With a population of 81.7 million, Egypt is one of the wealthier countries in continental Africa. From the mid 1990’s, Egypt is moving away from the socialist policies of the past as it has implemented economic reforms and restructuring programs which has resulted in an improved financial outcome. The transformation from the state controlled economy to economic liberalization has had difficulties with government & institutional rigidity, political hesitancy in relation to stability & social unrest, high levels of poverty remain. The introduction of macroeconomic stabilization programs have successfully halted inflation coupled with bringing down population growth. The government is balancing liberalizing the economy to free market forces but while protecting the poor.
The story 10 years ago was very different to today. Back then, depleting foreign exchange reserves and significant pressure on the Egyptian pound took place during 1997-2000. Tourism at that time had dropped significantly following the 1997 killings of foreign tourists at Luxor from Islamic extremists. And during 1998, Egypt’s foreign exchange reserves were further hit by low world oil prices and from the fallout of the 1997-98 Asian financial crises which dealt a blow to foreign investment into Egypt. Today, the opposite is now true as Egypt is enjoying an economic boom with buoyant GDP growth rates of 7.1 percent (2007). The Egyptian economy is realizing strong capital inflows, high foreign direct investment, rising real estate prices, increased remittances from abroad, much improved investment confidence, growing international reserve position, general improvement in manufacturing & agricultural sectors.
POLITICS: please contact BankINTRO.com for details.
ECONOMY: Egypt for years has had economic mismanagement whereby the authorities protected the local economy from foreign competition thus not forcing Egypt to modernize and advance. Further, foreign investors were hesitant due to taxation, endless red-tape & regulations, high tariff rates. The country has made progress with respect to red tape and bureaucracy however present day inflation pressures are a concern. Today, taxes have been lowered, companies privatized along with reduced subsidies. The economic model is moving away from protection and central planning more towards of an open modern managed free market economy. However, subsidies still remain which explains the large fiscal deficit at 7.5 percent of GDP (2007). The overall standard of living is rising but very slowly as the mass population base is not realizing economic gains or feeling better off economically.
The United States does provide Egypt with an annual military aid of approximately 1.3 billion USD. Over the last 25 years, upwards of 25 billion USD was given to Egypt from the United States in U.S. foreign aid, only Israel receives more. Currently, the United States is lowering the amount of aid to Egypt. Egypt is a leading producer of textiles in the world while petroleum and tourism are the backbone of the Egyptian economy.
The Egyptian oil industry is a major source of foreign income, the industry is well-developed including several refineries.
ECONOMIC FORECAST: mixed, cautious outlook. Egypt is currently a favorable business environment for investors – economic reforms coupled with an extensive hydrocarbon industry that is realizing record revenues. Continued high world oil prices in addition to a rebound in tourism will help support the foreign reserve position and the Egyptian pound. GDP growth is expected to ease to around 6.5 percent for 2008-09, the current account surplus is likely to fall towards balanced and a fiscal deficit to decline to 3 percent of GDP by 2010-11. It is estimated that GDP at 7 percent growth is required to prevent the unemployment rate from bursting. Overall economic country risk is moderate, rising food prices and inflationary pressures may create further stress for social disruptions.
Economic Statistics
Total GDP as measured by purchasing power parity stands at 432 billion USD (2007) with corresponding GDP/Capita in the area of 5,400 USD. GDP market price stands at 128 billion USD (2007). GDP growth includes year 2009 estimated at 7 percent, year 2000 GDP growth at 5 percent due to large scale construction projects. The government has pledged 120 billion USD over 20 years for mega-projects have been criticized for lack of transparency and economic credibility. CPI inflation has year 2008 forecasted at 8.8 percent, 2009 at 8.8 percent, years 2006-07 at 10.9 percent, 2005-06 at 4.2 percent. The current account is in surplus at 1.4 percent (2007), 2008 at 0.8 percent estimated, year 2004 surplus came in at 4.3 percent. Balance of payments surplus for 2006-07 at 5.3 billion USD although the trade component is in deficit at 13 billion USD (2007). Previous fiscal deficits at 9 percent of GDP. Net public debt is at 70 percent of GDP, external debt stands at 29.9 billion USD (2007). The unemployment rate stands at 9 percent (2007) - underemployment is a problem. Exports include hydrocarbons, cotton, textiles, metals, chemicals. Imports: machinery. Electricity is in surplus – exports. Oil is in surplus with net exports at 83,000 bpd (2005). Proven oil reserves at 3.7 billion barrels (2006). Natural gas surplus with exports at 8 billion cu m (2005), natural gas reserves at 1.6 trillion cu m (2006).
