the egyptian economy in 2009 16 july 2010 · the egyptian economy in 2009 y 2010 2 for your queries...

S A L The Egyptian Economy in 2009

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For your queries Research Department Marwan Mikhael Walid Sayegh Research Department

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[email protected] Tel: +961 1 747 802 Fax: +961 1 737414


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Momentum Driven Growth and Fast Adaptability

The fall of Lehman Brothers in September 2008 marked the beginning of a catastrophic period

for global markets, dubbed as the worst financial crisis since the Great Depression. During the

year and a half that followed, only a few economies managed to avert the tide of bankruptcies

and labor layoffs, which claimed an estimated 20 million jobs worldwide and resulted in a

staggering $4.1 trillion loss in global capital. The countries that were eventually capable of

avoiding an economic and social disaster during the period were those with consistent capital

inflows such as oil producing countries in the Gulf, giant East Asian manufacturers, and

emerging economies that had already been well performing and operated with a relatively

conservative financial system. Of the latter group, Egypt was one of the top performers.

During the fiscal year that extended between July 2008 and June 2009, Egypt’s upward trend

continued uninterrupted registering a 4.7% rise in real Gross Domestic Product. Although it

faced a plunge in its manufacturing exports and other external receipts, Egypt’s economy

proved quite resilient with the aid of a strong domestic demand that was boosted by

systematic raises in public wages. In addition, the negative investor sentiment during FY2009

was partially offset by state spending as the government took an active role in offsetting the

downturn of the economy.

Primarily, the government’s involvement in the alleviation of the effects of the crisis was

marked by the implementation of an expansionary fiscal policy that proved effective in

sustaining a healthy capital flow within the country. Supplementary Fiscal spending of LE23

billion ($4.2 billion) was thus designated to projects in infrastructure, creating new job

opportunities and establishing linkages to other sectors such as construction, manufacturing,

and tourism.

The Egyptian external sector conversely suffered grave losses in FY2009, witnessing declines in

manufacturing exports, as well as services receipts. However, and as the central government

maintained its control over trade policies, Egypt’s external sector was relatively quick to adapt

to the changing dynamics of international markets, especially with regards to trade in strategic

products. This attitude was manifest in the import quotas that were set on some agricultural

products as well as the export restrictions on input materials that were employed in other

sectors such as cement. Despite the fact that state interference and over centralization could

have been theoretically harmful to the promotion of growth and investment incentives, in this

particular case, it played a crucial role in controlling the country’s balance of payments that

suffered losses on a decline in tourism receipts and earnings from the Suez Canal.


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With regards to monetary policy and the role of the Central Bank (CBE), the Monetary Policy

Committee (MPC) tried to act in accordance with the market signals during FY2009 aiming to

find a balance between promoting domestic investment while controlling the levels of inflation

through interest rate manipulation. Furthermore, the CBE implemented reforms in public wages

and liquidity management as it began to upgrade its infrastructure to cater to the needs of a

growing consumer market.

The performance of commercial banks on the other hand was relatively modest as the lack of

private investment during the year resulted in the reduction of deposits by the business sector.

This was however offset by household deposits that witnessed a 17% rise, with the Egyptian

pound retaining its status as a preferred savings currency. With regards to Bank operations,

commercial institutions followed a cautious strategy during FY2009 purchasing Treasury bonds

by an excess of 67% compared to a year earlier while taking a more conservative stance on

lending.

Finally, Egyptian equities moved in line with world stock markets during FY2009 as the EGX30

fell to a four year low between September 2008 and February 2009. However, most of the

losses suffered by listed firms were later vigorously recovered with real estate firms leading the

pack, followed by travel, leisure, and banking institutions. By November 2009, the EGX30 had

jumped by 46% from January 2009, and the value of daily trades had more than doubled.

Egypt’s stock market has since become one of most active in the Middle East, with 333 listed

firms amounting to a market cap of LE464 Billion ($84.5 Billion).


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Table of contents

I. Real Sector: ................................................................................................................... 6

1. Manufacturing: ............................................................................................................................ 8 2. Agriculture: ........................................................................................................................... 13 3. Construction and Real Estate: ............................................................................................... 16 4. Tourism :................................................................................................................................ 19 5.Oil & Gas : .............................................................................................................................. 21

6.Telecommunications : ............................................................................................................ 23

II. External sector: .......................................................................................................... 25

A. Current Account: .................................................................................................................. 25 B. Capital Account:.................................................................................................................... 27

III. Fiscal Policy: .............................................................................................................. 29

1. Expenditure: .......................................................................................................................... 29 2. Revenues: ............................................................................................................................. 31

IV. Monetary Sector ....................................................................................................... 33

V. Banking Sector ........................................................................................................... 36

VI. Financial Markets: .................................................................................................... 40

A. Stock Market In 2009 ............................................................................................................ 40 VII. Business Enviroment .............................................................................................. 43

VIII. The Egyptian Economy in Figures ....................................................................... 46


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I. The Real Sector

The Egyptian economy demonstrated a high level of resilience in FY2009 weathering the global

financial crisis, as it achieved positive growth rates on momentum gained from previous years.

Although some of the main sectors were hard hit by the decline in foreign equities and local

investment capabilities, an increase in the production of oil and gas as well as a rise in

consumption levels contributed to the sustenance of growth. As a result, real gross domestic

product (GDP) increased by an estimated 4.7% compared to 7.2% in 2008, and nominal GDP

amounted to LE1,038 Billion ($189 Billion).

Graph1. Source: International Institute of Finance

As the Fiscal year in Egypt begins in June1, the global financial crisis had not yet taken its full

toll on the economy by the first quarter of FY2009, which registered a 5.8% growth in GDP. The

adverse effects on Egypt’s real sector were in fact most evident during the second quarter of

the year with GDP growth declining to 4.1% between October and December 2008. However,

the downturn in the economy was only short lived as the crunch began to wane off by H209

with the aid of a government stimulus plan that augmented public spending and raised growth

to an average of 4.4%. As such, the massive infrastructure projects, the tourist promotion

strategies, as well as the reforms in policy, all played a major role in boosting consumption

levels and investment activity.

1 Unless indicated otherwise, FY 2009 denotes the year extending between July 2008 and June 2009.

• Note :The 2009 average exchange rate used in the study is assumed at 5.49LE/$


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Construction on one hand was crucial to the expansion of the market to the outskirts of the

Capital, which was supplemented by intricate webs of infrastructure, attracting regional

investors. In addition, higher disposable incomes amplified local consumption offsetting the

decline in exports during the year. Finally, government promotion strategies, import tax cuts

and export quotas on input materials played a role in minimizing the damage withstood by

productive industries such as manufacturing and agriculture.

Regarding prices in Egypt, the emergence of new consumption trends, the boom in investment

levels, and wage increases did not aggravate Egypt’s inflationary pressures in FY2009. Primarily,

during the first quarter of FY2009, the CPI soared to 20.6% on a yearly basis, but was

comparatively contained through a raise in interest rates. The second half of the year however

witnessed a sharp fall in the CPI to 9.9% by the end of the year. This slump in inflation resulted

from a fall in world prices for commodities.



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1. Manufacturing Sector

Manufacturing is one of the most vital sectors in Egypt, presenting the country as one of the

major industrial economies in the MENA region. Egypt established its manufacturing sector on

a large scale in the late 1960’s as part of its socialist legacy targeting heavier industries, which

were mainly state controlled. Although gradual privatization began as early as the mid 70s

attracting major international firms, it was only until 2004 that a new outlook towards economic

progress took off with the assignment of the reform oriented cabinet of Ahmed Nazif. Since

then, Egypt’s manufacturing has grown at a yearly average of 11.3%, attracting a substantial

amount of foreign investment into the growing sector.

