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S A L The Egyptian Economy in 2009
16 July 2010
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S A L The Egyptian Economy in 2009
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For your queries Research Department Marwan Mikhael Walid Sayegh Research Department
Head of Research [email protected] Tel: +961 1 737 247 Fax: +961 1 737 414
Economist [email protected] Tel: +961 1 747 802 Ext: 1409 Fax: +961 1 737 414
[email protected] Tel: +961 1 747 802 Fax: +961 1 737414
S A L The Egyptian Economy in 2009
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Momentum Driven Growth and Fast Adaptability
The fall of Lehman Brothers in September 2008 marked the beginning of a catastrophic period
for global markets, dubbed as the worst financial crisis since the Great Depression. During the
year and a half that followed, only a few economies managed to avert the tide of bankruptcies
and labor layoffs, which claimed an estimated 20 million jobs worldwide and resulted in a
staggering $4.1 trillion loss in global capital. The countries that were eventually capable of
avoiding an economic and social disaster during the period were those with consistent capital
inflows such as oil producing countries in the Gulf, giant East Asian manufacturers, and
emerging economies that had already been well performing and operated with a relatively
conservative financial system. Of the latter group, Egypt was one of the top performers.
During the fiscal year that extended between July 2008 and June 2009, Egypt’s upward trend
continued uninterrupted registering a 4.7% rise in real Gross Domestic Product. Although it
faced a plunge in its manufacturing exports and other external receipts, Egypt’s economy
proved quite resilient with the aid of a strong domestic demand that was boosted by
systematic raises in public wages. In addition, the negative investor sentiment during FY2009
was partially offset by state spending as the government took an active role in offsetting the
downturn of the economy.
Primarily, the government’s involvement in the alleviation of the effects of the crisis was
marked by the implementation of an expansionary fiscal policy that proved effective in
sustaining a healthy capital flow within the country. Supplementary Fiscal spending of LE23
billion ($4.2 billion) was thus designated to projects in infrastructure, creating new job
opportunities and establishing linkages to other sectors such as construction, manufacturing,
and tourism.
The Egyptian external sector conversely suffered grave losses in FY2009, witnessing declines in
manufacturing exports, as well as services receipts. However, and as the central government
maintained its control over trade policies, Egypt’s external sector was relatively quick to adapt
to the changing dynamics of international markets, especially with regards to trade in strategic
products. This attitude was manifest in the import quotas that were set on some agricultural
products as well as the export restrictions on input materials that were employed in other
sectors such as cement. Despite the fact that state interference and over centralization could
have been theoretically harmful to the promotion of growth and investment incentives, in this
particular case, it played a crucial role in controlling the country’s balance of payments that
suffered losses on a decline in tourism receipts and earnings from the Suez Canal.
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With regards to monetary policy and the role of the Central Bank (CBE), the Monetary Policy
Committee (MPC) tried to act in accordance with the market signals during FY2009 aiming to
find a balance between promoting domestic investment while controlling the levels of inflation
through interest rate manipulation. Furthermore, the CBE implemented reforms in public wages
and liquidity management as it began to upgrade its infrastructure to cater to the needs of a
growing consumer market.
The performance of commercial banks on the other hand was relatively modest as the lack of
private investment during the year resulted in the reduction of deposits by the business sector.
This was however offset by household deposits that witnessed a 17% rise, with the Egyptian
pound retaining its status as a preferred savings currency. With regards to Bank operations,
commercial institutions followed a cautious strategy during FY2009 purchasing Treasury bonds
by an excess of 67% compared to a year earlier while taking a more conservative stance on
lending.
Finally, Egyptian equities moved in line with world stock markets during FY2009 as the EGX30
fell to a four year low between September 2008 and February 2009. However, most of the
losses suffered by listed firms were later vigorously recovered with real estate firms leading the
pack, followed by travel, leisure, and banking institutions. By November 2009, the EGX30 had
jumped by 46% from January 2009, and the value of daily trades had more than doubled.
Egypt’s stock market has since become one of most active in the Middle East, with 333 listed
firms amounting to a market cap of LE464 Billion ($84.5 Billion).
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Table of contents
I. Real Sector: ................................................................................................................... 6
1. Manufacturing: ............................................................................................................................ 8 2. Agriculture: ........................................................................................................................... 13 3. Construction and Real Estate: ............................................................................................... 16 4. Tourism :................................................................................................................................ 19 5.Oil & Gas : .............................................................................................................................. 21
6.Telecommunications : ............................................................................................................ 23
II. External sector: .......................................................................................................... 25
A. Current Account: .................................................................................................................. 25 B. Capital Account:.................................................................................................................... 27
III. Fiscal Policy: .............................................................................................................. 29
1. Expenditure: .......................................................................................................................... 29 2. Revenues: ............................................................................................................................. 31
IV. Monetary Sector ....................................................................................................... 33
V. Banking Sector ........................................................................................................... 36
VI. Financial Markets: .................................................................................................... 40
A. Stock Market In 2009 ............................................................................................................ 40 VII. Business Enviroment .............................................................................................. 43
VIII. The Egyptian Economy in Figures ....................................................................... 46
S A L The Egyptian Economy in 2009
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I. The Real Sector
The Egyptian economy demonstrated a high level of resilience in FY2009 weathering the global
financial crisis, as it achieved positive growth rates on momentum gained from previous years.
