December 2014 OutlookEgypt’s Looming Economic Recovery: Will the reform momentum prevail?

Economic Outlook, Quarterly Report

Published:December 2014

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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 which aimed at addressing Egypt’s macroeconomic imbalances and promoting social justice. These measures supported restoring confidence in the Egyptian economy and build the foundations of a more solid economic recovery.

The government also embarked 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.

Overall, a considerable improvement in business and investor sentiment is reflected in the recent quarterly economic growth figures and the government can help further improve confidence by showing further commitment to macro-reforms, maintaining socio-economic balance and most importantly 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.

Table of Contents

I-Executive Summary

II- Political and Economic Landscape

  1. Political and Security Situation
  2. Economic Setup, Recent Performance & Reforms

III- Global Economic Outlook

IV- Egypt’s Economic Outlook

  1. Key Outlook Assumptions
  2. Egypt’s Economic Outlook
  3. Economic Growth & Unemployment
  4. Breakdown of Economic Drivers and Unemployment
  5. Government Finances and Debt
  6. Prices and Interest Rates
  7. Banking Indicators and Exchange Rates
  8. External Sector

V- Key Risks

Annex I: Analysis on Q4 2013/14 Economic Growth

  1. Undisputed Economic Recovery: evidence from Q4 2013/14
  2. Good News
  3. Bad News

Annex II: Tax and Energy Reforms

  1. Tax Reforms
  2. Energy Reforms
  3. 5-year Electricity Prices Matrix

Annex III: Decoupling of Terrorist Attacks from Capital Market Performance


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