EGYPT ECONOMIC

DEVELOPMENTS & OUTLOOK:

CAN EGYPT SEIZE THE MOMENT ?

APRIL 20, 2015

Ahmed Kouchouk, Senior Economist

Sara Al-Nashar, Economist

1

Macro Fiscal Management – Cairo office

Outline

1) Egypt’s Latest Economic Developments 3-11

2) Egypt’s Latest Social Developments 12-16

3) Egypt Economic Conference; polices and measures 17-18

4) Economic Outlook 19-20

5) Key Risks 21

2

Latest Economic Developments: Relatively strong

rebound, driven by consumption and investments

Growth reached 5.6% in first half of FY15 compared to 1.2% in the first half of last year

The pick-up in growth reflects: resilient private consumption and higher investments (private & public) for four quarter in a row, however net exports continue to be a drag

However, the trend of quarter-to-quarter improvement in growth that started in Q1-FY14 was reversed in Q2-FY15. Strong growth will need to be maintained in Q3 and Q4 in order to achieve healthy growth for the whole year.

-15%

-10%

-5%

0%

5%

10%

15%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

Contributions to GDP Growth

Private Consumption Public Consumption Investments Net Exports GDP Growth

1

3

Source: Ministry of Planning

Latest Economic Developments: The ongoing

economic recovery is broad-based

Growth has been broad based;

manufacturing & tourism sectors

contributed two third of growth

Other improving sectors are:

agriculture, construction, trade,

transportation, and Suez canal

Extractive industries continue to

be a major drag on growth

General Government is slowing

down as well as ITC 2.65%

1.22%

0.47%

0.43%

0.41%

0.36%

0.18%

0.14%

0.14%

0.11%

0.10% -0.98%

-1.5% -0.5% 0.5% 1.5% 2.5%

Manufacturing

Restaurants and Hotels

Agriculture & Fishery

Construction & Building

Whole sale and Trade

General Government

Transportation and Storage

Suez canal

Communication & Information

Social Insurance

Real Estate Activities

Extractive Industries

Contribution to Growth (in %-pts)

FY 15 - H1 FY 14 FY 11-13

1

4

Source: Ministry of Planning

Latest Economic Developments: Unemployment is

starting to slowly inch down, yet it remains elevated

Unemployment is starting to

decline but remains elevated

compared to 2010 levels

With recent measures aiming

to control/limit public sector

hiring, the private sector has

to led employment

generation

Challenge: can the private

sector fill the gap and create

adequate formal jobs ?

8.90%

13.41%

12.90%

8%

9%

10%

11%

12%

13%

14%

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2

FY10 FY11 FY12 FY13 FY14 FY15

Unemployment Rate (%)

1

5

Source: CAPMAS

Latest Economic Developments: Inflation remains

persistently high

After a short-lived period of declining prices in H1 of 2014, annual inflation started to

pick up in FY 2014/15 and remains in double digits

Recently the higher inflation reflects : weaker pound (starting Feb. 2015), pick-up in price of butane cylinders (supply shortages), and higher prices of cigarettes and tobacco

Food prices are quite volatile but remain in single digits (due to favorable external conditions)

0

5

10

15

20

25

Annual Headline and Food Inflation (%)

Headline CPI Inflation Food & Beverage Inflation

1

6

Source: CAPMAS

Latest Economic Developments: The fiscal situation

slightly tightens, yet the outlook remains worrisome

The deteriorated fiscal

aggregates in July-Feb. 2014/15

is worrisome

Cautious when analyzing fiscal

outturns? Do not yet reflect

petroleum settlement & impact of

a number of enacted tax reforms

Investments grew by 31% (y-o-y),

key social spending items

escalated

Key tax items recorded strong

performance (sign of improved

economic activities)

6.2%

1.4%

9.0% 8.0%

3.5%

8.4%

0%

2%

4%

6%

8%

10%

Overall Deficit Primary Deficit Structural Deficit(Excludes one off

receipts andPayments)