Egyptian Manufacturing accounted for 16% of total GDP during the fiscal year 2008/2009,

witnessing a 2.3% growth in its value added compared to 5.8% a year earlier. The decline in the

yearly rise of its contribution to GDP was generally due to decreasing world demand for

industrial products. However, the resulting change in production played out to the benefit of

Egypt’s comparative advantages, and it marked a turning point towards Egypt realizing its

productive potential in certain subdivisions of the sector such as the food industry. In details,

manufacturing registered an increase in the production of consumer non-durable goods by 8%

(Food & Beverages, Textiles and Clothing, etc.) as well as intermediate goods by 5.3%

(Petrochemicals, Electric equipment etc.); both of which have fast-growing domestic markets.

Conversely, its produce that was dependant on imported resources, namely investment goods

(Metal Products, Motor Vehicles, etc.) and consumer durable goods (Domestic Appliances,

Consumer electronics, etc.) decreased by a respective 4.9% and 3.5%.

A. Food and Beverages

Production of consumer non-durable goods (CNDG) is a robust subdivision in Egypt’s industrial

sector with massive potential for additional growth. In 2009 CNDGs output accounted for

28.2% ($6.14 billion) of total manufacturing, and was led by the food and beverages industry

(F&B) that covered 70% ($4.3 billion) of CNDGs and 19.7% of the manufacturing sector in value.

CNDGs are highly dependent on Egypt’s huge consumer base, comprised of a population

estimated at around 80 million citizens. In addition, the 10 to 12.5 million tourists that visit

Egypt every year contribute significantly to the advancement of the sector, as they consist of

higher end consumers from the Middle East, Europe, and North America. Egypt is however still

far from realizing its full productive capabilities as most of its local consumers are in the lower-

income bracket with an F&B yearly per capita consumption of $460.


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It is estimated that the F&B industry will grow in the next five years as disposable incomes

increase, with a 28.5% forecasted rise in per-capita consumption. Such positive forecasts have

enticed major regional and global food producers to undertake major investments in Egypt’s

growing market.


B. Textiles and Clothing

Another important subdivision in Egypt’s manufacturing sector is the textile and clothing

industry (T&C). The T&C sector has traditionally been a dominant industry in Egypt and has

gained further importance following the creation of the Qualifying Industrial Zones (QIZ) in 2005,

giving Egyptian production duty free access to the US. In FY2009, textiles and clothing

accounted for 4.3% of overall manufacturing in terms of value added, with total output falling to

$2.1 billion from the $2.5billion a year earlier. The decline in the value of the industry came as a

result of its dependency on the export market that suffered grave losses starting late 2008 with

the global financial crisis, noting that textile exports represented around 24% of Egypt’s total

non-oil shipments at the time. This decline was especially noticeable in the cotton industry that

mainly dominates Egyptian T&C and corresponds to almost 27% of all manufacturing in terms

of volume, the second largest after food processing. The fall in international demand during

FY2009 delivered a powerful blow to Egyptian cotton products that could no longer compete

with the subsidized US cotton. As a result the cultivated area for cotton fell by an estimated

10% from the previous fiscal year, and prices declined to 95-106 US cents from 125-135 cents.


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The Egyptian T&C industry is expected to pick up in the coming years, at a pace both dependant

on the recovery of the world markets and the potential privatization of the sector, as although

the private share in finished clothing production reached almost 95% in 2009, it remained at

less than 60% in spinning and weaving.

C. Pharmaceuticals

With an expanding base of high skilled labor and a huge consumer market, Egypt is rapidly

becoming a major pharmaceuticals producer, with the industry divided among more than 30

domestic manufacturers, of which three-quarters are private firms. In recent years, local

pharmaceutical companies have become responsible for more than 90% of the market share,

mostly supplying high-volume basic medicines. In FY2009, Pharmaceuticals accounted for 3.2%

($0.69 billion) of manufacturing in Egypt, up by 10.1% in value added from FY2008 that

witnessed a 4.8% increase. Moreover, profit margins of companies continued to grow as they

invested in new types of drugs despite the rising prices of imported chemicals; noting that

Egypt imports 85% of its raw materials for the industry, with an import tax that has been

lowered to 2% from 10% in previous years. Moreover, the government has embarked on a

recent project to privatize most of the remaining state-owned firms; a move that will prove

beneficial in terms of promoting competition and subsequently encouraging innovation in the

field.

Graph4. Source: Business Monitor International


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i. World Statistics on Car Ownership and Manufacturing

Egypt only enjoys a ratio of 30 cars to 1000 people according to 2009 figures, compared

to 53/1000 in Morocco, 336/1000 in Saudi Arabia, and 435/1000 in Lebanon. For Egypt,

this implies a major potential for the growth of the car industry, especially considering the

huge urban population and the continually rising GDP per capita. On a global scale, the US

tops the list of cars per capita with a cars/people ratio of 765/1000 followed by

Luxembourg and Malaysia with respective ratios of 686/1000 and 641/1000. Japan comes

at the 10th position in the list with 543/1000 whereas the UK ranks 18th with 426/1000, just

behind Lebanon. As for car manufacturing by country, China was the first producer in

2009 with a total of 10.38 million cars, taking 21% of the world production market. The

second and third on the list were Japan and Germany with 6.8 and 4.9 million

manufactured cars respectively. The US ranked 6th in world output with 2.2 million

manufactured cars in 2009. As for Egypt, it was the 38th country on the list with almost

390 thousand cars produced.

D. Motor Vehicles

Egypt is reportedly the largest motor vehicle producer in North Africa and one of the only

manufacturers of a kind in the Middle East. With more than 30 assembly lines producing for

major international brands, Egypt’s productive capacity for motor vehicles reached 180,000

units per year in 2005 following the tariff cuts on car components and spare part imports.

Furthermore, the production of car components was similarly promoted by the government that

placed a minimum requirement of utilizing 40% of locally produced components in domestic

vehicle production. In FY2009, the automotive industry represented 15.7% of overall

manufacturing and it supplied 65% of total car sales in the country. Those figures were

represented by 390 thousand vehicles produced and around 260 thousand units sold.

The demand for Egyptian produced cars is estimated to continue growing at a fast pace in the

coming years in relation to the rise of Egypt’s middle class, especially considering the high tariff

rates imposed by the government car imports.


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E. Petrochemicals

Egypt’s petrochemicals industry is a fast growing sector that has expanded almost 15 fold from

2004 to reach a value of $4.8 billion in FY2009 and capture 13% of overall manufacturing. This

growth has been especially furthered by the rise in Egypt’s production of natural gas, which is a

major input product for the industry. In addition, petrochemical production is expected to

continue increasing in the next 15 years due to a diligent government effort to minimize the

country’s chemicals import dependency and reach a phase of high export capability. To meet

that end, a 20 year plan was hatched in 2002 by the Egyptian General Petroleum Corporation

(EGPC) to increase production to a yearly 15 million tons, generating up to $7 billion in

revenues. Although the plan is facing countless challenges, including delays in constructing

facilities and an expected 2 fold cost expansion to $20 billion, the project is on the path of

concluding its second phase that will corroborate a spread of operations across seven different

sites and create up to 100 thousand new job opportunities. Furthermore, it has attracted

numerous investors from India and East Asia into the country, to develop their own production

zones and join the growing agglomerations.

Although Egypt’s manufacturing is one of the most advanced in the MENA region, it is still in

the early stage of development and cannot yet compete in international markets. This is

especially true concerning its investment goods and consumer durable goods, which are both

high-energy and high-skilled labor dependant. However, Egypt’s development in building

capacities as well as attracting FDI due to its huge consumer market and cheap labor force, are

initial positive steps towards satisfying its domestic demand. Furthermore, the spillover of

technology and expertise from multinational firms, boosted by government-supported joint

ventures and the continuing privatization of the industrial sector, is set to contribute

significantly to the development of the sector.


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2. Agricultural Sector

Agricultural production in Egypt did not experience any considerable changes during the fiscal

year 2008/2009, despite the fact that it revealed an outlook of continuing expansion to be

boosted by domestic consumption. This positive outlook was reinforced by the evident growth

in the demand for local staple foods in accordance with rising levels of disposable income.

Conversely, export intended output witnessed a decrease in production in response to declining

world demand following the global financial crisis, as well as a government ban on exports for

some staple foods in an attempt to control domestic prices. In general, agricultural products

increased by an annual 3.4% in FY2009, including forestry, livestock, and fisheries, with a main

produce of wheat, rice, corn and sugar dominating the sector.


