MENA Country Report - Egypt

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02 jul 2015

In 2015 and 2016 Egypt’s economy is expected to grow by more than 4%, as improved stability in the country will boost domestic demand.

Middle East and North Africa economies

Atradius STAR Political Risk Rating*:

Algeria: 6 (Moderate-High Risk) - Positive

Egypt: 6 (Moderate-High Risk) - Negative

Jordan: 5 (Moderate Risk) - Negative

Kuwait: 3 (Moderate-Low Risk) - Stable

Morocco: 5 (Moderate Risk) - Positive

Saudi Arabia: 3 (Moderate-Low Risk) - Negative

Tunisia: 5 (Moderate Risk) - Negative

United Arab Emirates: 3 (Moderate-Low Risk) - Positive

 

* The STAR rating runs on a scale from 1 to 10, where 1 represents the lowest risk and 10 the highest risk.

The 10 rating steps are aggregated into five broad categories to facilitate their interpretation in terms of credit quality. Starting from the most benign part of the quality spectrum, these categories range from ‘Low Risk’, ‘Moderate-Low Risk’, ‘Moderate Risk’, ‘Moderate-High Risk’ to ‘High Risk’, with a separate grade reserved for ‘Very High Risk.’

In addition to the 10-point scale, rating modifiers are associated with each scale step: ‘Positive’, ‘Stable’, and ‘Negative’. These rating modifiers allow further granularity and differentiate more finely between countries in terms of risk.

 

For further information about the Atradius STAR rating, please click here.

 

Egypt

Political situation

Head of state: Abdel Fattah Saeed Hussein Khalil El Sisi (since June 2014)

Form of government: De facto military government

Population: 85.4 million (est.)

Regained stability after the military coup

After the coup d‘état of the Egyptian army against the Muslim Brotherhood government in July 2013, the political situation has stabilised again. But this stability came at the price of increased repression (curbed media freedom) and restrictions on demonstrations. Especially the Muslim Brotherhood movement has been suppressed and banned from the political process, with many leaders jailed, and some (including former President Mohamed Morsi) even facing capital punishment. Parliamentary elections were due to be held in March and April 2015, but were postponed indefinitely.

 

The internal security situation remains tense, as the military crackdown has pushed the Muslim Brotherhood underground, risking a further radicalisation of some elements. Scattered bombing attacks occur from time to time, especially in the Sinai Peninsula and the border region to Libya, where Jihadist forces are already stirring unrest.

 

Economic situation

Stronger growth and increasing foreign investments

After the military coup, Egypt ́s economic situation has improved, and growth is expected to accelerate due to improved business and consumer confidence and rising investments. The business-friendly Sisi-administration focuses on ensuring economic stability by attracting foreign investments (e.g. in energy and infrastructure projects) and has launched some reforms to improve the business environment, such as cutting red tape and improving the legal system. The regained political stability and the administration’s programme of economic development has indeed increased foreign investors ́ confidence.

 

In 2015 and 2016 the economy is expected to grow by more than 4%, as improved stability in the country will boost domestic demand. The government has also liberalised its exchange-rate regime slightly, allowing the Egyptian pound to depreciate, which supports export and tourism growth. Since June 2014 tourist arrivals have increased again year-on-year each month (tourism contributes more than 10% to GDP). Foreign direct investment (FDI) increased 140% year-on-year in H2 of 2014, although from a very low level seen in the years of political uncertainty. Egypt urgently needs FDI in order to improve its under-developed infrastructure and power supply and requires more housing for its fast-growing population (predicted to grow to more than 110 million by 2030).

 

The budget deficit amounted to 12% of GDP in 2014 and is expected to gradually decrease in the coming years, mainly due to a comprehensive cut in fuel subsidies in mid-2014 (in the past those subsidies accounted for more than 20% of government spending). At the same time some taxes have been raised. However, it will be politically difficult to implement additional measures to sharply reduce the deficit, especially to cut spending on social projects, as a large part of public spending is still geared towards maintaining social stability.

 

Since the military takeover, more than USD 20 billion in new aid and investments has come from several Gulf states to support the Egyptian economy. This financial support is still necessary given the budget and current account deficit and the low level of foreign reserves, with was just about three months of import cover in 2014. Domestic debt is very high at 94% of GDP, but external debt is low at 17% GDP. Debt service additionally weights on the public budget.

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