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Country Report Egypt

Country Report

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Egypt flag

A generous financial lifeline from the GCC countries kept the Egyptian economy afloat in 2013 and will do so again in 2014. Despite some stabilisation since the ouster of president Morsi in 2013, polarisation of the Egyptian society prevails and makes the country’s future highly uncertain.  

Strengths (+) and weaknesses (-)

(+) Geopolitical importance ensures financial support

Egypt’s strategic importance, derived from the economic significance of the Suez Canal and the country’s key role in regional diplomacy, facilitates financial support in times of crisis.

(-) Dependence on food and fuel imports

Egypt imports more than half of the 19m tons of wheat it consumes every year and the majority of the fuel it needs, rendering the country highly susceptible to price fluctuations on these markets.

(-) A large welfare state that is difficult to reform

Extensive food and fuel subsidy programs in place during the Mubarak regime (9% of GDP and 27% of the budget in 2010) were expanded to contain social unrest. The high reliance of the population on this system makes it difficult to reform without causing a backlash.

(-) Fluid political preferences

The political preferences of most Egyptians are not based on ideology, but on other grounds, such as the perceived capability to improve living standards or voter’s familiarity with a party, and are therefore very volatile. A certain degree of widespread loyalty to the army provides some stability. 

Key developments

1. Arab spring turns into winter, and the resulting instability stems an economic recovery

Oppression of the Muslim Brotherhood (MB) and dissent in general has intensified in recent months, and that has raised concerns about Egypt returning to a security state. The crackdown included the incarceration of thousands of MB members and supporters, as well as other critics such as journalists or revolution activists. A new controversial protest law allowed authorities to clamp down on critics. But, what really shocked the world was the mass death sentence of more than 1200 individuals for participating in violence during the August 2013 protests. We do note that that the verdicts are expected to become milder after appeal, as their purpose seemed to be to scare off potential protesters ahead of the presidential elections. These developments indicate that Egypt is prioritising security above democracy, and is returning to being a security state, now led by a regime that is perhaps even harsher than Mubarak’s. This authoritarian approach is not expected to hurt relationships with the West. However, a certain level of domestic instability will be maintained, as terrorist attacks and protests persevere. In turn, that will keep tourists and investors at bay and, hence, stem an economic recovery. As the economy continues to muddle through, it is highly likely that the new government will fail to improve living standards. Against the backdrop of increasing oppression, that could lead to a new bout of social unrest. In all, Egypt’s economy will most likely remain in the doldrums and its medium to long term future remains uncertain. Economic performance might improve if the stimulus programs adopted by authorities attract enough foreign investments (probably from the Gulf region).   

2. Elections reveal that the high degree of polarisation perseveres

The MB’s antagonistic approach had seriously polarised Egypt’s political scene and society during their near two year rule. The government that replaced it was a technocratic one. The transition roadmap this government announced was implemented without major setbacks, which raised expectations that political tensions would ebb. The government seemed to enjoy support with the population, as its harsh crackdown on dissent did not trigger any protests, though it was known that revolution fatigue also played a role. The results of the constitutional referendum held on 14-15 January 2014 were better than the results of the referendum held by the MB government (approval and turnout were 98% and 38%, respectively, against 62% and 33% during the MB referendum). The results seemed to confirm the population was endorsing the army. However, the results of the presidential elections on 26-28 May shed another light on this. While marshal el-Sisi’s landslide victory wasn’t surprising, the low turnout of 46% (lower than the 52% recorded in 2012 when Morsi was elected) was. Beside the fact that this undermines the legitimacy of the new president, it also reveals that the degree of polarisation in the Egyptian society is still high. Consequently, the situation in Egypt remains volatile and specific events, such as rampant electricity shortages or excessive oppression of dissent, could lead to renewed widespread social unrest. In the short to medium term however, the fact that the majority of the population yearns for stability is expected to contain such breakouts. In the longer term, as the political capital of the new government wears off, such developments become more likely. 

Figure 1: Budget deficits soars
Figure 1: Budget deficits soarsSource: EIU
Figure 2: Assistance pushes up external debt
Figure 2: Assistance pushes up external debtSource: EIU

3. Fiscal and external balances deteriorate, despite generous external assistance

In 2013, generous financial support from Gulf Council Countries (GCC) helped Egypt to finance its twin deficits and avoid a balance of payment crisis, but overall the external balances deteriorated. The current account deficit narrowed from 4.1% of GDP in 2012, to 3.9% of GDP in 2013, on the back of oil aid and grants from the GCC countries. However, as the lion’s share of the pledged assistance was in the form of debt, external debt increased by 28% to 20% of GDP in 2013. Though the level of FX reserves improved and is stable, it is still critical at 2.6 months of imports (end-April). Moreover, as domestic instability keeps foreign investors and tourists at bay, and the conflict in neighbouring Libya and Syria hurts remittances inflows, Egypt depends on external assistance for maintaining this level of FX reserves and to avoid a balance of payments crisis. GCC donations also supported public revenues. Still, the budget deficit increased from 10.6% of GDP in 2012 to 13.6% in 2013, on the back of an expansionary fiscal policy and falling revenues. Public debt also increased; from 86% of GDP in 2012 to 92% of GDP in 2013. Given the sluggish forecast for economic growth, Egypt will continue to rely on external assistance to finance the public deficit. Fortunately, support is expected to remain strong in the short term. In the longer term, however, it is expected to ebb away. Reforms of the generous food and energy subsidy programme could buttress the twin deficits, but such measures could also spark social unrest. It is positive that the government has set a few small steps in the right direction. An IMF programme would be welcome in this regard. From that perspective, it bodes well that the GCC countries not only announced additional assistance for Egypt after elections, but also encouraged cooperation with the IMF. Until such a programme is in place, Egypt will continue to rely on help from its neighbours.

Factsheet of Egypt
Factsheet of EgyptSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

97% of Egypt’s territory is a vast desert plateau. The remainder is made up by the Nile valley and delta, where most economic activity takes place. The Nile is very important for the Egyptian economy, as it provides the necessary water for agriculture, 98% of fresh water needs and 10% of energy supply. Though 10 other countries are located on the river, colonial agreements granted water rights to Egypt and Sudan only, of which the lion’s share to Egypt. However, the situation might change as these rights have been challenged in recent years, leading to increased tensions. Egypt used to be a fairly closed economy, but the development of the oil and gas sector boosted the value of exports. Mining, mainly oil and gas exploitation, is the largest sector and accounts for roughly 17% of GDP. However, its share is set to fall as a lack of investments will hurt output. Wholesale and retail trade account for the largest share of output in services (11% of GDP), but tourism and the Suez Canal transit feed are the main foreign exchange earners, accounting for almost half and almost a quarter of total services exports (9% of GDP), respectively. The current account is also structurally supported by remittances inflows (7% of GDP in 2013). Ever since independence from the UK in 1952, the Egyptian army has played a prominent role in politics, albeit mostly behind the curtains. The military facilitated both the ousting of Hosni Mubarak and of Mohammed Morsi - both events representing de facto coups backed by the Egyptian people. The ouster of Mubarak in 2011 was also backed by the international community, while Morsi’s ouster was more controversial. The military’s influence is also visible in the national economy, in which it has an estimated stake of 40% (2009). It is therefore expected that the army will intervene to protect its economic interests, and thus play a stabilising role. 

Economic indicators of Egypt
Economic indicators of EgyptSource: EIU
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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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