Rice counts as the primary component of the Egyptian diet and has proven to be a demand

inelastic commodity with its consumption levels continuing to rise despite the increase in

prices. Rice output grew by an annual 0.13% in 2009 to 4.3M tons, relatively low in comparison

with previous years due to the government imposed ban on exporting the commodity,

implemented in 2008. The ban came as an attempt to control domestic prices and was

accompanied by a subsidizing scheme that rendered the commodity an appealing crop due to

its high-fetching price. However, the government aims to cut production in the coming years to

prevent irrigation water from being wasted, given that rice is a water intensive crop and Egypt is

a relatively water-poor country.


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This decrease in rice output due to smaller cultivated land will be partially offset by the rise in

the crop’s yield following the government’s adoption of genetically modified plants, which are

reportedly yielding 23% higher output than the average crop.

The cutback in cultivated rice area is intended to be replaced by higher grain production to the

purpose of cutting import dependency in the future, noting that Egypt imports more than 50%

of its local demand in wheat and corn. Accordingly, the government assumed a policy that aims

to increase wheat production to cover at least 75% of local consumption in the next decade,

especially following the decline in output to 7.8M tons in FY2009 from 8.2M tons a year earlier.

As for corn output, it is expected to continue its upward trend as it has become a popular

commodity with its use as cheap livestock feed, although it only expanded by 0.6% to 6.2M

tons in 2009. Furthermore, in FY2009 local consumption of grains outweighed production

considerably and grew at a much faster pace, rising by 3% and 4% for wheat and corn

respectively to 16.5 and 10.8 million tons, and indicating the heightened pressure by the market

to expand domestic productive capabilities.

ii Russian Wheat Export Crisis

Demand for wheat in Egypt hovers around the margins of 16 million tons per year making its

per capita consumption one of the highest in the world. Considering the country’s capacity

to produce only half of this amount, Egypt has become the world’s leading wheat importer,

mostly depending on Russia for the supply of the commodity. 58% of Egypt’s wheat imports

came from Russia in 2009, compared to 40% in 2007. Russia’s increase in Egypt’s import

share of wheat came after the former country slashed its offer price significantly,

undercutting the US’s export price by almost $20 per ton. However, the growing wheat trade

between the two countries has been far from resourceful for Egypt due to frequently rising

complaint’s regarding the quality of the imported product that is reportedly unsuited for

consumption. Egyptian authorities have rejected several Russian wheat shipments in recent

years, detained staff members from the official wheat buyer’s office, and started an

investigation regarding the possible forgery of inspection certificates, suspecting the

collaboration of Russian exporters with corrupt traders in Egypt. Russian traders on the other

hand maintain that Egypt is making false claims regarding spoilt wheat exports to extract a

better deal from suppliers. Although some of the consequent decline in Russian wheat

supply is being substituted with French imports, the situation is aggravating the already

afflicted bread market in Egypt, which is suffering shortages, mainly because of subsidies.


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Another prevalent agricultural commodity in Egypt is sugar, extracted from sugarcane and sugar

beets. In FY2009, the total production of Egyptian sugar reached 1.6 million tons, up by 6.6%

from the previous year. However, this amount only covered around 60% of domestic

consumption leaving the remaining 40% to be satisfied by imports.

As sugarcane is another water intensive crop, the government has tried to keep the area for its

cultivation stable while expanding the area for the cultivation of sugar beets. Sugar output is

forecast to increase by 7-8% in 2010 due to the larger cultivated area of sugar beets as well as

higher yielding sugarcane crops, resulting from improved cultivation techniques. Furthermore,

the expansion of sugar beet cultivation area is expected to have multiple beneficial effects on

the agricultural sector, as sugar beets can grow in land with high salt concentration and absorb

the salt from the soil in 3 to 5 years, making the land suitable for other crops as well.


Taken as a whole, the agricultural sector in Egypt is gradually undergoing major changes to

match the country’s need for land and water, while providing for the country’s demand.

Furthermore, efforts are being made to improve the quality of Egyptian produce and its crop

yields. However, anticipated increases in population and urbanization levels in the next decade

pose a challenge for Egypt, demanding upgrades in its productive capacities and levels of

productivity. The current requirement for Egypt’s agricultural sector is perhaps not to become a

competitive agricultural exporting country in the next decade, but to be able to provide for its

domestic demand without having to rely heavily on imports.


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3. Construction and Real Estate

1. Construction

For a year that was characterized by a slump in the global housing market, construction in

Egypt sidestepped the downturn of the world economy in FY2009, growing by an impressive

13%. This was accomplished with the aid of new infrastructure projects initiated by the

government, as well as real estate ventures by the private sector. Correspondingly, demand for

building material drastically increased during the year, inciting the government to place a ban on

cement exports. The objective of the ban was to meet domestic demand for the product after

cement consumption had expanded 26% y-o-y by year end.

In the Construction industry, the Egyptian government launched massive infrastructure projects

during FY2009 targeting water waste processing, power generation, and transportation

networks. The initiated projects that amounted to LE15 billion ($2.64 billion) contributed on a

broad basis to economic activity during the year, bearing forward linkages into multiple sectors

such as manufacturing and trade. For example, several new cement production facilities were

issued licenses during the reported year to the aim of satisfying local demand. The number of

new production entrants is expected to reach 14 by 2015.

Following the outstanding upshot in the economy in response to the first capital injection, the

stimulus package was reinforced in June 2009 with an additional LE9 billion ($1.64 billion).

Graph7. Source: Oxford Business Group


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2. Real Estate

In Real Estate, demand was favorably diversified during FY2009 towards residential,

commercial, and tourism projects. Correspondingly, the sector advanced at a fast pace by

capitalizing on the improvement of the country's finance and services sectors, as well as its

growth in population and urbanization levels.

Initially, Egypt’s current population count of 80 million citizens is forecast to exceed100 million

in the next 15 years, thereby creating a huge additional demand for housing units, especially for

medium and low grade housing. This realization has boosted the number of suppliers in the

Egyptian Real Estate market, attracting major multinational and regional firms such as

Lebanon’s Solidere International and Abu Dhabi’s Emaar Properties, which are subsequently

diversifying from debt stricken Dubai.

The real estate demand for residential has been met by a relatively incompatible mode of

supply in recent years, focusing on higher priced housing, despite the severe shortage in units

and the unavailability of vacancies in medium and lower grade units. As a result, the levels of

occupancy for new projects are still low, estimated at 20%. In FY2009, the Egyptian

government began debating a new tax policy for the real estate sector that would increase the

yearly tax for new buildings valued at LE1 million or more, and exempt those valued less than

LE450,000; thereby encouraging additional supply for low income housing.

Similarly, and with Egypt gradually becoming a new favorite location for foreign investment in

the MENA region, the demand for commercial real estate has increased significantly over the

past year. As a result, firms have reportedly started buying into the higher priced residential

projects, and property developers have picked up on the trend, allocating a large portion of their

projects to satisfy commercial demand inside the capital and on its East and West outskirts.

In addition to residential and commercial properties, Egypt is a major market for tourist related

projects, including hotels, as well as entertainment and shopping districts. The demand for

such projects became especially significant after the number of tourists in Egypt almost

doubled from 6 million in 2003 to 12.5 million in 2008. According to SODIC, a major Egyptian

real estate firm, there is a deficit of 22,000 hotel rooms in Cairo alone. Other property firms

such as ERC target Egypt’s Red Sea resorts that attract half of the tourist influx every year.


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Egyptian Real Estate has witnessed a massive boom in activity within the growing East and

West Cairo, which has been mostly focused on luxury and high-end apartments. This has left

the majority of the Egyptian population in demand of middle rate primary housing within the

capital that continues to see climbing population levels and a rise in average incomes.


