Egypt’s Business Barometer shows improved perception and economic activity

The service sector fared best, with communications, tourism and financial intermediation pushing it to the top. (Photo courtesy MCIT)

The overall performance of Egyptian businesses improved by two points from July to September 2017 compared to the previous quarter, according to a report published by the Egyptian Center for Economic Studies (ECES).

The ECES surveyed 120 private sector companies regarding their perception of the performance of the Egyptian economy and their own business for the first quarter of the current fiscal year, which spanned from July to September 2017.

The survey also touched upon those firms’ outlook for the second quarter, or October through December 2017, and the results were announced in the center’s quarterly Business Barometer report.

Overall, the view about the signs of recovery of some economic indicators, such as the GDP growth rate, seems optimistic.

“Large firms recovered and benefited from the liberalization of the exchange rate at a faster pace as shown in the previous issues of Business Barometer. The improvement in [small- and medium-sized enterprises (SMEs)], however, was gradual and accelerated during the relevant quarter,” the report reads.

The center highlighted that this led to an improved outlook for both, with large firms having a slightly lower score.

Economic activity level across the board
As the quarter was accompanied by a significant increase in consumer prices, the Business Barometer evaluated the economic activity level of large firms, SMEs and sectors.

The rise of prices of inputs, final products and wages were brought about by economic reform measures, such as an increase in electricity prices and the implementation of the value-added tax (VAT).

Large firms saw high domestic sales and exports, but also higher inventory, which means that their production fared higher than domestic sales and exports. Due to economic shock, production capacity utilization in those firms decreased.

SMEs enjoyed positive views on domestic sales and exports in the first quarter of 2017-18, leading to higher production and capacity utilization. An increased use of local inputs may have led to a rise in the economic growth index for SMEs, the Business Barometer explains.

On a sectoral level, the service sector fared best, with communications, tourism and financial intermediation pushing it to the top. The Barometer attributes improvement in communications to possible increased production and high domestic sales, while a boost in tourist arrivals bolstered the tourism sector.

Improved performance in the capital market fortified the financial intermediation sector, while high prices of raw materials and difficulty in borrowing led to a decline in the positive views of the construction and manufacturing sectors. Meanwhile, the doubling of road services prices pulled down the transportation sector’s performance.

Additionally, the investment index improved due to optimism about the government’s seriousness in adopting reforms meant to enhance the investment climate, after the executive regulations of the new Investment Law and the industrial licensing procedures came to light.

Positive expectations
For the second quarter of the current fiscal year, businesses expect a rise in domestic sales and exports, resulting in an improved outlook for production and capacity utilization. Large firms’ and SMEs’ outlook on business remains positive, but less optimistic than in the previous quarter.

“Increased positive views on domestic sales may be attributed to the continued positive views on economic growth compared to the previous quarter and to the commitment of respondents to future production plan,” the Business Barometer report indicates.

Sectorally, firms operating in the financial services and telecommunications sectors have the highest expectations, followed by the manufacturing sector.

Lowest expectations are found in the tourism and transportation sectors, possibly due to the lack of future contractual engagements for the surveyed firms in both sectors.

“Most large firms [and SMEs] expect final product prices and wages to remain high, albeit slightly lower than in the previous quarter. They also expect the same for input prices, which can be explained by the continued pass-through effect of reducing fuel subsidies and increasing electricity prices in the previous quarter,” the report adds.

After the raise in the interest rate in the first quarter of the fiscal year, most large firms and SMEs are also expecting higher investment and employment in quarter two of 2017-18.

Business constraints unchanged
When asked to pinpoint the major constraints on the business sectors, the surveyed firms and SMEs gave similar answers to those they had given in the previous quarter: inflationary pressures, corruption, difficulty in interacting with government entities, unstable economic policies and the taxation system.

This hints at minimal progress in removing constraints from the fourth quarter of the previous fiscal year, despite the government’s adoption of certain measures to control inflation, such as raising interbank rates.

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