March 31, 2014
Egypt in 2014: You come up with the assumptions, and we run the analysis
In January 2014, Dcode EFC conducted an online survey to solicit input on the expectations of survey participants on some of the most important variables affecting Egypt’s economy in 2014 as well as on the medium term. The responses to the survey formed the base assumptions in conducting an “interactive”Â macroeconomic outlook for the country. Dcode EFC incorporated the solicited assumptions about the political economy and international developments into its coherent forecasting model and used sound analytical techniques to provide you with the likely economic implications and forecasts that are consistent with such assumptions. The survey and results were based on tens of responses and were regularly updated on Dcode EFC’s website and is presented in the annex section at the end. We thank those who were keen to share with us their inputs and insights and this interactive report attempts to produce consistent economic forecasts along with these precious inputs.
This interactive report attempts to shed light on Egypt’s economic prospects in light of the views and assumptions spelled out earlier in 2014 by a diversified group of professionals and experts in response to an online survey conducted by Dcode EFC. Key political and economic assumptions highlighted and shared by the respondents included the following:
- Amendments to 2012 constitution will take place as scheduled and will be approved. This would be followed by presidential then parliamentary elections at the end of current transitional phase. The respondents had mixed views with regards to the intensity and scale of demonstrations.
- The security situation would remain volatile with escalation in violence and terrorist attacks.
- The government would pursue a more ambitious fiscal consolidation path that includes phasing out of subsidies (fuel and food) along with higher taxes.
- On the external account, the respondents expect resilient and even higher exceptional Gulf assistance and Suez Canal receipts, yet they have mixed views with regards to remittances inflows.
- Most respondents believe that the IMF loan will not materialize over the forecast horizon, with the bilateral relation between Egypt and the EU normalizing at a faster pace than with the US.
- On the international front, most respondents projected higher global prices of commodities and oil as well as a pick-up in global economic activities.
Key Macroeconomic Implications:
Respondents’ expects the escalation of violence, attacks and deteriorated security situation which will lead to lower tourism receipts and hence lower exports of goods and services. Also, respondents had mixed views with regard to remittances inflows (views split between an increase and stabilization). As such, remittance inflows are expected to stabilize rather than increase which will limit rate of growth of private consumption (main engine of real growth). This would lower projected real economic activities and would translate into higher unemployment rate. Also, the lower tourism receipts and remittance inflows would have negative impact on balance of payments and net international reserves.
On the other hand, the surveyed audience supported a higher Gulf inflows path in the form of higher FDIs and lending by bilateral and regional Financial Institutions. These developments would have a positive impact on investments activities and hence on real growth as well as on external accounts.
The respondents projected an accelerated (rather than a gradual) phasing out of energy subsidies. This can have a slightly positive impact on projected fiscal aggregates. Dcode EFC does not interpret these assumptions to imply unrealistically a sudden and shocking measures that eliminate subsides schemes but rather a higher pace of gradual streamlining of current subsidies schemes. This would also lead to higher inflation and deflator along with the impact of a continued depreciated Pound over forecast horizon. Accordingly, the higher projected inflation and prices would have negative impact on private consumption that would further act as a brake on real economic activities and real GDP growth path.
Key Economic Indicators Forecasts (based on respondents’ assumptions):
Annual Gross Domestic Product (GDP) is expected to continue to under-perform in the short and medium terms. Real GDP growth is expected to average 2.26% in FY2013/14 before gradually rebounding to reach 3.1% and 3.3% in FY 2014/15 and FY 2015/16, respectively. The forecasted growth path reflects still a resilient private consumption despite growing at lower pace that what has been recorded in past years, strong public consumption due to constitutional spending targets and expansionary polices and measures adopted by recent governments, and more importantly a recovery in investment expenditures as confidence levels improve with higher political stability and the implementation of corrective reforms. We project large infrastructure and housing projects to be pursued over the medium-term with more focus on lagging regions (Upper Egypt and frontier governorates). These developments would outbalance the negative contribution of net exports, on average, over the short-term horizon. As such, the unemployment rate is projected to continue to increase throughout the projection horizon. Downside risks still prevails especially if political and security situations further deteriorate.
