Egypt's business sentiment upbeat despite subdued private sector activity

A drop in new orders and output pushed the IHS Markit Purchasing Managers' Index lower

Egyptian firms are optimistic about business conditions for the year ahead. EPA

Business sentiment in Egypt climbed to an 18-month high despite private sector activity dropping slightly in August as new orders and output declined. This was the tenth deterioration recorded in a year.

The IHS Markit's Purchasing Managers' Index, which measures the health of the non-oil sector, fell to 49.4 from 50.3 in July, dropping below the 50-mark that signals expansion, according to a report on Tuesday.

"The decline was due to a drop in sales which, while down for the third time in four months, was the weakest fall seen in this period," said David Owen, economist at IHS Markit. "Concerns around current economic and employment conditions are still being highlighted by panellists as limiting business activity."

The International Monetary Fund has approved a $2 billion (Dh7.34bn) tranche, the last installment of a three-year $12bn loan to Egypt that helped revive its economy through tough austerity measures. The government devalued its currency and cut subsidies at the end of 2016 to get the loan agreement, followed by further spending cuts. The reforms helped end a major dollar shortage, repaired overburdened finances and pulled the country out of an economic crisis, although Egyptians have felt the burden of the austerity measures.

The contraction in business activity was driven by a decline in output levels in August after an expansion in July, slower sales and the impact of weak labour market conditions, said the report.

Input costs rose after a rollback of subsidies pushed up fuel prices, forcing Egyptian companies to raise their selling prices at the fastest rate in a year, as they passed on the higher expenses to consumers.

Companies saw a "moderate increase" in backlogs in August because liquidity issues limited the volume of purchases at several businesses, leading to difficulties in completing outstanding work.

On the upside, despite overall challenging conditions, the outlook of Egyptian companies for business activity going forward climbed to an 18-month high in August.

"Companies are appearing increasingly optimistic for the year ahead. Sentiment has been subdued since the middle of 2018, but is starting to pick up now amid hopes of a recovery in growth," Mr Owen said.

New export orders rose for the second consecutive month. Egyptian companies said there was a noted improvement in foreign markets, as contracts from trading partners in the Middle East and other regions increased.

"This indicated that the fall in total sales was driven by weakness in domestic demand," the report said.

To meet this surge in export sales, employment rose marginally in August, ending the previous three-month decline. On average, the rate of job creation was the strongest in a year.