Sales Tax (GST) system with a modern Value Added Tax (VAT) and enacting a long-debated tax code on real estate.

The newly introduced measures along with more flexibility in managing the exchange rate, since the beginning of 2014, represent to large extent key components of the Stand-by Arrangement previously agreed upon with the IMF back in 2012 that aimed at addressing Egypt’s macroeconomic imbalances and promoting social justice. These measures are expected to help restore confidence in the Egyptian economy and build the foundations of a more solid economic recovery, despite its potential negative impact on the popularity of the current president and cabinet.

Apart from macro policies, the government is planning to embark on a number of mega-projects supported by earmarked funding by private and sovereign investors from the Arab Gulf. These include the Suez Canal corridor, the Gold triangle project, large housing developments as well as many important infrastructure projects. While the implementation efficiency of the government is currently limited, we believe it will gradually improve and the momentum of implemented public investments may eventually accelerate a rebound in private investments, especially as the political transition comes to an end and the security situation further improves.

The corrective measures adopted by the government inevitably affect a large segment of the population and increase social pressures especially as the unemployment rate remains high at 13.4%. The political leverage of the current regime and hence its commitment to reforms will ultimately depend on public satisfaction which can only be guaranteed by efficient and effective channeling of savings realized to public services and social programs with proper targeting that improve the overall welfare of the targeted groups.

Overall, a considerable improvement in business and investor sentiment is observed and the government can help further improve confidence by showing commitment to macro-reforms, maintaining socio-economic balance as well as solving key hurdles facing investors like the interrupted supply of energy, inadequate access to credit due to crowding out by the government, lack of skilled labor and long and costly bureaucratic procedures for business registration and liquidation.

Finally, this issue of Egypt’s Economic Outlook along with other publications by Dcode EFC will support our partners and clients in optimizing their business decisions through better understanding of the economic context and foreseen prospects for the Egyptian economy.

Table of Contents

I- Executive Summary

II- Political and Economic Setting

    1. Political and Economic Landscape
    2. Key Outlook Assumptions
    3. Global Economic Outlook

III- Egypt’s Economic Outlook

1. Economic Growth and Unemployment

  1. Consumption
  2. Investments
  3. Exports and Imports
  4. Unemployment

2. Government Finances and Debt

  1. Fiscal Outlook
  2. Budget Revenues
  3. Budget Expenditure

3. Prices and Interest Rates

  1. Consumer Prices

4. Interest Rates

  1. Banking Indicators and Exchange Rates
  2. External Sector

IV- Key Risks


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