Patrick Werr: Signs of hope emerge for Egypt even as inflation soars

This year was never going to be easy for Egypt, but there are causes for it to be hopeful, writes Patrick Werr.

The economic news could hardly seem bleaker, but despite the grimness, there is light at the end of the tunnel.

According to the latest figures, Egypt’s consumer inflation soared to 30.2 per cent in the year to February, and private sector activity contracted for its 19th consecutive month.

In the short term, the inflation surge was because of a one-time leap in prices in November. This was triggered by a 3 percentage-point increase in value added tax, increases in various fuel prices of up to 46 per cent and by an increase in import prices when the pound was devalued by more than half.

But the main culprit has been the cash-strapped government’s printing of money to plug its horrendous budget deficit.

Markit Economics on Tuesday released its purchasing managers’ index (PMI) for March. The PMI, a closely watched measure of non-oil business activity, showed that the rate of contraction actually sped up, with the index falling to 45.9 from 46.7 in February, where any reading below 50 indicates contraction.

This year was never going to be easy. But to me, the economy looks like it will soon pick up.

1. Natural gas is set to take off

Egypt is one of the few countries in the world where natural gas exploration is booming. Total, Eni and BP signed new exploration agreements worth US$220 million in December. Eni expects the first gas from its super-giant Zohr field off the Mediterranean coast to start flowing by the end of the year.

This, along with other gas projects in the works, will soon allow Egypt to stop expensive gas imports and begin exporting, probably within two years. The country has two mostly idle gas liquefaction plants in place, meaning it has the capacity to export as soon as the gas becomes available.

The oil ministry expects Egypt’s gas production to jump by 1.5 billion cubic feet per day to about 5.9 billion by the end of the year and to more than 7.5 billion by 2020-21. The country consumes more than 5.2 billion a day, but this is expected to jump when three huge power plants being built by Siemens come on line this year.

2. Tourism can only increase

Tourism a decade ago accounted for about 10 per cent of Egypt’s GDP, but the 2011 uprising wiped much of this out. The Russian plane crash over Sinai in October 2015 finished off the job.

But in the past few months there have been signs of a rebound. Hotel occupancy rates jumped 69 per cent in the year to January 2017, according to US-based JLL, an investment management consultant. Anecdotal evidence indicates that the upsurge has continued over the past two months.

Providing there are no new major security disasters, tourism should continue to rebound. November’s currency devaluation cut the cost of Egyptian holidays by as much as half literally overnight, and potential tourists pay attention to this. After more than a decade of construction, Egypt already has top-notch hotels and infrastructure in place, so the return of holidaymakers should be fairly rapid.

The real test will come in the autumn, when the post-summer tourist season begins.

3. Exports should rise and imports fall

It is too early to judge how much the November devaluation will boost exports, but it’s certain to be by a substantial amount. According to the last balance of payments figures, non-oil exports jumped to $3.76 billion in the last quarter of 2016 from $2.93bn a year earlier.

Non-oil imports actually increased by a small amount in the fourth quarter of 2016, to $11.86bn from the previous quarter’s $11.65bn. This is probably because of pent-up demand from when importers could not get foreign currency before the November devaluation.

The important figures will be those of early 2017, when the order books begin reflecting the effects of the devaluation.

4. Foreign investment

Likewise it’s too early to judge how the devaluation will affect foreign, but with assets suddenly made cheaper, investment promises to surge.

The most recent figures only caught part of the post-devaluation period. Foreign investment surged in the last quarter of 2016 to $2.41bn from $1.76bn a year earlier. A good part of this was foreigners investing in treasury bills and bonds. This extra source of funds should help push down the cost of financing Egypt’s huge budget deficit.

5. IPOs

There is a boom in IPOs, with four private companies now seeking funds in the market. Other companies are also expected to hit up the market in the months ahead, including state-owned Banque du Caire, which is due to offer 20 per cent of its shares by the end of June, followed by Arab African International Bank, which will offer 40 per cent of its shares.

Patrick Werr has worked as a financial writer in Egypt for 27 years.

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