Although some of the main sectors were hard hit by the decline in foreign equities and local
investment capabilities, an increase in the production of oil and gas as well as a rise in
consumption levels contributed to the sustenance of growth. As a result, real gross domestic
product (GDP) increased by an estimated 4.7% compared to 7.2% in 2008, and nominal GDP
amounted to LE1,038 Billion ($189 Billion).
Graph1. Source: International Institute of Finance
As the Fiscal year in Egypt begins in June1, the global financial crisis had not yet taken its full
toll on the economy by the first quarter of FY2009, which registered a 5.8% growth in GDP. The
adverse effects on Egypt’s real sector were in fact most evident during the second quarter of
the year with GDP growth declining to 4.1% between October and December 2008. However,
the downturn in the economy was only short lived as the crunch began to wane off by H209
with the aid of a government stimulus plan that augmented public spending and raised growth
to an average of 4.4%. As such, the massive infrastructure projects, the tourist promotion
strategies, as well as the reforms in policy, all played a major role in boosting consumption
levels and investment activity.
1 Unless indicated otherwise, FY 2009 denotes the year extending between July 2008 and June 2009.
• Note :The 2009 average exchange rate used in the study is assumed at 5.49LE/$
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Construction on one hand was crucial to the expansion of the market to the outskirts of the
Capital, which was supplemented by intricate webs of infrastructure, attracting regional
investors. In addition, higher disposable incomes amplified local consumption offsetting the
decline in exports during the year. Finally, government promotion strategies, import tax cuts
and export quotas on input materials played a role in minimizing the damage withstood by
productive industries such as manufacturing and agriculture.
Regarding prices in Egypt, the emergence of new consumption trends, the boom in investment
levels, and wage increases did not aggravate Egypt’s inflationary pressures in FY2009. Primarily,
during the first quarter of FY2009, the CPI soared to 20.6% on a yearly basis, but was
comparatively contained through a raise in interest rates. The second half of the year however
witnessed a sharp fall in the CPI to 9.9% by the end of the year. This slump in inflation resulted
from a fall in world prices for commodities.
Graph2. Source: International Institute of Finance
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1. Manufacturing Sector
Manufacturing is one of the most vital sectors in Egypt, presenting the country as one of the
major industrial economies in the MENA region. Egypt established its manufacturing sector on
a large scale in the late 1960’s as part of its socialist legacy targeting heavier industries, which
were mainly state controlled. Although gradual privatization began as early as the mid 70s
attracting major international firms, it was only until 2004 that a new outlook towards economic
progress took off with the assignment of the reform oriented cabinet of Ahmed Nazif. Since
then, Egypt’s manufacturing has grown at a yearly average of 11.3%, attracting a substantial
amount of foreign investment into the growing sector.
Egyptian Manufacturing accounted for 16% of total GDP during the fiscal year 2008/2009,
witnessing a 2.3% growth in its value added compared to 5.8% a year earlier. The decline in the
yearly rise of its contribution to GDP was generally due to decreasing world demand for
industrial products. However, the resulting change in production played out to the benefit of
Egypt’s comparative advantages, and it marked a turning point towards Egypt realizing its
productive potential in certain subdivisions of the sector such as the food industry. In details,
manufacturing registered an increase in the production of consumer non-durable goods by 8%
(Food & Beverages, Textiles and Clothing, etc.) as well as intermediate goods by 5.3%
(Petrochemicals, Electric equipment etc.); both of which have fast-growing domestic markets.
Conversely, its produce that was dependant on imported resources, namely investment goods
(Metal Products, Motor Vehicles, etc.) and consumer durable goods (Domestic Appliances,
Consumer electronics, etc.) decreased by a respective 4.9% and 3.5%.
A. Food and Beverages
Production of consumer non-durable goods (CNDG) is a robust subdivision in Egypt’s industrial
sector with massive potential for additional growth. In 2009 CNDGs output accounted for
28.2% ($6.14 billion) of total manufacturing, and was led by the food and beverages industry
(F&B) that covered 70% ($4.3 billion) of CNDGs and 19.7% of the manufacturing sector in value.
CNDGs are highly dependent on Egypt’s huge consumer base, comprised of a population
estimated at around 80 million citizens. In addition, the 10 to 12.5 million tourists that visit
Egypt every year contribute significantly to the advancement of the sector, as they consist of
higher end consumers from the Middle East, Europe, and North America. Egypt is however still
far from realizing its full productive capabilities as most of its local consumers are in the lower-
income bracket with an F&B yearly per capita consumption of $460.