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4. The Tourism Sector

Tourism in Egypt was negatively affected in 2009 by the reduced purchasing power of mainly

European tourists following the global financial crisis. Nevertheless, tourist arrivals had only

decreased to 12.4 million visitors by the end of the year, from 12.7 million in FY2008. The

delivered performance was therefore much better than originally expected as it was boosted by

several exogenous factors coupled with strengthening measures by the Egyptian government.

The relatively improved European economic activity during H209 mitigated the fall in the

number of tourists from the 9.5% year on year decrease in H109. This was especially evident by

the reignited surge in the number of tourists from Russia that constituted 14% of total visitors

to Egypt during the year.

On a local scale, the government-backed promotional strategies that included the subsidization

of some of the empty flight seats from Europe and the exemption of hotels from tourism

promotion fees, paid off significantly in campaigning for Egypt as a low-cost tourist destination,

eventually limiting the yearly decline in arrivals to 2.3%. Furthermore, tourism was shored up by

the low value of the Egyptian currency with respect to the Euro and the British Pound, making

Egypt one of the most affordable tourist destinations in the region.


Tourist expenditure in FY2009 slipped by 1.9% from FY2008, a slower pace than that of tourist

arrivals, indicating a higher amount of money spent per tourist. The 10.6 billion dollar revenue

from tourist spending during the year accounted for 5.5% of GDP compared with 6.6% a year

earlier. This effect was also related to the depression of consumer prices in Egypt during

FY2009, most notably food products.


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Regarding the number of tourists that stayed in hotels, it decreased by 2% to 10.2 million in

FY2009 from 10.86 million in 2008. This number is expected to improve next year with hotels

expanding their coverage area in Egypt and their capacity to accommodate a larger number of

visitors in anticipation of a rise in tourists to Red Sea resorts. Moreover, according to the

ongoing construction projects, the number of hotel rooms is expected to increase by 6% in

2010 to 299,000 rooms, after having increased by 16% in 2008 from 2007.

On a regional level, Egypt accounts for almost 36% of all tourist inflows to North Africa and

around 8% of the total number of tourists coming to the Middle East. Its first three source

countries in FY2009 were Russia, Germany and the UK, with 1.3M, 0.96M, and 0.89M visitors

respectively. The number of Russian tourists began rising after 2006, surging by more than 50%

to 1.5M in 2007, representing 14% of tourist arrivals. All in all European tourists represent 70%

of all visitors to Egypt.


With tourism soaring by more than 40% between 2006 and 2008, the sector has become an

essential element of the Egyptian economy, contributing much more to growth than to GDP

through its constructive influence on other sectors. For example, tourism has provided almost

1.6 million jobs during FY2009 extending domestic consumption capabilities, in addition to

creating demand for Egyptian consumer goods. Furthermore, it has highlighted the need for

upgrading the infrastructure r such as transportation and telecommunications, motivating public

ventures that benefit the entire economy.


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5. Oil and Gas

The Petroleum industry played a fundamental role in leveraging the Egyptian economy in

FY2009, remaining one of its main sources for foreign currency. With crude oil and natural gas

making up 44.8% of the county’s total exports, energy in Egypt directly accounted for 15.5% of

nominal GDP through mining and refining. Furthermore, oil dependant sectors such as

transportation, storage, and electricity generation contributed by 5.4% to GDP.

The contribution of Petroleum to the development of Egypt’s manufacturing sector added

significantly to its economic weight. Of the domestically consumed 78% of natural gas in 2009,

23 billion cubic meters (bcm) went to the generation of electricity, 3.6 bcm to steel production,

3.4 bcm to nitrogenous fertilizers and 2.7 bcm to cement; all of which constitute basic input

materials to productive sectors (construction, agriculture).

Regarding crude oil, the discovery of new wells in recent years (especially in the Gulf of Suez

that currently contains more than 65% of the country’s reserve capacity) has brought up Egypt’s

proven oil reserves from 4.1 billion barrels (bbl) to 4.49bbl in 2009. Nevertheless, Egypt’s oil

production has been declining at an almost steady rate since its peak in 1996 when output was

at a record 921,000 barrel per day (b/d). The fiscal year 2008/2009 was no different from the

downward trend since then as production fell to 685,000b/d from 722,000b/d a year earlier on

account of a decrease in world demand. Data by the International energy agency (IEA)

estimates a fall of 2% in worldwide energy production in 2009, the first decline of a kind since

1981.

Conversely, the yearly decline in Egypt’s oil extraction was balanced by the 11% rise in gas

production to 65 billion cubic meters (bcm) following the discovery of new reserves offshore

the Nile Delta and the West Desert. Consequently, natural gas emerged as the new dominant

energy commodity in FY2009 accounting for 55% of total fuel extractions, jumping to 8.3% in

value added to GDP from less than 1% in 2003.


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Graph11. Source: Oxford Business

In oil refining, Egypt is the largest center in Africa with a combined processing capacity of

726,000 bpd across nine refineries. The government plans to increase production of lighter

products, petrochemicals, and high octane gasoline by upgrading existing facilities. In addition,

the government is promoting two new projects – a 500,000 b/d unit near the Suez Canal and

another at Ain Sukhna with a capacity of 130,000 b/d.

Graph12. Source: Ministry of Economy and Trade


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23

As for oil transportation, Egypt holds a strategic importance owing to its operations of the Suez

Canal and Sumed (Suez-Mediterranean) pipelines, which are two crucial routes for

transportation of oil from the Persian Gulf. The Sumed pipeline for example is responsible for

75% of oil exports from Saudi Arabia, Kuwait, Egypt, and Iran to Europe.

6. Telecommunications

The growth that was witnessed in Egypt’s telecom sector during the past 5 years is yet another

example of the country’s significant demographic advantages that can be well employed when

coupled with healthy management. On one hand, Egypt’s already robust population growth and

urbanization rates have attracted private and foreign service-providers into the sector,

heightening the competition for market control and encouraging innovation in the

communications industry. On the other hand, the government’s continuing liberalization of the

telecom sector and its commitment to fulfill the sector’s need in infrastructure contributed to

the extension of telecom services to most of the regions and income classes of the country.

Primarily, the fastest growing segment of the telecom industry is mobile services. Mobile

penetration rates have surged from 40% in 2007 to over 70% in 2009 with a total number of

subscribers reaching 57 million by the end of the year. In FY2009, the rise in subscription rates

iii. Egypt’s Wind and Solar Power

In an effort to limit greenhouse gas emissions and ease domestic oil dependency, Egypt is

currently adopting new policies to develop its renewable energy production. The primary

aim that has been established by the Ministry of Electricity & Energy is to meet 20% of

electricity demand from renewable energy sources by 2020. Wind energy is set to play a

major role in this design, supplying 60% of the intended mark. The Egyptian government

has already financed 400 megawatts of wind-energy capacity in the Gulf of Suez with the

aid of the World Bank’s IFC. Although the 2020 objective of producing 7200 megawatts in

wind farms is still far from being achieved, additional projects have been already geared up

and are set to kick off in the next few years. Furthermore, projects that aim to reduce gas

emissions from transportation are underway, with new bus and light rail networks being

built to connect Cairo to the growing Eastern and Western Suburbs. Finally, solar based

power facilities are already under construction in the South of Cairo and are projected to

supply 2,900 megawatts once the plant is in operation.


16 July 2010

24

was similarly influenced as other sectors by the financial crisis, and therefore grew by only 26%

compared to 44% a year earlier. Although the market has been deemed saturated by some

experts, mobile penetration is expected to pick up in coming years, especially with a spread in

infrastructure to previously unconnected areas as well as the rising popularity of 3G

subscriptions. Service providers are currently adopting innovative strategies in capturing a

larger market share, using 3G subscriptions to attract their customers to longer term post-paid

accounts from the pre-paid ones; noting that the latter currently accounts for 90% of the

market. This is consequently contributing to a fall in the prices of regular subscriptions and

therefore, higher penetration rates.

