How to make sense of the numbers: Acumen Consulting explains Egypt’s economic vitals

Acumen suggests that potential export destinations for Egypt include several countries in Latin America, given the privileges of Egypt’s Free Trade Agreement with Mercosur (Photo courtesy of Acumen Consulting)

Navigating Egypt’s economic landscape can become challenging given a scarcity of reliable data and an oversupply of rumors, constant changes as the government’s economic reform program is in full swing and the lack of credible sources that put macroeconomic indicators and developments into perspective.

To make sense of the noise, boutique management consulting firm Acumen Consulting hosted an event under the name “Eyes on the Vitals”, with speakers from the public and private sector, including executive chairman of the board of Orascom Developments Holding Samih Sawiris and assistant sub-governor for the Central Bank of Egypt (CBE) in the Banking Reform Sector Nermine El-Tahri, as well as agency representatives.

During the event, Acumen Consulting founding partners Inji Amr Borai and Sandra Farid gave an overview of Egypt’s macroeconomic indicators, what affects them and what to expect from them in the future.

Inflation and interest rates
While worldwide inflation has reached 3.1 percent in 2017, local inflation stood at almost 16 percent in December 2017, as the CBE is targeting 13 percent by the fourth quarter of 2018. In December 2017, inflation rose sharply to 23.5 percent compared to November, but is now steadily declining, Acumen suggests. The key drivers of inflation in Egypt were mainly the devaluation of the Egyptian pound and a rise in consumer prices due to the increase of import prices. That is why the CBE implemented a contractionary, as opposed to an expansionary, monetary policy to raise interest rates. In open market operations, interest rates drop in the wake of expansionary monetary policy, while they hike under the contractionary monetary policy.

The CBE targets a 13-percent inflation rate by Q4 of 2018

The contractionary policy would push inflation downwards as people would prefer to save their money rather than spend it at high interest rates. The cost of borrowing goes up, which also discourages investment through making the purchase of capital more expensive. Additionally, variable mortgage rates went up.

Currency fluctuation
Over the past year and a half, the Egyptian pound has fluctuated tremendously. The drivers of such fluctuations were threefold.

Firstly, a decrease in tourism revenues after 2011. As an example, revenues from the tourism sector dropped to $6.1 billion in 2015 from $7.3 billion the year before. Secondly, a negative trade balance and thirdly, a drop in foreign direct investment (FDI) after 2011 due to economic and political instability, which affected foreign currency reserves.

What all of that boils down to is a bigger opportunity for exporters, “as their products are now competitively priced against their foreign counterparts,” Acumen states. Additionally, the prices of imported inputs have risen tremendously, which led businesses to depend on local production. The financial market has also become more attractive to foreign investors, as foreign holdings of treasury bills reached a record high of LE7.5 billion in 2017.

Trade balance
Egypt has been seeing a negative trade balance – meaning that the value of imports exceed the value of exports. Currently, the country’s top export categories include electrical machinery and equipment, edible fruits and nuts, plastics, vegetables, roots, tubers, clothing and fertilizers, according to Acumen.

In terms of trade partners, Egypt mainly does business with the United States (4.5 percent), Italy (6.6 percent), Saudi Arabia (7.8 percent), the United Arab Emirates (13 percent), Turkey (6.4 percent) and the United Kingdom (4.7 percent). Acumen suggests that potential export destinations include several countries in Latin America, given the privileges of Egypt’s Free Trade Agreement (FTA) with the Common Market of the South (Mercosur), which cuts tariffs by 90 percent and cancels customs duties on agricultural goods. Other suggested destinations include Kazakhstan, India, Ethiopia, Uganda and Malaysia.

FDI trends
Despite the drop of FDI after 2011, inward flows are slowly rising again, mainly directed at the oil sector (53 percent). The general trend has moved on from green field investments, in which a parent company builds its operations in a foreign country from the ground up, to mergers and acquisitions of existing players in the market, such as Fawry. Most of these deals could be found in the food and beverage, retail, healthcare and education sectors.

Most of the FDI has come from the United Kingdom (47.4 percent), followed by the United Arab Emirates (10.6 percent), Germany (7 percent), the United States (5.4 percent) and France (2.5 percent).

Acumen concluded by providing an overview of global business and technology trends, such as blockchain technology, the recruitment of millenials, the rise of hybrid business models and the increase in entrepreneurship support.

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