POSITIVE: major natural gas supplier to Europe - Egypt has one of the world’s largest proven gas reserves, formation of a middle class taking place, personal & business taxes have been lowered, regulation burden has been reduced. CONCERN: percent below the poverty line (2005), labor force only at 22.5 million with a very young demographic profile with the median age at only 24.5 years, demands of a rapidly growing population, environmental fallout - farmers using chemical fertilizers to supplement the Nile River irrigation, limited arable land – dependence on Nile river, potential water shortages for Egypt as both Sudan and Ethiopia are placing greater demands for water with their own growing economies.
REGIONAL ANALYSIS:
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BANKING SYSTEM:
The Central Bank of Egypt plans to adopt inflation targeting for currency exchange rate regime. Recent peak for inflation came in at 12.8 percent in March 2007, 8.5 percent in August 2007. Egypt’s foreign exchange reserves including gold are measured at 31.1 billion USD (2007) equivalent to over 6 months of imports coverage and 8 times short term debt. Interest rates stand at 9 percent for 30 day T-Bill, daily interbank rates at 10 percent. Within Egypt’s domestic commercial banking sector, bank privatization is underway.
KNOWLEDGE:
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CURRENCY: ISO symbol ‘EGP’, Egyptian pound, gineih. At time of review on May 20, 2008, the Egyptian pound was valued at 5.352 EGP to 1 US-dollar (USD) and/or 8.386 EGP to 1 Euroland euro (EUR). Currency regime in place is that of a managed float / float since January 2003 from the former fixed peg. The EGP has experienced further exchange rate liberalization since mid 2007. Prior to the freeing of the exchange rate in 2003, a parallel market rate to the official exchange rates at time had a variance up to 15 percent between the two exchange rates. As measured by purchasing power parity, the EGP is upwards of 50 percent undervalued to the USD as of July 2007.
CURRENCY HISTORY: from year 2000-03, the EGP experienced multiple exchange rate devaluations when measured against the USD. Again, in late January 2003 with the freeing of the currency, the pound depreciated by 16 percent to the USD. With the freeing of the exchange rate, the market and official rates converged rather than another exchange quote reflecting the parallel market rate.
Historical official exchange quotes include April 2008 at 5.42 EGP to 1 USD, March 2007 at 5.7, May 2006 at 5.76, January 2005 at 5.89, July 2004 at 6.22, October 29, 2003 at 6.173, June 4, 2003 at 6.02, February 5, 2003 at 5.468, January 29, 2003 at 4.888, January 1, 2003 at 4.574, January 2002 at 4.61 (USD peg with plus/minus 3 percent band), January 2001 at 3.83 (crawling exchange rate peg), January 2000 at 3.42, April 1999 at 3.36, January 1998 at 3.4, November 1995 at 3.39. Year 1993 to 1998 pegged at 3.39 EGP to 1 USD , year 1992 at 3.33, year 1991 at 3 EGP, 1990 at 1.5 EGP, year 1989 at 0.83 EGP, 1979-88 at 0.6 EGP, 1968-78 at 0.4, 1950-67 at 0.36, 1962 switched to a USD peg from the former British pound peg. Last major currency crisis took place in August of 1989.
CURRENCY FORECAST: better business climate. Currency risk profile has improved tremendously over the last couple of years with an improving economy and potential for new oil & gas discoveries with increased FDI.
Currency risks include political, regional & domestic security, infrastructure deficiencies, shortage of skilled labor, inflation and changing demographic towards a younger population base. In July 2005, a domestic terrorist strike killed 88 which impacts Egypt’s tourism industry very negatively. In 2004, Egypt received 8 million tourist arrivals for an industry valued upwards of 6 billion USD equivalent making tourism, oil & gas and U.S. foreign aid large industry components of Egypt’s GDP.
BankINTRO.com’s best guess currency projections are fairly positive for the Egyptian pound. The EGP appreciated during 2007 to the USD, further modest exchange appreciation is likely for the remainder of 2008 with rising inflation pressures. By 2009, the EGP is likely to depreciate with a strengthening USD and lower energy prices. For further background information on the EGP, please contact us by clicking the currency consulting banner below.