With regards to fixed lines, they continued to decline in numbers during FY2009 and as was the

case in many countries worldwide, they were replaced by mobile coverage. The rate of fixed

line penetration thus fell from 15.3% to 13.7% during the year, with the number of active

subscriptions totaling 10.3 million. The entire fixed-line operation is still controlled by state

owned Telecom Egypt (TE) that limited the decline in its earnings by expanding its internet

services, as TE picked up on the technological boom further developing the infrastructure to

provide broadband facilities. Accordingly Internet utilization witnessed a much higher than

expected surge of 45% in 2009, with the number of internet users estimated to have reached

16.5 million by the end of the year compared to 11.5 million in 2008. 39% of the rise in internet

usage was met by Dial-up and IDSN connection, 46% was occupied by ADSL connections,

whereas broadband took a 10% stake of the market.

Graph13. Source: Oxford Business, BMI


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II. The External Sector

As the global appetite for investment and consumption diminished in FY2009, the structural

disadvantages in Egypt’s trade balance and the fall in foreign capital inflow weighed down on

the country’s external sector, preventing it from ending the year with a positive balance of

payments (BoP). Accordingly, Egypt’s (BoP) endured a deficit of $3.4 billion in FY09 against a

$5.4 billion surplus in FY08. As such, the current account recorded a deficit of $4.4 billion, while

the capital account achieved a net inflow of $1.4 billion.

1. Current Account

The setback in Egypt’s balance of payments in 2009 was partially alleviated due to the

government’s effort to attract capital through FDI and Tourism, and reduce imports by

developing domestic productive capabilities. Moreover, Egypt’s abundant resources and its

potential for self sufficiency in various consumer products allowed the country some room to

restructure its import needs for the year despite its inability to forgo the purchase of major

commodities such as pharmaceuticals and certain staple foods. Nevertheless, internal efforts to

reduce the deficit only paid off modestly, as Egypt’s dependency on its oil sector and services

receipts as major sources for foreign capital proved to be costly after the financial crisis took its

toll on international economic activity and commodity prices. Accordingly, the current account

registered a deficit of $4.4 billion, with current receipts and payments amounting to $57.2

billion and $61.6 billion respectively.

Starting with the trade balance, both exports and imports declined in Egypt following the global

financial crisis as consumption and demand fell, negatively weighing down on external trade.

As a result, Egypt’s traded volumes narrowed by 8% to $75.5 billion in FY2009 from $82.2

billion a year earlier, with export earnings amounting to $25.2 billion and import payments

adding up to $50.3 billion.

As exports slid by 14.3% in FY2009 compared to a 4.6% decrease in imports, Egypt’s balance

of trade widened by a yearly 7.5% to $25.1 billion. The greater part of the endured loss came as

a result of a decrease in oil and gas earnings by 24% to $11.4 billion, accounting for 45.2% of

total exports. The descent in petroleum proceeds resulted from a drop in world prices for the

commodity following the decline in global demand for oil. Moreover, non-oil exports scaled

down by a yearly 4.8% to $14.2 billion due to a fall in foreign demand for food products and raw

materials.


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26


Likewise, raw material import payments fell by 33.2% to $6.5 billion on account of their lower

international prices. Moreover, imports of intermediate goods such as steel products,

chemicals, and car parts, which made up 33% of total imports, dropped by 1.1% to $16.7 billion

due to a production cut by Egypt’s manufacturers following a fall in international as well as

domestic demand for such products. Accordingly, import payments for consumer durable

goods that include transport vehicles and domestic appliances tumbled 14.1% to $2 billion.

Although the balance of services continued to register a surplus in FY2009, it was 16.5% lower

than the previous year settling at $12.5 billion on account of a decrease in all of the constituent

receipts. To begin with, investment earnings from international markets slumped by 41.1%, as

foreign countries held their interest rates low in order to stimulate their economies that suffered

severe losses in 2008/2009. Similarly, foreign equities and sovereign bonds lost considerably

during the period, dragging down the value of Egyptian portfolio investments abroad and

adding to the shortfall of Egypt’s current account. Locally, transportation receipts from the Suez

Canal slipped by 8.4% on a yearly basis to $4.7 billion as international trade slowed down and

the transit benefits from vessels using the Canal contracted, in addition to lower shipping

activity on fears from growing Somali piracy. As for revenue from tourist activity, the slowdown

in visitor arrivals and gross tourist expenditure compounded losses from the sector to 3.1%

from FY2008, finishing with a revenue of $10.5 billion.


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27

Finally, other services receipts that include contracting, insurance and communications fees fell

by 31.9% to $3.6 billion. Finally, services payments, which are insignificant with respect to

receipts, also edged down during FY2009 on account of a decline in interest and dividend

payments on Egyptian bonds and equities, profit transfers to oil companies, tourism payments,

and government expenditure in Egyptian embassies abroad.

Remittances fell back in FY2009 after the lapse of international labor in September 2008, with

an estimated 20 million jobs lost on a global scale according to the International Labor

Organization (ILO). On top, considering the fall in cash and commodity grants, net unrequited

transfers to Egypt subsequently contracted by 11.7% to $7.6 billion.



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2. Capital Account

Foreign capital invested in Egypt’s emerging industries and into the oil sector customarily plays

a central role in counterweighing the deficit caused by the trade balance. In FY2009 however,

the capital account declined significantly from a year earlier finishing the year with a surplus of

only $1.4 billion, compared to $7.6 billion in FY2008.

The underperformance of multinational enterprises (MNEs) in 2009 hampered their international

investment capabilities, limiting their outward investment during the year. Accordingly, net

foreign direct investment into Egypt recoiled by 38.7% to $8.1 billion compared to $13.2 billion

a year earlier. Investments in factories, and production capacity ‘Greenfield investments’, fell to

$2.3 billion from $6.4 billion in FY2008. Conversely, oil sector investments grew by 31% to $5.4

billion following new gas discoveries in H209.

In addition, portfolio investment witnessed an outflow of $9.2 billion during the year, with

worries over waning government bond markets during the financial crisis, as $7.1 billion of the

outflow resulted from trade in treasury bills.

SGraph16. Source: International Institute of Finance


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III. Fiscal Policy

Egypt’s Fiscal policy in FY2009 was balanced between promoting growth and maintaining state

sponsored social stability. The engaged approach was mainly achieved through investment in

huge infrastructure projects, the subsidization of strategic sectors, namely oil and gas, and the

restructuring of wages for lower income groups and civil servants. On one hand, the

government aimed to stimulate the economy through capital injections following the yearly

decline in export gains and the deceleration of investment activity by the private sector. On the

other hand, to tone down the budget deficit that resulted from increased spending, additional

taxes on individual incomes and business profits were imposed. This mix of policy succeeded

in boosting economic activity during the year, alleviating the negative effect of the financial

crisis while laying the ground work for future growth in private and foreign investment.

Following this firm stance against an extensive spillover of the financial crisis into the domestic

economy through stimulus spending, Egypt’s government budget was at a deficit of LE71.8

billion ($13 billion) by the end of FY2009 compared to LE61.1 billion ($11.1 billion) in FY2008.

Consequently, the primary budget deficit amounted to LE19 billion ($3.4 billion) compared to

LE10.6 billion ($1.93 billion) a year earlier. Government treasury bonds were used to finance

two-thirds of the overall yearly deficit, whereas external debt was used to finance the remaining

one-third.

1. Expenditure

In total, government spending surged on a yearly basis by 24.5% to LE351.5 billion ($64 billion)

growing significantly in terms of investments, subsidies, and wages. Investment spending

accounted for the largest increase in the account, rising by 27% to LE43.4 billion ($7.9 billion)

subsequent to the LE15 billion stimulus package aimed at developing Egypt’s infrastructure.

Accordingly, projects such as construction ventures in water sanitation facilities and

transportation networks contributed significantly in boosting economic activity through internal

contracting and the creation of job opportunities. Conversely, projects targeting the

improvement of Egypt’s social services such as education and health were very small taking

respective GDP shares of 0.3% and 0.2%.

