Economic Analysis - Growth To Remain Lacklustre - MAR 2017


BMI View: Egypt 's economic growth will pick up marginally over the coming quarters, however , a beleaguered tourism sector and muted expansion in fixed investment will mean growth is far below potential and has a minimal impact on unemployment. We remain significantly below Bloomberg consensus on growth in 2017.

Egypt's economy will see marginal increases in growth over the coming quarters but will remain far off levels required to reduce unemployment significantly. Our forecasts are a slight uptick compared with previous years; however, economic expansion on par with the early 2000s, at 5-6%, is at least five years away. Growth will be increasingly driven by fixed investment (particularly given the much weaker currency) as consumer and government spending remain weighed down by fuel subsidy reform. Private consumption growth will be muted given our expectation for a hike in interest rates and the lacklustre growth in the tourism sector which is key to spending.

Recovery To Be Slow
Egypt - Real GDP Growth (%)
e/f = BMI estimate/forecast. Source: BMI, Central Bank of Egypt

Out of all MENA countries in 2017, our growth forecast for Egypt (2.7%) differs the most from consensus (3.6%); we believe Egypt's economic growth is slowing considerably as low base effects have worn off and structural impediments remain. We expect the decimated tourism industry to recover only very slowly, and growth in consumption (both public and private) to be low, given subsidy reform, high unemployment and efforts to reduce the fiscal deficit. Indeed, recent purchasing managers' index readings have shown an increasingly pessimistic outlook for future growth. We believe growth will not pick up until the end of 2017 when there will be greater clarification over investment laws.

Over the longer term, the outlook is slightly more positive. We expect Egypt to conclude talks with the IMF by the end of the year, which will result in a loan agreement in the region of USD12bn over the next three years. An agreement with the IMF would be symbolically important as it would show investors that the government is committed to reforming its economy, which could trigger an uptick in investor sentiment and thus fixed investment.

Impediments To Growth Remain

There are significant structural weaknesses in Egypt's economy, particularly anaemic credit growth to the private sector and an only modestly improving employment picture, which will prevent more recovery in the near term. According to the central bank, the official unemployment rate has fallen very slowly from an all-time high of 13.1% in Q313 to 12.8% in Q316 and we believe the actual rate is significantly higher. In addition, we see little chance for a notable improvement in the unemployment rate as growth will do little to tackle the 500,000 entrants into the labour market each year. We expect unemployment to remain in the double digits for at least the next five years.

In addition, we believe the conditions necessary for a more aggressive acceleration in economic growth are not yet present. Namely, Egypt's fiscal and current accounts are experiencing significant strains, while policy levers available to authorities are minimal. The external climate is also likely to prove less than favourable in the near term, with the eurozone (which absorbs one-quarter of Egyptian exports) growing at only a minimal pace.

Little Optimism For Future Growth
Egypt - PMI Readings
N ote: 50 level separates expansion and contraction . Source: BMI, CBE

Egypt's crucial tourism sector will remain a major constraint on growth over the coming quarters and have a significant impact on private consumption given around 10% of jobs and GDP are related to the sector. Following the bomb on the passenger plane in Egypt's Sinai Peninsula in October 2015 the UK and Russia, which together account for around 30% of tourist arrivals, still have travel restrictions on Sinai province. Monthly tourist arrivals have already dropped by three quarters since 2011 and stood at 320,000 in September 2016, the second lowest figure in the past decade.

Gas Exports To Support Long-Term Growth

Over the longer term, there is significant potential for oil and gas exports as investment is returning to the country. In particular, we highlight that the prospects for the Western Desert are particularly promising, given it has been underexplored and offers comparatively low-cost onshore development opportunities. The Western Desert has shown a very significant hydrocarbon potential. This is backed by positive exploration results, notably by Eni: over the past three years, Eni has doubled its oil production through exploration and development of deep sequences within the Western Desert area. As yet, production is still a long way off, but given the improving operating environment, this could bolster our long-term outlook.

Gas Returns, Oil Stabilises
Egypt - Oil & Gas Production
f = BMI forecast. Source: JODI, EIA, BMI

We expect Egypt's large manufacturing export base to see growth over the coming quarters given recent investment in the autos and food sectors especially with the devaluation in the Egyptian pound will have on boosting competitiveness. That said, while the external environment is certainly improving, global growth is far from being strong enough to act as a key driver of Egypt's macroeconomic recovery.