In % of GDP July-Feb 2013/14 July-Feb 2014/15

EGP Millions

July-Feb

2013/14 July-Feb

2014/15 Annual %

change

Total Expenditures 373,316 385,157 3.2%

Wages and salaries 108,237 125,243 15.7%

Purchase of goods and services 14,047 16,159 15.0%

Interest Payments 95,379 105,877 11.0%

Subsidies, Grants & Social benefits 109,373 78,212 -28.5%

GASC (Food) 14,211 17,799 25.2%

Payment to pension Funds 21,900 24,909 13.7%

Social pension 3,315 4,452 34.3%

Other expenditures 23,800 30,149 26.7%

Investments 22,480 29,519 31.3%

1

7

Source: Ministry of Finance

Latest Economic Developments: Driven by lower grants, revenues

are underperforming despite green shoots in certain tax categories

Revenues Developments (EGP Millions, unless otherwise stated)

July-Feb

2013/14 July-Feb

2014/15 Annual percent

change

Total revenues 254224 208078 -18.2%

Taxes 148758 149780 0.7%

Taxes on wages and salaries (from employment) 14249 16552 16.2%

Taxes on incomes from industrial and commercial activities as well as

professionals income 3170 4560 43.8%

Taxes from CBE 2542 4003 57.5%

Taxes from Suez Canal 7100 7700 8.5%

Taxes from companies 10958 16462 50.2%

Taxes on securities interest payments 10480 10681 1.9%

Taxes and fees on cars 1398 1818 30.0%

GST on domestic goods 9431 11504 22.0%

GST on imported goods 17119 22356 30.6%

GST on services 5773 7450 29.0%

Excises on domestic commodities 15838 24038 51.8%

Taxes on valued customs 10599 11865 11.9%

Grants 51360 7874 -84.7%

Other Revenues 54105 50424 -6.8%

1

8

Source: Ministry of Finance

Latest Economic Developments: Early signals that the

banking sector is resuming its lending to non-gov. sectors

Banks are channeling additional credit to the private and households sectors, signaling improved confidence, slightly lower interest rates, and pick-up in credit demand by firms to resume their CAPEX and expansions

However, lending to government remains highly elevated (growing at double pace of private sector) due to high deficit and borrowing needs.

14.2%

30.1%

0%

10%

20%

30%

40%

50%

60%

Jan.

Feb

.M

arc

hA

pril

May

June

July

Aug

.Sep

.O

ct.

Nov.

Dec.

Jan.

Feb

.M

arc

hA

pril

May

June

July

Aug

.Sep

.O

ct.

Nov.

Dec.

Jan.

Feb

.M

arc

hA

pril

May

June

July

Aug

.Sep

.O

ct.

Nov.

Dec.

Jan.

Feb

.M

arc

hA

pril

May

June

July

Aug

.Sep

.O

ct.

Nov.

Dec.

Jan.

Feb

.

2011 2012 2013 2014Credit to the private sector Credit to the government

1

9

Source: Central Bank of Egypt

Latest Economic Developments: Limited availability

of forex through banks is a key concern

NIR stabilized at $16.8 bn.

during July-Oct 2014, before

dropping to $15.3 bn. by end-

Mar. 2015

Why the drop in NIR?

exceptional repayments of

Qatari deposits/bonds worth

$3.2 bn., and partial

repayment of oil arrears of

more than $2.8 bn.

The official exchange rate

depreciated in Feb. 2015 after

stabilizing for 7 months. It

reached LE 7.63/US$ in official

and parallel markets

1

0

5

10

15

20

25

30

35

40

5

5.5

6

6.5

7

7.5

8

Ja

n-1

1M

ar-

11

Ma

y-1

1Ju

l-1

1S

ep

-11

No

v-1

1Ja

n-1

2M

ar-

12

Ma

y-1

2Ju

l-1

2S

ep

-12

No

v-1

2Ja

n-1

3M

ar-

13

Ma

y-1

3Ju

l-1

3S

ep

-13

No

v-1

3Ja

n-1

4M

ar-

14

Ma

y-1

4Ju

l-1

4S

ep

-14

No

v-1

4Ja

n-1

5M

ar-

15

in B

illi

on

US

$

LE

/US

$

Exchange Rate (left axis) NIR (right axis)