In line with supporting the manufacturing sector, easing transportation costs, and alleviating the

pressures on low income groups, Egypt’s government set aside almost half of its FY2009

budget for commodity subsidies and wage increases. Subsidies, which were consigned to

several goods, namely food products and fuel, jumped by 11.4% to LE93.8 billion ($17 billion)


16 July 2010

30

taking up 26.7% of total expenditures. Accordingly, the most notable beneficiaries were the

General Authority for Supply Commodities (GASC) and the Egyptian General Petroleum

Corporation (EGPC). Primarily, GASC received 28% of subsidy increases for its wheat imports

following the rise in international prices. The subsidy on wheat is traditionally vital in Egypt’s

budget agenda as the population is highly dependant on wheat imports for bread, noting that

Egypt is the world’s largest wheat importer.

Egypt’s national oil and gas company EGPC on the other hand only received a 4.1% increase in

subsidies in FY2009 due to the decrease of oil prices during the year. In general, Egypt’s oil and

gas subsidies amount to more than two thirds of their export revenue, with the government

bearing almost 75% of world petroleum prices in the domestic market. The subsidy to EGPC is

to buy oil and gas from Egypt’s foreign firms to fulfill domestic demand.

The second largest constituent of government expenditure is public wages. Public employees’

wages and compensations climbed by 21.2% in FY2009 to LE76.1 billion ($13.8 billion) on

account of rises in fringe benefits and special allowances of which LE28.7 billion went to social

benefits. Accordingly, public wages represented up to 25% of total government spending in

FY2009, offsetting the decline in purchasing power of state employees caused by the rises in

consumer prices. Finally, the rise in domestic interest rates during the year contributed to an

increase in interest payments by 4.5% to LE52.8 billion, making up 15% of total government

expenditure.

iv. The Paradox of Petroleum Subsidies

Despite their positive impact on economic and social stability, oil subsidies to consumers in

Egypt arguably allow grave consequences to the development of the economy. Most

importantly, they help sustain monopolies in several productive sectors due to the privilege

they indirectly present to firms in oil-based manufacturing. The fertilizer industry for example

is controlled by 3 major companies in Egypt, profiting substantially from the subsidy due to

low operating costs. This format makes the fixed to operating costs ratio too high for new

firms to enter the market and be able to compete with already established producers.

Thereby, they limit additional competition and productivity in the sector by indirectly

aggravating the entry barrier into the market. On the other hand, eliminating oil and gas

consumption subsidies would negatively impact the overall economy by instigating a sharp

rise in inflation levels, considering that all sectors of the economy are either directly or

indirectly connected to the price of oil and gas.


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2. Revenues

The rise in public expenditure in FY2009 was matched with an increase in revenues as the

Egyptian government adopted a new taxing scheme in an effort to contain the widening budget

deficit. In total, public revenues jumped by 27.6% to LE286.5 billion ($52.1 billion). Around

42.5% of the increase in revenues came form a rise in taxes, which subsequently added up to

LE163.2 billion ($29.7 billion). Sales tax for goods and services remained at their 10% rate in

FY2009 fetching LE62.7 billion ($11.4 billion) on account of higher levels of consumption during

the year. Sales tax on consumer products and basic inputs for production were reduced to 5%.

The increase in tax revenues mainly resulted from higher rates imposed on EGPC, in addition to

income taxes and company profit taxes. Conversely, custom duties increased at a much slower

rate due to shrinking international trading activity during the year, drawing in an additional LE71

million ($12.93 million) from 2008, and amounting to LE14.091Billion ($2.56 Billion).

Furthermore, property income taxes from EGPC, and the Suez canal contracted by LE7 billion to

LE36.5 billion during the year as the Suez canal authority scaled down its activity with its

receipts declining drastically during the year. This decline was however offset by LE7.9billion of

property income taxes from private real estate firms and license fees from cement and iron

factories, which flourished with the real estate boom.

In FY2009, the Egyptian government set down plans to levy new taxes on real estate in order to

guide the sector into complying with the needs of the market, while balancing the taxing

system in accordance with social aims through a form of progressive taxation. As such, it was

v. Private vs. Public Wages

The Egyptian minimum wage has remained at $6/month for the past 26 years despite the

large increases in consumer prices over the same period. According to a report by the

Egyptian Center for Economic Studies, taking inflation into account, Egypt’s minimum wage

to per capita GNP has decreased from 60% in 1984 to 13% in 2007 becoming one of the

lowest in the world. In general, public wages in Egypt averaged at $76 per week in 2008,

50% higher than private wages that averaged around $50 per week. However, the number

of employees in the informal sector, mostly lower-end self-employed individuals, makes up

a large percentage of the lowest income segment of the labor force, dragging down

significantly the average of private incomes. In terms of distribution over the two sectors,

official numbers estimated a 70-30% private-public employment ratio in 2005, with the

figure shifting considerably to the favor of the private sector in recent years.


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suggested that an annual tax of LE660 ($120) should be levied on buildings worth LE1 million or

more, while those worth less than LE450 thousand would be exempt from the tax.




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IV. Monetary Sector

During the first half of FY2009, the Central Bank of Egypt (CBE) adjusted its monetary policy in

response to inflationary signals by regulating the inter-bank lending and deposit rates while

withdrawing excess liquidity from the market. However, following the consistent cuts in rates

during H209, Egypt’s fiscal year ended with an increase in the total supply of aggregate money

without any significant hike in price levels. The pursued policy was thus in line with the overall

public effort to offset the negative impact of the global financial crisis on Egypt’s economy by

promoting internally driven growth through domestic consumption and investment.

1. Money Supply

Money supply continued to increase in FY2009 with domestic liquidity (M2) growing by 8.4%

(LE104 billion) compared to 15.7% a year earlier. By the end of June, M2 was at LE831 billion.

The largest stake of the yearly rise in money supply was captured by the quasi money account,

as time and saving deposits jumped by 10.3% (LE44.8 billion) to LE481.1 billion. This rise

demonstrated the high confidence in the Egyptian pound that had proven stable over the years

in relation to major foreign currencies, qualifying as an appropriate saving instrument.

On the other hand foreign currency deposits scaled up by only 4.6% or LE7.3 billion to reach

LE167.2 billion as capital inflows from Egyptian expatriates, which customarily contribute the

most to the bulk of the mentioned deposits, declined significantly over the period. As for the

narrow money aggregate, or M1, it spread during the year by 7.3% or LE12.4 billion as money

in circulation outside the banking system increased by LE13.5 billion after deposit rates were

reduced to 9% from 10.5% by the end of FY2008.


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2. Interest Rates and Consumer Prices

As for consumer prices, during the first half of FY2009 inflation surged to an average of 22.3%

as most commodities retained their pre-crisis rates. Accordingly, the Monetary Policy

Committee (MPC) increased the overnight lending and deposit rates over two stages by 1%

each to 11.5% and 13.5% respectively.

However, after December 2008, inflationary pressures subsided as the prices of most staple

consumer goods in Egypt declined following the fall in world prices. Concurrently, the negative

effects of the crisis had begun to take their toll on the economy weighing down on private

investment in some productive sectors; which was also evident from the increase in time and

saving deposits during the year.

Therefore, to encourage capital investments, the MPC reduced the deposit and lending rates by

a total of 2% and 3% over four different sessions to 9% and 10.5% respectively. The end of

year inflation finally settled at 10%, holding the average inflation for FY2009 at 16%.


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Money supply was not only influenced by interest rate policies and capital inflows during

FY2009, but was similarly affected by systematic improvements in the banking sector that

allowed smoother maneuvering of liquidity. The CBE was mainly aiming to better the payment

and settlement procedures by adopting a new technology based on an electronic payment

system for its personnel, and initiating the design to include the 12 million government

employees in the years to come; noting that public sector workers continue to receive their

salaries in cash.

Furthermore, the CBE launched the real time gross settlement (RTGS) system in FY2009 to

avert payment and credit risks. This system allowed higher processing efficiency, contributing

to a larger number of local currency transfers and faster checks’ clearance during the year. As a

result, domestic and international exchange of money increased in 2009.

3. Exchange Rate Policy

The Egyptian government has adopted different peg strategies to the US dollar since the 1950’s

starting with the conventional peg, and moving to the crawling peg and later to the crawling


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bands regime. After the year 2000, a managed float regime was assumed for the Egyptian

Pound, and it was introduced for the first time to the unified currency exchange against its

foreign counterparts.

