Petroleum products
The contribution from the petroleum sector is expected to recover this year Petroleum products has seen contribution to overall GDP fall from 9% in 1996/97 to 6% in 1997/98. We expect slight increase for the year to the end of June 1999, helped by the recovery in the oil price and the increase in expenditure in the sector witnessed over the year. For the current year, we expect the percentage attributable to petroleum and products to rise back to 8-9%, on the back of increased oil prices.
Transport and communications
Transport sector has grown rapidly
Transport and communications has grown relatively sharply over the past few years, up from 7% in 1996/97 to 9% in 1997/98. This has been due, in great part, to the growth in both industries, with greater overall wealth in the economy stimulating investment and spending, with a greater number of internal travelers, for example, boosting growth.
Construction
Construction looks to have slowed down but should recover with the large infrastructure projects
Although statistics have been released on the construction industry over the past 18 months, there is no comparative historic data to help understand trends. For the year to the end of June 1998, construction accounted for 5% of GDP. Over the past year, construction.?at least in terms of housing? looks to have slowed down slightly, as the market for private housing appears to have over-heated in the short term.
However, we expect the sector to remain strong due to the number of large construction projects across the country. These projects include major investments in the leisure industry, along the coast in particular, as well as the projects to distribute water, the Toshka scheme in particular, which will also involve major investment in infrastructure to develop agriculture, housing and commerce across a large area to the south west of the Nile delta.
Government services and social/other services
Government services remain too important
Government services have accounted for 8% of GDP for the last two reported years, which we believe, is too high to be sustained in the long term. Added to this, social/other service accounted for 8% of GDP in the year to the end of June 1998. The importance of the government’s contribution to GDP is another legacy of Egypt’s four decades of nationalization from the 1950s.
The result is a large, cumbersome and inefficient bureaucracy. It is unlikely that the new cabinet?while it is set to reform the management of government?will cut employment within the layers of government in a heavy-handed way. Natural wastage will be the main policy. Stability is all-important and a major program of restructuring is unlikely to occur. The contribution to GDP from government and social/other services is therefore unlikely to alter significantly in the short term, although the government will look to squeeze spending in the medium term.
Industry and mining
Industry and mining is a key sector to watch for growth
Industry and mining is one of the key sectors to watch over the next few years. In the year to the end of June 1998, the sector accounted for 19% of total GDP, versus 18% in 1996/97. We believe that the growth in this sector will be a key indicator of Egypt’s economic progress, as we must look to the development of industry to determine whether the industrial base is growing strongly enough and whether investment into the sector is stimulating economic growth, new employment and?just as importantly? export growth.
The government recently announced that companies will not have to pay taxes on goods destined for export, a change of policy designed to stimulate investment into industrial production. It will be several years before this change has an impact on the statistics, but it should underpin general investment and should be positive for the economy. The mining sector remains very under-developed, partly because so much of Egypt is desert. Although there have been indications that there are gold deposits in the western desert, as yet there are no clear indications of the breadth of possible natural resources.
Interest Rates
Real interests rates around 9%
The rise in interest rates this year has provided evidence of the central bank trying to maintain the strength of the pound. The central bank discount rate is now 12%?giving a real rate of 9%?far too high a rate for an economy growing at 5.5-6.0% and for a developing economy which requires domestic investment to expand industry. We expect rates to fall, possibly as early as November, if positive action is announced regarding the currency and the central bank.
Summary
Egypt is the third-largest economy in the Middle East and North Africa region, as well as one of the strongest, with significant potential for future economic growth and diversification. With a real commitment to economic reform, which encompasses a large privatization programme and the encouragement of private investment and growth in the private sector, the attractions for both foreign direct investors and portfolio investors continue to increase.
The government and its institutions manage the economy in a highly conservative manner: a legacy of an IMF structural adjustment program in 1990, this fiscal discipline has kept the budget deficit firmly under control.
Economic growth to the end of June 1999 is expected to have been 6.0%. For the year to the end of June 2000, we forecast growth of 6.5% and 7.0% for the year to June 2001.
Reducing inflation has been a key achievement
The fight against inflation has been one of the success stories of the last decade. Inflation has fallen from around 20% in 1991 to 2.9% at the end of August this year. The continuing low levels of inflation, despite the rise in economic activity, have been a pleasant surprise to the market, being lower than forecast.
Although foreign exchange reserves have fallen, they are still at comfortable levels. Foreign exchange reserves have fallen from around US$20bn earlier in the year to US$17.6bn at the end of July 1999 (equivalent to 11.8 months cover of imports).
The overall level of reserves indicates the large inflows of capital from tourism, remittances from Egyptian expatriates and the income from the oil sector. Oil export revenues in Q4 1999, for example, rose to US$321m from US$196m in Q3 1999. However, the fall in reserves this year as currency has been released to supply the demands of the market (having been held back initially by the central bank) has highlighted the central bank’s lack of flexibility in coping with market demands.
As a result, the informal peg against the US dollar?against which the Egyptian pound has been technically over-valued over the decade?has been called into question. The issue of the value of the pound and a steadfast exchange rate mechanism is one of the key issues for the government to resolve in the short term. The Ministry of Economy has undertaken the restructuring of the central bank and we expect several announcements and mission statements on these key issues shortly.
The current account deficit and the country’s poor non-oil export record may be viewed as not as good as desired. At Egypt’s stage of economic development, however, a current account deficit equivalent to 2% of GDP should not be a surprise. There is a great need to modernize industry and commerce, especially in the public sector: in order for this to happen, foreign-supplied equipment is key and imports are therefore likely to be high. Inflows from foreign direct investment and other capital inflows, however, mean that the current account deficit is sustainable at current levels.
The rise in oil prices and the sharp increase in tourism arrivals and revenues should help to keep the current account in check. The low level of non-oil exports continues to be a concern and it is an area upon which we expect the government to focus, although a real improvement in exports is likely to take several years.