 Dcode EFC standard outlook report includes further analysis and highlights as well as extended forecasting horizon that end in FY 2017/18.
The fiscal situation is projected to relatively improve in FY 2013/14 relative to the previous year mainly in light of exceptional Gulf grants (cash and in-kind), one-off receipts in the form of transfer of government deposits to the treasury of around EGP 30 billion, and lower cost of government borrowing . As such, we project overall deficit to reach around 11.5-12% of GDP in FY 2013/14. This estimate assumes minimal implementation of fiscal reforms imbedded in original FY 2013/14 budget figures with number of key reforms (sale tax reforms and streamlining of fuel subsidies) rolled over to the following years.
Dcode EFC, based on respondents’ assumptions, projects that the fiscal deficit would increase in FY 2014/15 to hover around 12.3% of GDP due to lower exceptional inflows, ambitious constitutional spending targets, and full implementation of the minimum wage scheme. Over the medium term, a gradual fiscal consolidation path is assumed as economic activities are projected to rebound and as the implementation pace of intended corrective reforms gains some momentum. This would mainly include the introduction of a fully-fledged value added tax and phasing out of energy and food subsidies. Accordingly, the fiscal deficit as a percentage of GDP would potentially start to decline, albeit modestly, to record almost 11.5% in FY 2015/16.
Average Headline inflation is projected to record low double-digit levels in the short term despite economic underperformance (hover around 10.8%), and will stabilize at around 10% in the following two years. It is noteworthy that the forecasted increase in average inflation rate in FY 2013/14 reflects an accommodative monetary policy by Central Bank of Egypt to stimulate domestic demand, persistence of supply bottlenecks, and continued lagged pass through effect of a weaker currency. Over the medium term, inflationary pressures would emanate from a rebound in economic activities, a weaker pound that would prompt a higher imports bill when denominated in domestic currency, sustained and gradual increase in fuel and electricity prices, projected increase in business costs due to higher taxes and streamlining of energy subsidies, and high international fuel prices.
 The transferred government deposits relate to the utilization of grants transferred to Egypt back in early 1990s due to its participation in the second Gulf war. These grants were deposited as government deposits at CBE.
On the foreign exchange front, the Egyptian Pound is expected to continue to depreciate against the USD to record EGP 7.25 by end of FY 2013/14, EGP 7.6 by June 2015 and EGP 7.95 by end of FY 2015/16. Overall, we forecast an improvement in external sector indicators over the short and medium terms on the backdrop of notable Gulf support and sustained depreciation of the Pound that would improve the competitiveness of Egypt’s exports and restrain the non-oil imports bill. In the short term, Egyptian authorities will strive to utilize all potential and available external financing vehicles, including bilateral lending and grants, buying oil products from Gulf countries at relatively favorable terms, and tapping regional financial lending institutions. Over the medium term, the government might opt not to sign (or at least postpone) a formal Stand-by agreement with the IMF to avoid any strict conditionality and/or the labeling of corrective policy measures as “not home-grown”. Instead, it might utilize the IMF policy advisory services and technical support especially on the taxation and revenue mobilization fronts.
Dcode EFC, based on the respondents’ assumptions, projects a continuation in the resilient performance of remittances over the medium-term, albeit growing at muted rates than seen over the past three years. The still strong projected remittances inflows are justified by a favorable economic outlook in most oil-rich Gulf countries which represent a key source of remittances flowing into Egypt, as oil prices are projected to remain at high levels.
Tourism receipts, according to the respondents’ assumptions, are expected to decline remarkably in FY 2013/14 in light of deteriorated security conditions, before gradually rebounding as security conditions partially improve. The projected gradual recovery in the tourism sector reflects slightly higher tourist arrivals and average spending by tourists. On the other hand, concerns over adverse security conditions and poor public safety, particularly in the transportation sector, can hinder prospects of a much stronger rebound that would allow tourism to boom and record exceptionally high growth rates over the medium-term.