Desperate for signs of hope any report with something positive to say about the economy is seized on eagerly by the public. Things have not been easy lately. In the last three months inflation has increased dramatically and the pound has lost 100 per cent of its value against other currencies. Is there an end to it all? President Abdel-Fattah Al-Sisi recently promised relief within six months. The Economist Intelligence Unit (EIU) is also optimistic. It has singled out the Egyptian pound as one currency likely to appreciate against the US dollar in 2017. “We think that the markets have overshot after the welcome float of late 2016 and expect a 14 per cent appreciation this year,” says EIU Chief Economist Simon Baptist. Welcome news for Egyptians who since the floatation on 3 November have seen the pound fall to LE18/dollar compared to an LE8.88 official rate before the floatation. Also this week the Wall Street Journal noted that investors surveyed by Citi, the financial services multinational, “are enthusiastic about the prospects” for five frontier/emerging markets, including Egypt. A frontier market is a developing country which is too small to be considered an emerging market. Representatives of 27 regional and global investment funds were in Egypt this week at the invitation of investment bank EFG Hermes and met with Al-Sisi who spoke with them about recent economic developments. The visit reflects a growing interest in Egypt as an investment destination, Minister of Finance Amr Al-Garhi said on television. The economic reforms undertaken by the government in the past few months have had a positive effect on international assessments of the Egyptian economy, Al-Garhi told the president during a recent meeting to discuss economic reforms. Major reforms implemented towards the end of 2016 included the implementation of a Value Added Tax (VAT) and cuts to fuel subsidies in addition to the floatation of the pound. The flickers of optimism are not shared by everyone. The average citizen is having a difficult time making ends meet. Devaluation, higher energy prices and VAT significantly reduce purchasing power, says Farrah Al-Moghazi of N Gage Consulting. Egypt's inflation rate hit 23.3 per cent in December according to the Central Agency for Public Mobilisation and Statistics. The government's inability to mitigate the consequences of the devaluation on pharmaceuticals and the skyrocketing prices across several sectors have fuelled pessimism, she says. But that is only natural, argues Allen Sandeep, director of research at Naeem Brokerage. The immediate impact of such economic reforms are inevitably painful to much of the population. The government's push for reform came on the back of a three-year $12 billion financial bailout from the International Monetary Fund. “It takes a while for the positive impacts of such reforms to be felt by the public, always providing the government follows through with the reforms,” says Sandeep. He points out that it took almost four years for India's GDP growth to move beyond six per cent after reforms, also involving an IMF bailout loan, were put in place in the early 1990s. So exactly what is there to be positive about in 2017? One can be optimistic on several fronts, says Al-Moghazi. In the short-term the Egyptian equity market is becoming one of the most attractive emerging markets in the world, she says, with attractive yields on T-bills and bonds and strong performance of the stock exchange. A rebound in tourism is also expected with the imminent resumption of flights between Russia and Cairo and devaluation making Egypt a more competitive destination. Sandeep also finds reasons to be cheerful. Past IMF bailouts — in India, Brazil and Argentina — point to strong possibilities for sustained economic recovery over the next five years, he says. Unfortunately, for now at least, this has only been reflected in the Egyptian Stock Exchange's performance since the floatation of the pound. The benchmark EGX 30 index soared to its highest level in six months following the floatation and has continued to climb. Foreigners have been net buyers since then. Egypt's economic growth rate registered 4.3 per cent of GDP in the fiscal year 2015-16, down from 4.4 per cent in the previous year. The IMF had predicted a growth rate of 4 per cent for 2017. Demand, and by extension growth, will be affected by the unprecedented levels of inflation, says Al-Moghazi. But she is hopeful growth figures will be boosted by natural gas production and increased foreign direct and public investments. Recent announcements that Eni, the Italian multinational oil and gas company, plans to increase its energy exploration investments to $3.5 billion in 2017 are a positive sign, as is the fact that the Zohr gas field is expected to start production before the end of 2017. Sandeep estimates savings of around $2 billion as a result of new gas productions, together with the possibility of exporting Egyptian gas in the future. Higher remittances and tourism revenues are expected to narrow the current account deficit to $16.5 billion in fiscal year 2016-17, and $7.2 billion in 2017-18, from the $18.7 billion in fiscal year 2015-16, said Naeem Brokerage in December. Other factors that could contribute to growth include increased foreign direct investments, diversification of the economy with an emphasis on local manufacturing and reduced bureaucracy, says Al-Moghazi. The government has prepared a draft investment law and new bankruptcy laws which it hopes will boost investment. Minister of Investment Dalia Khorshid said at a press conference this week that the new investment law focuses on better attracting investors and ensuring easier market entry and exit. The business community is not only awaiting the investment and bankruptcy laws but new industrial license, importers' registration and food safety laws. Al-Moghazi stresses an improved outlook depends not only on new legislation but the enhancement of government performance and greater official understanding of the requirements of business. The minister of investment also announced that tranches of the state-owned Alexandria Mineral Oils Company (AMOC) and Engineering for the Petroleum & Process Industries (Enppi) are to be offered on the Egyptian stock exchange this year following approval from the two companies' boards of directors. These are expected to attract further investment interest. But there are some risks according to Naeem Brokerage's December report. Any slowdown in tourism could result in further weakness of the pound as rates are set by a liquidity-starved foreign exchange market. The report also worries about the $47 billion non-petroleum import bill and higher global energy prices. “Higher energy prices do not bode well for Egypt anymore — an annual import bill of $9 billion is already a sizable obligation,” it pointed out. There are other potentially negative signs. The CBE recently announced that external debt had reached $60 billion by the end of September 2016, up from 55.8 billion at the end of June, 2016. It is increased debt that allowed the CBE to boost its hard currency reserves to $24.3 billion by the end of December. External debt is expected to increase further this year and the most recent figures do not include borrowing in the last quarter of 2016. September figures did not include the first tranche of $2.75 billion from the IMF or other borrowing needed to complete the IMF deal. The government also plans to borrow from international markets through a Eurobond issue for which it is planning a marketing roadshow starting mid-January. Yet Al-Moghazi remains cautiously upbeat. “Debt is still within safe limits,” she says, though Egypt will need to increase economic growth and improve its current account balance to sustain the economy's ability to meet external obligations.