Prior to the global financial crisis, the value of the Egyptian Pound had been rising considerably

against the US dollar on hikes in the price of oil, and an increase in foreign investors’ interest in

the country’s industries. Between 2004 and June 2008, the Egyptian pound appreciated from

almost 6.3 LE/$ to 5.33 LE/$. This appreciation was however held back following the global

financial crisis that witnessed huge capital outflows. By the end June 2009, the Egyptian Pound

had depreciated by 4.7% to 5.59LE/$ from June 2008, compared to a 21% depreciation of

Brazil’s ‘Real’ and a 24% depreciation of Turkey’s Lira.

V. The Banking Sector

Egypt’s robust banking sector remained relatively sheltered from the global financial crisis,

mainly thanks to the ambitious reform plan launched by the Central Bank of Egypt (CBE) in

September 2004, and the consolidation and privatization wave it triggered. Furthermore, their

limited dependency on short term wholesale funding channels and the traditional composition

of their portfolios with limited exposure to toxic products enabled Egyptian banks to escape to

a great extent the spillovers of the turmoil.

In FY2009, banking activity measured by the growth in the sector’s total assets, remained

relatively stable and even registered a shy positive performance. In fact, total banking assets

inched up by 0.80% to $198.90 billion or 105.14% of GDP. However, the banking activity

witnessed an obvious slowdown from FY2008 when the sector’s assets soared by 15.50 %.

This deceleration was generated by two factors. First, obligations to local banks fell by $ 12.33

billion or 68.6%. This was an outcome of the decline in obligations to the CBE by $ 13.82 billion,

as the Central Bank withdrew its foreign currency deposits at banks in return for increasing its

foreign currency sales to them. In return, on the asset side, balances with the CBE contracted

by $ 20.42 billion. With the beginning of the global recovery, the Egyptian banking activity

gained momentum again as total assets jumped by 5.47 % in H2 FY2009 to $ 209.78 billion.


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On the liabilities side, deposits were the main driver of growth as they surged by 8.36 % during

FY2009, up to $147.48 billion or 77.96 % of GDP. This increase was mainly fueled by the

substantial expansion in government and households deposits that compensated the sharp

drop in business sector and non-resident deposits.

The latter retreated by 19.57 % to $ 869.76 million, as many investors repatriated their cash

holdings to cover their losses in financial markets. Of the remaining non-resident deposits in the

banking sector, there was a shift in currency holdings as deposits in the Egyptian Pound

tumbled by nearly 40% to $ 439.89 million whereas deposits in foreign currencies jumped

23.17% to $429.87 million indicating that a large portion of the non-residents, who kept their

assets in Egyptian Banks, transformed their holdings into foreign currency.

Furthermore, with the credit crunch on the international level and the slowdown of global

demand and trade that caused exports of goods and services to drop by 13 %, firms reduced

their cash balances and withdrew a significant fraction of their deposits to auto finance their

working capital and some necessary investments. Hence, total deposits of the private business

sector fell by 8.07 % to $ 29.62 billion following an upswing of 39.75 % in FY 2007/2008.

As for the deposits of the public business sector, they declined by 2.71 % to $ 6.84 billion. To

note that the private business sector’s deposits in foreign currencies slightly increased, adding

up 1.95 % to $ 10.62 billion, as firms repatriated their deposits with international banks that

were harshly hit by the crisis. This drop was compensated by a 17.4 % growth in households’

deposits that reached $93.58 billion, reflecting the solid confidence of the Egyptian public in the

local banking sector. Moreover, the government’s deposits climbed by 16.7% to $18.64 billion.


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Graph22. Source: Central Bank of Egypt

On the assets side, the growth was driven by the expansion of banks’ portfolios and by a solid

albeit slower rise in credits. Concerning the former, the total value of securities and Treasury

bills held by banks augmented by a significant 64.76 %, up to $ 60.58 billion, resulting from a

93.92 % upsurge in the sector’s portfolio of T-bills in local currency that reached $ 47.73 billion.

This rapid accumulation of T-bills in Egyptian Pound points out to the fact that banks have

become more risk averse in the context of the global financial crisis and sought for safer

investment opportunities by acquiring sovereign bonds.


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Graph23. Source: Central Bank of Egypt

Hence, even if Egypt did not suffer from a credit crunch, the pace of lending activity moderated

as banks adopted a cautious strategy due to the aggravation of risks on a global and regional

level but also due to a weaker demand for funding as many firms postponed their investments.

Total loans advanced by 7 % in FY 2008/2009 to $77.86 billion. This compares to a 13.35 %

expansion in FY 2007/2008 and a 9 % growth in FY2007. Worth mentioning that the growth of

loans to the manufacturing sector accounted for 35.86% of the total increase in loans while

services sector and trade activity accounted for 25.3% and 13.7% of the rise in stakes.

All in all, the results of major performance indicators in FY 2008/2009 reflected the sturdiness of

Egypt’s banking sector. To elucidate, the capital adequacy ratio (ratio of the capital to risk-

weighted assets and contingent liabilities) of the sector was 14.3 % beating the required

minimum of 10 %. Furthermore, Egyptian banks had a very high liquidity with an average ratio

of 44.3 % against a required minimum of 20 %. Despite their high liquidity that could harm

profitability, the local banking sector had acceptable earning ratios with a return on average

assets of 0.8 % and a return on average equity of 14 %.


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Egyptian banks have continued to expand their local network during FY 2008/2009. While the

number of banks operating in the country fell by one to 39 institutions, the number of branches

increased by 4.36 % or 150 to 3,441. However, the Egyptian market remains underserved as

there are 22,300 residents per branch compared to an average of 15,000/branch in India and

2700/branch in the US.

With that said, the Egyptian banking sector still suffers from some flaws related to transparency

issues and to high leverage ratios. In comparative terms, the debt-to-equity ratio of listed

Egyptian banks is 69.65 % against 50.31 % for Qatari counterparts, 14.37 % for Lebanese

banks and 6.03 % for Saudi institutions. Pressing forward with the reform plan of the sector

should help deal with these frailties.

Such problems were partially addressed in the first stage of reforms implemented by the CBE

between 2004 and 2008, centered on the consolidation and privatization of the banking sector,

financial and managerial restructuring of State-owned banks, the problem of non-performing

loans, and upgrading the Supervision Sector. It has resulted in major international banks

increasing their presence in Egypt as well as in the consolidation of the banking sector, with 39

banks now in operation compared with around 60 before the reforms. Additional efforts

towards banking sector consolidation should bring down the cost of private sector credit and

fuel small business growth.

Accordingly, the ECB launched the second phase of reforms in 2009, and the process is

expected to last until 2011. This second phase aims at raising the efficiency and soundness of

the Egyptian banking sector, and enhancing its competitiveness and ability for risk

management. The main measures of this phase mainly pertain to the restructuring of state-

owned banks, the application of Basel II standards and encouragement of loans to small and

medium-sized enterprises (SME).

VI. Financial Markets: Egyptian equities shadowed US stocks following the market crash in September 2008 as

investors were alarmed by the general tone in world trade and subsequently sold off most of

their holdings in Egypt’s listed firms. As a result, the country’s main stock index, the EGX30,

more than halved by the end of 2008 plunging 56.4% to 4,596.5 points. The downward trend

continued throughout the first 2 months of 2009, as the EGX30 extended its losses bottoming

out at 3,389.3 points. However, as US equities started to rise again by March 2009 signaling


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improved market sentiment, Egypt’s EGX30 followed suit surging 108% up to 7,199 points by

October before settling back at 6,208 points by the end of the year.

By the end of FY2009, the Egyptian market’s capitalization had slumped 38.2% to $72.6B from

FY2008 as a result of the ensued losses, as well as the de-listing of more than 20% of quoted

firms from the market. This loss could be further seen through the respective changes in

volumes and values of traded shares, where the former increased by a yearly 36.4% to 25.6

million shares while the latter declined by 43.5% from $81.7Billion to $46Billion.

