Turnaround signs for Egyptian economy after tough year

Capital Economics expects the Egyptian economy to grow by 2.5-3 per cent in 2014, but warns of political tensions.

Egyptian shopkeepers sit at their shops in the tourist market in central Luxor. Industrial production in Egypt fell by 16 per cent year-on-year in the third quarter. Ed Giles / Getty Images

Egypt’s economic outlook could be improving after a difficult 2013, a new report says.

“We think that the Egyptian economy will grow by around 2.5 to 3 per cent in 2014, up from around 1.5 per cent this year,” Capital Economics, a London-based research consultancy, said in its report this week.

However, the consultancy warned that a flare-up in political tensions will continue to pose a major risk.

“Much will hinge on political developments. With fresh parliamentary and presidential elections due in the first half of next year, there is the risk that tensions between the armed forces and supporters of the Muslim Brotherhood flare up again,” Capital Economics said.

“The economy was already weak prior to the ousting of president Morsi in July and, unsurprisingly, it has suffered against the backdrop of the social unrest and political upheaval that followed,” it added.

Tourism, one of the most important sectors in the Egyptian economy, has been hit hard. Tourist arrivals have collapsed and are close to their lows reached shortly after the Arab Spring.

In the six months following the “second revolution”, Capital Economics estimated that tourism revenues have dropped by about US$2.5 billion compared with the same period a year ago.

The rest of the economy has not fared much better either, the consultancy said.

Industrial production fell by 16 per cent year-on-year in the third quarter.

Although the quarter’s GDP figures have yet to be released, Capital Economics expects that the economy probably shrank by 0.5 per cent to 1 per cent year-on-year.

Some signs of a turnaround are on the horizon.

“A recovery of sorts could get under way next year, supported by a second Gulf-funded stimulus package,” the report said.

It added: “Another Gulf-funded stimulus package appears to be in the pipeline. In recent media comments, finance minister Ahmed Galal said that the authorities were in the process of putting together a package of around $4.4bn. Few details were given but he said that around one-third of the funds would be used to finance a rise in the public sector minimum wage, while the remainder would be used for public investment.”

Capital Economics said that the latest economic data showed signs of improvement. For instance, the purchasing managers’ index stood at 52.5 in November, up from an average of 44.5 since the “second revolution”. This was the highest reading in the survey’s short history, the consultancy said.