With corporate earnings about to be announced, experts believe the Egyptian economy has held its own for now, but a global rebound is needed for Egypt to recover its pre-crisis growth levels, Niveen Wahish reports It has been a hard first six months. This year got off on the wrong foot with a global recession at its heel. However, half way through the year things seem to have stabilised. The International Monetary Fund in their Article V Consultations report said the Egyptian economy is "still healthy given the global environment". Yet experts believe the outlook in the short term is nothing to hold your breath about. According to Reham El-Desoki, senior economist at Beltone Financial, preliminary earning reports show that economic performance "is improving slightly on a quarterly basis, but still down on an annual basis." Just this Sunday Suez Canal Authority Chairman Ahmed Fadel announced that Egypt's annual revenue from the Suez Canal fell 7.2 per cent in fiscal year (FY) 2008/09 to $4.74 billion compared to $5.11 billion the previous year. However, citing Reuters, Fadel said that flows had improved gradually in recent months. The same goes for tourism. Minister of Tourism Zoheir Garana was quoted this week as saying that the first half of the year witnessed a drop of 8.67 per cent in the number of tourists and 9.48 per cent in the number of nights and tourist revenues. However, he said that during the first two weeks of July, the drop was zero. In 2008 the number of tourists was 12.8 million bringing in $10.980 billion. A report by CI Capital Research showed that FDI inflows fell to $5.2 billion in the first nine months of 2008/09, a drop of 53.4 per cent from $11.3 billion in the same period of 07/08. However, the report has been seeing more confidence in the Egyptian economy since the beginning of 2009. It expects investments to have improved by 12 per cent in the fourth quarter of 2008/09 by 12 per cent, up from four per cent in the previous quarter. Two factors which have contributed to pulling the economy together are local consumption and government spending. According to CI Capital Research, higher spending and private consumption led to resilient consumption. It said that in the first nine months of 2008/09 consumption grew by 4.8 per cent compared to 5.1 per cent during the same period a year earlier. In the meantime, it showed that the government confirmed its commitment through continued expenditure on infrastructure investments with increases of 5.6 per cent, 4.4 per cent and 6.7 per cent respectively in the first, second and third quarters of FY 2008/09. Mohamed Abu Basha economist at investment bank EFG-Hermes also believes the stimulus package injected by the government at the breakout of the crisis has had a positive effect. He pointed out that investment pumped by the government and government-affiliated investments replaced the scarcity in private investments. Beltone's El-Desoki explained that the objective was to stimulate real demand in the economy. She believes that it has contributed to resilience in demand which reflected on the growth figures in the third quarter of the FY and which came as a surprise to everybody. Growth inched from 4.1 per cent in the fourth quarter of 2008, to 4.3 per cent in the first quarter of 2009. "The key factor is to continue to inject funds into the economy to help buoy growth in the current FY," she said. But Abu Basha does not see it is feasible. "The budget can not afford another LE15 billion. Even without such an amount, the budget deficit in the 2009/10 budget is expected to reach 8.4 per cent compared to 6.9 percent in the 2008/09 budget." He added that there is a limit to what any stimulus could do seeing that Egypt's economy is very much tied to the outside world in areas such as trade, investment and tourism. "The LE15 billion stimulus was a temporary relief and it helped the economy surpass the hardest spot, but without an improvement abroad, there is not much that can be waited for. We would continue to revolve in the range of the four per cent or maybe towards the higher end of the four per cent growth rate. To reach the six or seven per cent growth rate, the global indices need to improve," he said. CI Capital Research reiterates a similar opinion. Although they say in their report that "a softer decline in US Industrial Production [IP] Index will moderate the decline in Egyptian exports" and that the "escalating oil prices will alleviate the weakness in external demand," they still believe that Egypt is still "trending along the bottom of a U- shape path." This is attributed to the fact that exports represents 36 per cent of GDP in FY 2007/08 at a time, the global economy is sluggish. The IP index saw a softer drop of 1.8 per cent in the fourth quarter of 2008/09 compared to a 2.5 per cent decline in the previous quarter. On a similar note an HC Securities Macro and equity note titled "Brace for second round effects" expects the Egyptian economy to grow by only 3.5 per cent in 2009/10. "The reduction in growth from peak 07/08 levels of seven per cent will feel like the economy is in second gear," HC research said. The report said that "the negative implications of a sharp decline in activity within the developed world have yet to be fully reflected within the Egyptian economy. We believe that second round effects of weaker global demand will have considerable implications due to Egypt's close links with the developed world." In fact, HC sees that such factors will "dramatically reduce the economic outlook for Egypt." And it does not see an end to the downward external factors before 2011. In the meantime, it said that "the economy needs to grow at five per cent to accommodate new entrants to the labour market. Weaker headline growth will see unemployment rise." The unemployment rate stood at 9.4 per cent in Q1 2009 compared to 8.8 per cent in Q4 2008. The IMF report says that "for the medium-term, reducing fiscal vulnerabilities is a precondition for achieving Egypt's growth potential." The fund sees that "sustained high fiscal deficits and public debt could undermine investors' confidence and put upward pressure on the yield curve, with attendant risks to government financing costs, economic activity and the exchange rate." It said that government plans to resume medium-term fiscal consolidation should be supported by strengthening revenues through the "introduction of a full-fledged VAT; and increase the efficiency and control of government spending with further rationalisation of subsidies and decisive progress with financial management reforms. As plans for pension and healthcare reforms are finalised, it would be important to ensure that the potential fiscal impact is controlled." It also recommended further exchange rate flexibility saying that it "would help the economy adjust to the weaker external environment and provide scope for more independent monetary policy." But the implementation of more reforms by the government might be tricky in the current social and political environment according to El-Desoki.
