Egypt: A Year In Review

14.01.2009

2008 was a year of healthy growth for the Egyptian economy but the country has not escaped the slowdown resulting from the global financial crisis. Bread shortages in the first half of the year led to social unrest, prompting the government to take immediate and concerted action to stave off a potential crisis. While the country managed to avoid further strife thanks to the government's emergency measures, 2008 has served as a timely reminder of the difficult challenges accompanying Egypt's economic growth.

While inflation has taken its toll on the country, reaching a 16-year high of 22% in July 2008, Egypt's economy continued to expand at a steady rate, albeit with slightly moderated expectations for the coming months. Gross Domestic Product (GDP) grew by 7.2% in the fiscal year ending June 30, although Finance Minister Youssef Boutros-Ghali announced in October that the country's growth would likely slow slightly to 6% in the current fiscal year, after three consecutive years of more than 7% growth.

The strong figures for the first half of the year underline the continued success of Egypt's move towards economic liberalisation, initiated by the 2004 reformist cabinet and led by the prime minister, Ahmed Nazif.

The 2007/2008 fiscal year GDP growth was spurred in large part by dramatic income increases from some of the country's biggest economic earners, including the tourism sector and the Suez Canal. Tourism, which accounts both directly and indirectly for 11.3% of GDP, saw a 32% increase in revenues, bringing $10.8bn into the economy. Likewise, revenues from the Suez Canal rose by 23.6% to a record $5.2bn, local media reported.

Other sectors of the economy have seen significant growth as well over the past year, particularly the construction and telecommunications sectors, which have expanded by 14.8% and 14.2%, respectively.

Additionally, the steady inflow of Foreign Direct Investment (FDI) into the Egyptian economy has stimulated spending in a number of sectors. The Central Bank of Egypt stated that FDI jumped from $11.1bn in the 2006/2007 financial year, to $13.2bn in 2007/2008. Around half of this went into greenfield investments, a third of which was directed towards the energy sector, according to local media. Real estate has also seen a surge in growth and received $400m in foreign investment this year. The industry and manufacturing sector has been particularly successful in attracting new foreign operators, who have been lured by Egypt's geographical location, large labour pool and competitive input costs.

At a time when traditional investment from countries like the US and Europe is facing a slowdown, Egypt is reaping the benefits of a significant wave of investment from its Gulf neighbours as they are looking to diversify their assets. In the 12-month period ending in June 2007, the six Gulf Cooperation Council (GCC) member states poured a total of $2.5bn into Egypt for new ventures and market expansion. The United Arab Emirates (UAE), for example, has a strong presence in the country's telecoms sector, following the $2.9bn purchase by Etisalat in 2007 of a mobile operator licence, while Kuwait-based bank NBK bought a 99.77% stake in Al Watany Bank of Egypt.

Mahmoud Mohieldin, Egypt's minister of investment, revealed this week that the UAE was the third biggest foreign investor in his country, with investments worth $2.9bn at the end of 2008. More recently, Dubai Group has acquired a 49% stake in an Egyptian glass manufacturer in partnership with Cairo-based private equity firm Citadel Capital while the Kuwait Fund for Arab Economic Development (KFAED) has announced it would be significantly increasing its investments in Egypt, with a loan of $105m to the state-owned West Delta Electricity Production Company to expand a power plant in Abu Qeir, about 40km east of Alexandria.

Egypt is also attracting new comers, such as China, India and Turkey, which are currently expanding their presence on the Egyptian FDI map. Additionally, the Libyan government announced its intention to take its investment in the Egyptian economy up to $10bn within the next two years. According to the Egyptian Ministry of Investment, Libya is already among the top 10 investors in Egypt.

Benefiting from the influx of foreign corporations, Egypt's outsourcing sector has also boosted its international profile. The country was awarded the prize for best outsourcing destination of 2008 by the British National Outsourcing Association (NOA), as a result of its young, multilingual workforce, low operating costs and developed infrastructure.

However, despite the record numbers of FDI inflows and steady expansion, signs hint at slower growth to come. Beltone Financial, a regional investment bank, issued a report on September 10 that revised its growth expectations from 7.5% to 6.6% for the financial year of 2008/2009, and from 7.8% to 5.8% for 2009/2010.

While Egypt's direct exposure to the financial crisis has been more or less limited, the European economic downturn does pose a more significant threat to the Egyptian economy. Cyrus Sassanpour, representative for the International Monetary Fund in Egypt, told OBG that he believes a slowdown in the European economy could impact Egypt in two related ways. First, it could potentially reduce imports of Egyptian products, as European consumers look elsewhere for cheaper goods. Secondly, the Egyptian pound could strengthen versus the euro. This would not only make Egyptian exports more expensive, but could affect areas such as tourism, by making Egypt more expensive for European holidaymakers. As prices go up, European travellers might be spurred to pursue other, cheaper Mediterranean locations.

The slowdown in the country's primary trading bloc has also spurred Egypt to diversify its export partners, thereby reducing its dependence on traditional export destinations. Over the past few months, members of the Egyptian government have met with officials from Brazil, Malaysia and India to examine the possibility of boosting trade and investment ties. As part of the drive to boost regional cooperation, a new pipeline was inaugurated in July to supply Egyptian gas to Jordan, Lebanon and Syria. Egypt and Libya are also looking to enhance their economic ties and taking advantage of their geographical proximity, with the announcement of two major cross-border investment projects in the energy sector. According to the Central Bank of Egypt, trade between the two countries grew 39% last year to $267m. Egyptian exports to Libya reached $141m in the financial year 2006/2007, while Libyan exports to Egypt jumped 75%, reaching $126m.

Certainly, while the global slowdown will likely hamper Egypt's trading prospects in the short-term, the country's low costs and competitive workforce will continue to underpin steady growth through 2009. Similarly, the downturn will eventually lessen pressure on the consumer price index, slowing inflation and allowing for more stable price increases. Egypt's long-term economic development looks set to benefit from the global upheaval as well, provided it continues to reduce its dependency on the European and US markets and diversify its trade links with other emerging markets.