10

Source: Central Bank of Egypt

Latest Economic Developments: External accounts

display mixed signals

BOP recorded US$1 billion deficit due to deteriorated current account and lower capital

account receipts (lower exceptional receipts)

Oil trade balance deteriorated, non oil imports widened (remain depressed and backlog

exists), exports were sluggish, and portfolio inflows did not resume yet

On the positive side: remittances inflows are resilient, tourism receipts are rebounding (albeit

from low depressed levels), and FDIs inflows are picking up

Exceptional Developments: Egypt paid Qatar $3.2 bn. due debt and oil companies $2.8 bn.

of arrears and in return received some $2.5 bn. of Gulf grants

1

-20000

-15000

-10000

-5000

0

5000

10000

Oil TradeBalance

Non Oil TradeBalance

Gulf grants(cash and

commodity)

FDI Tourist Recipts Remittances

USD

Millions

July-Dec 2013 July-Dec 2014

11

Source: Central Bank of Egypt

Latest Social Developments: High poverty rates,

with regional disparities.

Social indicators in Egypt point to dismal conditions:

- High Poverty Rates (Latest official estimate by CAPMAS 26.3%; with poverty

rates reaching 50% in rural Upper Egypt)

- Inequality is not very high (Gini of 0.30). However, this mainly reflects the

dampened welfare of the highest income brackets, rather than improved

prosperity amongst the less privileged

- More recent poverty data are not yet available, however following are the

upside/downside factors to the poverty outlook

2

Note: Figures here are based on CAPMAS data for FY13; not necessarily comparable to previous

years’ estimates.

12

Latest Social Developments: High poverty rates,

with regional disparities.

2

Upside Factors:

- Recent economic uptick.

- Contained international prices (in light

of lower international oil and grain

prices)

- Populous measures (min. wage, special

cadre.)

- Constitutional stipulations that

mandate an increase of health and

education allocations.

Downside Factors:

- Gradually streamlining energy subsidies

(direct and indirect impact)

- Tax reforms may translate into higher

consumer prices

- Prolonged instability in the region, and

lower international oil prices may mean

loss of remittances

- If labor market conditions did not improve,

high unemployment and poor job quality

may lead to rising poverty.

13

Latest Social Developments: Zooming into

unemployment developments

The Male-Female difference

remains above 15 percentage

points

Unemployment rates indeed

started to decline, but this was

partially explained by “drop-

outs” from the labor force,

primarily amongst men.

(Male LFP 4%-points

between Q2-FY11 and Q2-

FY15).

2

49.2% 47.0%

0%

20%

40%

60%

80%

Oct-DecFY11

Oct-DecFY12

Oct-DecFY13

Oct-DecFY14

Oct-DecFY15

Labor Force Participation (% of population)

Male LFP Female LFP LFP

0%

5%

10%

15%

20%

25%

30%

Oct-DecFY11

Oct-DecFY12

Oct-DecFY13

Oct-DecFY14

Oct-DecFY15

Unemployment (% of labor force)

Male Female Unemployment, total

Source: CAPMAS

14

Latest Social Developments: Well targeted cash

transfer programs are finally starting to roll out

The government, with the Bank’s support, is launching a new conditional and

unconditional cash transfer programs (Takaful and Karmah). The Government plans to

roll out the Takaful and Karama program in three phases, covering in total 1.5m

families/beneficiaries by end 2017

Phase-1 will cover 500,000 families in 2015 in the poorest 19 districts in 6 upper

Egypt governorates (with poverty rate of 60% or above) as determined according

to the poverty map using 2012/13 HIECS. A Proxy Means Testing (PMT) will be

applied to all applicants

Conditionality under the Takaful program will comprise semi-annual health growth

monitoring of children under 5 and participation in health/nutrition awareness

events for families with children under 6; and 80% school attendance for families

with children aged 6-18

2

15

Latest Social Developments: Reforming food subsidies to

reduce leakages and enhance consumer choice

Old Ration System:

The government subsidized

commodities

Each citizen was allowed a specific

monthly quantity of subsidized basic

food commodities (cooking oil,

sugar, rice, Macaroni).