The Egyptian stock exchange was dependent on individual investors for 65% of its traded

values in 2008. A lot of those investors tried to profit from markets that provided a recurring

income, such as the real estate firms that offered dividends from rental proceeds. Accordingly,

the high level of investment in the housing market prior to the financial crisis made the entire

stock market especially responsive to international markets’ fluctuations that were similarly

driven by changes in the risky real estate market. This started with the sub-prime mortgage

crisis in the US, and following the first recovery, it was similarly hit by negative sentiment from

Dubai’s debt burden in 2009.

Nevertheless, several factors in Egypt’s dynamic makeup made the recovery of its stock market

much faster than that of world and peer economies. First of all, the robust demand for the

produce and services of Egyptian firms, supported by a massive domestic consumer base

boosted the performance of the country’s listed firms. Furthermore, the huge population count

and a severely undersupplied housing market contributed significantly to the performance of

the real estate sector, which occupies a good portion of the country’s listed equities. And

although this particular sector continued to be influenced by the pessimistic sentiment from

Dubai’s debt crisis, a complementary effect of the discouraging regional status of real estate

was the shift of investor interest from Dubai to Egypt, outweighing the negative force of

investor caution.

• The following Graphs compare the performance of the EGX30 to Dubai’s Stock Market

index, Palm Hills Development, Egyptian Gulf Bank, and El Sewedy Electric respectively:


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Source: Egypt Stock Exchange; Thomson Reuters




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Egypt’s stock market generally projects the country’s overall performance with regards to many

factors, including financial and economic development, regulatory reform, and the ability to

attract domestic and foreign investment,

Concerning economic growth, the listing of firms in manufacturing, construction, and financial

services indicates the movement of Egypt towards a more advanced economy that is capable

of recycling its capital in order to achieve higher levels of production and self-sustainability, with

consumers and financing agents becoming one and the same. This change similarly indicates

Egypt’s move towards a more regulated market that protects the ownership rights of investors,

as the fluidity of transactions in public financial markets requires a better equipped and clearer

system of protection and enforcement of the rule of law.

Finally, given a growing market that offers diverse profit outlays, and an improving business

environment, Egypt’s Stock exchange is bound to attract individual and institutional investors in

the medium and long term, and continue to advance at a considerable pace.


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44

VII. Business Environment As productive dependency on the private sector in Egypt has been rising since 2004, additional

regulations regarding the organization of business procedures and the dealings between

suppliers, producers, and consumers have become vital to the country’s economic progress. In

addition, the recent boom in foreign direct investment and the improvement of corporate listing

have extended the demand for Egyptian business standards to correspond to international

benchmarks. Accordingly, Egypt has been adopting a thorough set of reforms in the past 5

years, targeting government regulations in an effort to promote a healthy and efficient business

environment, although it remains relatively underdeveloped.

According to the Doing Business report by the World Bank that examines 11 different criteria

defining ease of doing business, Egypt ranks 106 out of 183 countries worldwide in the

advantages of its business environment. Egypt still ranks behind peer countries such as the

UAE and Saudi Arabia, However, this rank marks an improvement from pre market reform years

with the country ranking 126/183 only one year earlier.

The factors used in this study include basic standards that determine the cost, time, and initial

capital required for a firm to start up a business and to maintain a competitive and law-secured

position in the market. As such, the ease of obtaining a production license, access to financing,

bureaucratic procedures required to initiating business, investor protection, as well as external

costs (political interference, corruption, consistency of business law) all contribute to the

assessment of the country’s business environment.

Source: International Institute of Finance


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45

A. With regards to starting a business, Egypt’s global standing improved considerably in 2009

from a year earlier pushing its global rank up to 24/183; one notch behind the UAE’s global

position and better than UAE’s and Jordan’s ranking at 44 and 125 respectively. This change

came as the cost of starting a business (as a percentage of per capita income) decreased from

28% in 2008 to 18%, and the initial capital required for the project fell from almost 13% to 2%

of the same value. The mentioned improvements that also included the reduction of days and

procedures to starting up operation marked an important step by the Egyptian government

towards embracing a market oriented economy that eases all bureaucratic deterrents on

prospective entrepreneurs.

B. Given that access to credit is a major instrument that contributes to the development of a

country’s private sector and consequently its productive capabilities, Egypt’s financial

institutions have been trying to improve credit information techniques to tap into growing

demand for financing new projects. This progress however is yet to be sufficiently matched by

the legal constitution of the service, which would properly define and protect debtors’ and

creditors’ respective rights and obligations. However, Egypt’s lending institutions continue to

grow annually and ease their policies while maintaining a relatively low risk policy. As such,

Egypt ranked 71/183 on a global scale in 2009, compared to 61/183 for Saudi Arabia and

127/183 for Jordan.

vii. Informal Institutions

Protection of property and business rights comes as a primary concern to entrepreneurs

who are looking to invest in a country and expect a relatively consistent return on their

ventures. When such rights are not properly defined, enforced, or are subject to political

interference, informal channels usually come into the picture to make up for the regulatory

deficiencies. In China for example, an estimated 70% of all business before the year 2000,

took place through informal networks between suppliers, distributers and producers. Those

were initially built upon family and previously established social connections. The dominance

of social networks was inspired by a severe lack of regulatory presence, and a vaguely

defined law that was often manipulated by government officials. Naturally, corruption was

wide spread during the period, exhorting extremely high costs on the country’s economic

progress by limiting the scope of internal business to immediate connections, while making

it difficult for foreign firms to enter the market without any established relations and political

backing. Those problems were eventually confronted by the market through publicly

developed institutions such as business associations that indirectly guaranteed the reliability

of their members through their proven reputations rather than having business transactions

secured by law. Such networks formed the country’s informal institutions.


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46

C. Ranking in Other Measures of Business Environment With Respect to Regional Economies

Source: International Finance Corporation; World Bank

Source: International Finance Corporation; World Bank


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47

VII. The Egyptian Economy in Figures

Indicators 2005 2006 2007 2008 2009 Real Sector

Nominal GDP ($, Billion) 98.08 112.51 135.66 163.29 189.18 Real GDP Growth (%) 4.5 6.8 7.1 7.2 4.7 CPI Inflation (end of period, %) 4.8 7.2 8.5 20.1 10.0

External Sector Balance of Payments ($ Billion) 2.92 1.76 2.23 0.88 -4.42 Total Imports ($ Billion) 24.19 30.44 38.30 52.77 50.34 Total Exports($ Billion) 13.83 18.45 22.01 29.35 25.16 Balance of Trade ($ Billion) -10.35 -11.98 -16.29 -23.41 -25.17 Remittances ($ Billion) 5.42 5.54 7.06 9.33 8.24 Foreign Direct Investment ($ Billion) 3.86 5.96 10.51 12.12 6.77

Public Finance Sector Public Revenues ($ Billion) 24.21 32.04 37.45 45.32 52.55 Public Expenditures ($ Billion) 32.45 42.36 47.69 57.63 65.74 Primary Balance ($ Billion) 2.7 3.04 2.93 2.59 3.04 Fiscal Deficit ($ Billion) -8.24 -10.31 -10.23 -12.3 -13.18 Public Debt ($ Billion) 101.39 101.66 108.78 114.52 137.96 Debt-to-GDP ratio (%) 103.4 90.4 80.2 70.1 72.9

Banking Sector Deposits in LE ($ Billion) Foreign Deposits($ Billion)

57.2 11.9

64.5 14.4

82.9 16.9

93 21.4

10.6 226

Loans to the Private Sector ($ Million) - 1 12 196 200

Monetary Sector Money Supply M3 ($ Billion) 106.29 121.97 144.62 170.71 184.73 CBE Domestic Credit ($ Billion) 85.02 92.816 96.77 103.993 126.653 CBE Foreign Assets ($ Billion) 14.73 24.29 39.82 55.31 46.29

Financial Sector EGX30 (end of period) 6,325

6,973

10,550

4,596

6,209

the egyptian economy in 2009 16 july 2010 · the egyptian economy in 2009 y 2010 2 for your queries...

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