CAIRO: Egypt's economic growth for fiscal year 2009/2010 could slow down to 3.5 percent, Cairo investment bank HC securities predicted in a report released Tuesday. The report, entitled "Egypt Macro and Equity Outlook - brace for second round effects, provides a detailed look at Egypt's current macro economic standing, and the factors that could impact future growth. The report's prediction of a drop to 3.5 percent growth rate is optimistic compared to research done by other local analysts. Cairo investment bank EFG-Hermes, for example, recently forecasted a 3.1 growth rate for fiscal year 2009/2010. According to the report, the "second round effects of the financial crisis have yet to fully impact Egypt in the areas of foreign direct investment (FDI), shrinking export markets and currency depreciation. "The immediate financial shock wasn't felt in Egypt but it has hit in certain areas like tourism, Suez Canal revenues and exports. You could say that this was the second round of effects. In the long term, when global growth resumes it will be much slower for everyone, said Simon Kitchen, an economist at Cairo investment bank EFG-Hermes. Continued slowdown in these areas will negatively impact the country's economy well into the coming fiscal year, according to the report's author. "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, the report states. The effects of a global slowdown will be most acutely felt in the areas of tourism, Suez Canal revenues, remittances from Egyptian expatriate workers and export markets. While economic links with the developed work are vital to Egypt's continued growth, dependence on external economic factors is a negative area demanding reforms, says the report. The report cites FDI and currency depreciation as major areas of concern for the coming fiscal year. According to the report, FDI has peaked for this economic cycle, and inflows of foreign investment can be expected to slow down throughout the current fiscal year, due to budget constraints faced by international corporations. "FDI has slowed, but it has held up better in the oil and gas sector than in the rest of the economy, explained Kitchen. The report calls government FDI projections of $8 billion for the current fiscal year "too optimistic. The author predicts that it could take a minimum of two years for FDI levels in Egypt's non-oil sectors to regain momentum. While Egypt's Central Bank holds strong foreign currency reserves, the report predicts a 5 percent depreciation of the Egyptian pound to LE 5.89 against the US dollar this fiscal year, due to dropping levels of foreign capital inflow. Predictions by EFG Hermes for depreciation this fiscal year are comparable. "We've predicted that the pound will hit LE 5.8 to the dollar by the end of 2009. In general, the forces that determine the exchange rate of the pound against the dollar are very finely balanced at the moment; there is little money coming into stocks and a small improvement in tourism, but no major discernable trends in either direction, said Kitchen. However, the report concedes that the potential for depreciation is not clear-cut due to the international reality of depreciating currencies and the desire of the Egyptian authorities to keep the exchange rate relatively stable. With sectors linked to the world economy threatened by second wave effects from the financial crisis, the report identifies the empowerment of local small and medium enterprises as a means of bolstering Egypt's economy. "SME's could hold the key to unlocking the linkages of the Egyptian economy to the developed world and provide a stimulus to the domestic economy if banks, which are cash rich, loosen their lending criteria and extend credit to this large and untapped segment of the market, said the report.
