News on the economic front over the last couple of months has looked encouraging, a noticeable change from the gloom that has overshadowed the economy since the 25 January Revolution. The headlines of financial pages last week included an increase in growth rates to 3.5 per cent during the last quarter of fiscal year 2013-2014, compared to 2.1 per cent during the previous fiscal year as a whole, a doubling in foreign direct investments to $6 billion and a 69 per cent decline in the balance of trade deficit. The latest figures on industrial production reflects a 4.2 per cent year-on-year increase in June, the first time growth has been positive in a year. The political stability following the implementation of the political roadmap and the election of President Abdel-Fattah Al-Sisi, who completed 100 days in office this week, has helped to restore confidence in the country in the aftermath of the revolution. The effect was reflected in business sentiment in Egypt, as measured by the Purchasing Managers Index (PMI) prepared by the HSBC Bank, which surveys business activity in 350 private-sector companies on a monthly basis. The index grew at its sharpest rate in eight months in August, fed by increased output and a sharp rise in new orders at companies. “The strong scores for output and orders are encouraging, though there are a lot of challenges ahead. But we remain optimistic that growth will gain pace in the last months of this year and into 2015,” said Simon Williams, chief economist for the Middle East at HSBC. The question is whether these improvements are sustainable. One of the main problems is the increase in the inflation rate. Egypt's annual urban consumer inflation climbed to 11.5 per cent in August, from 11 per cent in July. The country raised fuel prices by up to 78 per cent in July, as part of a long-awaited step to reform subsidies and reduce the budget deficit. Shortages of fuel and increases in prices have created production gaps that may affect industrial production. “The nature and magnitude of the energy price hikes means that headline inflation is likely to remain high over the next twelve months or so. However, it should fall back in the second half of next year,” said Jason Tuvey, Middle East economist at Capital Economics, an independent research group. On a positive note, most experts rule out moves in the short run by the Central Bank (CBE) to increase interest rates in order to curb growth. The CBE increased interest rates in July by one per cent to contain inflationary pressures resulting from the upward adjustment of energy prices. Strains on Egypt's balance of payments have eased, Tuvey said, in turn reducing the need for the CBE to keep interest rates high. This has come on the back of an influx of financial support from the Gulf states since the toppling of former president Mohammed Morsi last year. The UAE said earlier this month that it will provide Egypt with $8.8 billion in petroleum products, indicating that the flow of aid will continue. Al-Borsa, a financial daily, quoted unnamed government officials on Tuesday as saying that the UAE also planned to invest as much as $20 billion in the new Suez Canal Corridor Development Project. On another positive note, Egypt has recently agreed a $500 million loan with the World Bank, while the IMF has been asked to undertake consultations ahead of an investment summit next year. “This may be a sign that the international institutions are set to play a more prominent role in the implementation of economic policy and that Al-Sisi doesn't intend to rely solely on financing from the Gulf, which comes with little oversight,” Tuvey noted. Egypt's inking of a financing deal with the IMF, or even the rubber-stamping of a reform package, “could unlock billions of dollars' worth of official aid and attract foreign investors back to the country,” he said. One factor that might help lure investments is that the government has now started to repay its debts to foreign energy companies. It has also agreed to increase the price at which it buys gas from RWE, a German oil and gas company. Observers say that the deal that will be examined by other foreign companies. “These moves should help to improve operating conditions for foreign energy firms working in Egypt and, in turn, boost investment and output,” Tuvey said. Only a couple of weeks after the deal was announced, RWE said it had increased investment for the 2014-2015 fiscal year to approximately $300 million, compared to the previous $218 million. The money will be used to drill new wells and develop others in the Ras Badran, Ras Fanar, and Gabal Al-Zeit oil fields in the Gulf of Suez, the company said. The bulk of foreign direct investment coming to Egypt goes to the energy sector. Foreigners have also been net buyers on the country's stock market over the past three months, the longest run in at least three and a half years. However, one item that could curb growth is the fact that local banks are not capable of financing growth by extending credit. This, according to a Capital Economics research note, is due to a heavy burden of non-performing loans, together with the banks' investments in treasury bills and bonds, which limit the liquidity available to private companies. Private-sector credit has grown by an average annual rate of six per cent in each of the last three years. But, with the average inflation rate recording nine per cent over the same period in real terms, credit growth has been negative. According to the report, this has been one factor behind the weakness of domestic demand and thus limited growth rates. While the official non-performing loan ratio of 9.3 is not too high and has fallen steadily over the past five years, observers believe that the real figure could be much higher, especially in the light of the increase in the unemployment rate.
