Egypt's non-oil economy shows signs of recovery in December

North Africa's biggest economy reported improving conditions for the first time in three months

epa07736075 The World's tallest skyscraper Burj Khalifa is illuminated in the colors of the Egyptian flag to mark the Egyptian national day in Dubai, United Arab Emirates, 23 July 2019. Egypt celebrates annually on 23 July the revolution of 1952 that removed the Royal rule and led to the creation of the first Egyptian republic. EPA/ALI HAIDERShow less

Egypt's non-oil private sector economy showed signs of recovery in December as growth continued to slow, but at a softer pace, breaking a three-month cycle of accelerated economic contraction.

Expectations of an improvement in business conditions and optimism in the biggest North African economy also rose to the strongest level since October.

The headline seasonally-adjusted IHS Markit Egypt Purchasing Managers’ Index – a composite indicator designed to give an overview of operating conditions in the non-oil private sector economy – rose for the first time in three months in December to 48.2 from 47.9 in November. This signalled a slightly softer, and only moderate, deterioration in business conditions across the Egyptian non-oil private sector.

"Egypt PMI showed some signs of a turnaround in December, with the headline reading increasing,” David Owen, an economist at IHS Markit, said.

“Despite contracting further, both output and new orders fell at softer rates than in November. This indicates that the downturn in the non-oil sector is beginning to ease.”

Egypt, whose economy has struggled since the removal of president Hosni Mubarak in 2011, signed a three-year, $12 billion (Dh44.07bn) Extended Fund Facility with the International Monetary Fund in November 2016 to revive its economy through tough reform measures. The government devalued its currency and cut subsidies at the end of 2016 to secure 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 pressured by the austerity measures.

Companies surveyed by IHS reported further declines in both output and new orders with panellists saying market conditions remained subdued in general at the end of the year. Output levels also fell, with some companies stating that liquidity issues restricted business activity. However, the rate of decrease was softer than in November, according to the report.

Total new orders also deteriorated at a slower rate in the latest survey period. Anecdotal evidence, however, pointed to a lack of contracts, while demand from foreign clients fell at the steepest rate in over three years amid a difficult trade climate.

Headwinds remain on the external front for the Egyptian non-oil private sector economy, with export orders falling at the steepest rate in over three years, Mr Owen said.

Weakening business volumes also had a negative impact on employment in December, with businesses cutting job numbers for the second consecutive month and at a faster pace than in November. Several companies said falling sales had led to a reduction in the labour force.

On the positive side, cost pressures remained cool, as a strong exchange rate against the US dollar helped companies import goods at cheaper rates. Some panellists saw input prices rise, due to higher electricity bills and customs duties. However, there was only a slight overall increase in costs.

Respondents said they hoped to gain higher sales volumes through discounting. Purchasing activity also rose marginally in December, despite falling output requirements.

The 12-month outlook for output improved modestly at the end of 2019, with the degree of optimism stronger than the average for last year. IHS said companies expect business activity to rebound, with some citing new branch openings and the Egyptian pound strength against the US dollar as reasons.

"The clear positive from the survey is that the strong exchange rate with the US dollar is helping to restrain input costs inflation. Companies have responded with solid reductions in output charges during the past two months, which may help to boost sales in the near future,” Mr Owen said. “Upcoming PMI releases will show whether the non-oil sector can be swiftly reinvigorated."