Outcomes: This has led to poor quality

products and opened doors for black

market

2

New Subsidy System:

The government moved from subsidizing

commodities to an allowance based

system

Each citizen is entitled to a monthly

allowance of EGP15, and is free to buy

any product from a basket of 20 food

commodities. The plan is to enhance the

list to include 40 products by end of

2015

There are tremendous leakages from the food subsidy system, estimated at 29

percent prior recent reform process (73% of non-poor Egyptian households have

access to food ration cards.)

Nevertheless, food subsidies are key to protecting the poor. (It is estimated that

removing food subsidies would increase the national poverty rate by 9%-points

16

Egypt Economic Conference: Recently announced tax

measures to support a more conducive business environment

Tax Measures:

1. Reduced and unified highest income tax rate on individuals and corporates at 22.5% down from 25% and 30% for individuals and corporates respectively

2. Intend to maintain the new tax rates for the coming 10 years; to ensure stability after 4 years of frequent changes.

3. Apply the new tax rate uniformly on all activities and establishments in Egypt (including economic zones)

3

22.5%

30.0%

10%

15%

20%

25%

30%

35%

40%

Highest Corporate tax rate (Egypt vs. Peers)

Source: Egypt Ministry of Finance and KPMG-2014 report

17

Egypt Economic Conference: Other recent measures by the

government to create a more conducive business environment

Investment Promotion: a new investment law was ratified in March

2015 with the following key features:

1. The General Authority for Investments (GAFI) is authorized -in certain sectors

and activities- to go through all the procedures and to obtain all needed

licenses on behalf of the investor

2. A new legal framework for dispute resolution was introduced that sets

standard and clear procedures for addressing future disputes

3. Sales tax on capital goods and machinery was cut down from 10% to 5%, and

also process of refunding taxes paid on inputs and capital goods was simplified

and speed up

3

18

Egypt Economic Outlook: Indicators are likely to

improve, yet the high fiscal imbalances remain worrying

19

Economic Outlook

Real growth is expected to pick up to reach 4.3 % in FY15, 4.7% in FY16, and 5.2% in FY18; growth can pick higher if foreign investment strengthened

Prices projected to remain at high single digits (mixed forces: price adjustments and demand pull factors vs. proactive monetary policy & lower bottlenecks)

Overall deficit would remain high despite following a gradual declining path over the MT to reach 9.4% of GDP in FY18

Higher BoP. surplus, yet the current account would remain in deficit due to widening trade deficit

Challenges

Steadfast reform implementation and building efficient SSNs

Availability of the currency

High financing needs on the fiscal sides as economic conference produced good results for external financing tide to projects, and some support for reserves build up at the Central Bank but no budget support.

4

Egypt Economic Outlook: Indicators are likely to

improve, yet the high fiscal imbalance remain worrying

4

1.8 2.2 2.1 2.2

4.3 4.7 5.0

5.2

1.0

2.0

3.0

4.0

5.0

6.0

2011 2012 2013 2014 2015 2016 2017 2018

Real GDP growth rate (y/y)

10.7

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

2011 2012 2013 2014 2015 2016 2017 2018

Unemployment Rate (%)

1.0 1.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

2011 2012 2013 2014 2015 2016 2017 2018

Overall BoP. (% of GDP)

4.6

2.5

3.5

4.5

5.5

6.5

2011 2012 2013 2014 2015 2016 2017 2018

NIR commodity imports coverage (months)

20

Source: Authors compilations

Key Risks: The outlook remains clouded by the uncertain

global & regional conditions and the need to maintain reform

21

On the upside: if the economic conference deals materializes, growth could

be higher mainly through higher stimulated domestic demand. However, one

will need to pay attention to the productivity of these investments in the

long term, as well as their contribution to long term/quality job creation

On the downside:

1. Security situation at home and in the region can cloud the forecast.

2. The strength, breadth, and depth of global recovery is uncertain (given

EU economic performance which is Egypt main trade partner)

3. Also, financing costs on capital markets can worsen (e.g. by Greece-EU

debt/default talks, interest increases in the US) at a time when Egypt

borrowing needs may be high.

5