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It is estimated that the F&B industry will grow in the next five years as disposable incomes
increase, with a 28.5% forecasted rise in per-capita consumption. Such positive forecasts have
enticed major regional and global food producers to undertake major investments in Egypt’s
growing market.
Graph3. Source: International Institute of Finance
B. Textiles and Clothing
Another important subdivision in Egypt’s manufacturing sector is the textile and clothing
industry (T&C). The T&C sector has traditionally been a dominant industry in Egypt and has
gained further importance following the creation of the Qualifying Industrial Zones (QIZ) in 2005,
giving Egyptian production duty free access to the US. In FY2009, textiles and clothing
accounted for 4.3% of overall manufacturing in terms of value added, with total output falling to
$2.1 billion from the $2.5billion a year earlier. The decline in the value of the industry came as a
result of its dependency on the export market that suffered grave losses starting late 2008 with
the global financial crisis, noting that textile exports represented around 24% of Egypt’s total
non-oil shipments at the time. This decline was especially noticeable in the cotton industry that
mainly dominates Egyptian T&C and corresponds to almost 27% of all manufacturing in terms
of volume, the second largest after food processing. The fall in international demand during
FY2009 delivered a powerful blow to Egyptian cotton products that could no longer compete
with the subsidized US cotton. As a result the cultivated area for cotton fell by an estimated
10% from the previous fiscal year, and prices declined to 95-106 US cents from 125-135 cents.
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The Egyptian T&C industry is expected to pick up in the coming years, at a pace both dependant
on the recovery of the world markets and the potential privatization of the sector, as although
the private share in finished clothing production reached almost 95% in 2009, it remained at
less than 60% in spinning and weaving.
C. Pharmaceuticals
With an expanding base of high skilled labor and a huge consumer market, Egypt is rapidly
becoming a major pharmaceuticals producer, with the industry divided among more than 30
domestic manufacturers, of which three-quarters are private firms. In recent years, local
pharmaceutical companies have become responsible for more than 90% of the market share,
mostly supplying high-volume basic medicines. In FY2009, Pharmaceuticals accounted for 3.2%
($0.69 billion) of manufacturing in Egypt, up by 10.1% in value added from FY2008 that
witnessed a 4.8% increase. Moreover, profit margins of companies continued to grow as they
invested in new types of drugs despite the rising prices of imported chemicals; noting that
Egypt imports 85% of its raw materials for the industry, with an import tax that has been
lowered to 2% from 10% in previous years. Moreover, the government has embarked on a
recent project to privatize most of the remaining state-owned firms; a move that will prove
beneficial in terms of promoting competition and subsequently encouraging innovation in the
field.
Graph4. Source: Business Monitor International
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i. World Statistics on Car Ownership and Manufacturing
Egypt only enjoys a ratio of 30 cars to 1000 people according to 2009 figures, compared
to 53/1000 in Morocco, 336/1000 in Saudi Arabia, and 435/1000 in Lebanon. For Egypt,
this implies a major potential for the growth of the car industry, especially considering the
huge urban population and the continually rising GDP per capita. On a global scale, the US
tops the list of cars per capita with a cars/people ratio of 765/1000 followed by
Luxembourg and Malaysia with respective ratios of 686/1000 and 641/1000. Japan comes
at the 10th position in the list with 543/1000 whereas the UK ranks 18th with 426/1000, just
behind Lebanon. As for car manufacturing by country, China was the first producer in
2009 with a total of 10.38 million cars, taking 21% of the world production market. The
second and third on the list were Japan and Germany with 6.8 and 4.9 million
manufactured cars respectively. The US ranked 6th in world output with 2.2 million
manufactured cars in 2009. As for Egypt, it was the 38th country on the list with almost
390 thousand cars produced.
D. Motor Vehicles
Egypt is reportedly the largest motor vehicle producer in North Africa and one of the only
manufacturers of a kind in the Middle East. With more than 30 assembly lines producing for
major international brands, Egypt’s productive capacity for motor vehicles reached 180,000
units per year in 2005 following the tariff cuts on car components and spare part imports.
Furthermore, the production of car components was similarly promoted by the government that
placed a minimum requirement of utilizing 40% of locally produced components in domestic
vehicle production. In FY2009, the automotive industry represented 15.7% of overall
manufacturing and it supplied 65% of total car sales in the country. Those figures were
represented by 390 thousand vehicles produced and around 260 thousand units sold.
The demand for Egyptian produced cars is estimated to continue growing at a fast pace in the
coming years in relation to the rise of Egypt’s middle class, especially considering the high tariff
rates imposed by the government car imports.
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E. Petrochemicals
Egypt’s petrochemicals industry is a fast growing sector that has expanded almost 15 fold from
2004 to reach a value of $4.8 billion in FY2009 and capture 13% of overall manufacturing. This
growth has been especially furthered by the rise in Egypt’s production of natural gas, which is a
major input product for the industry. In addition, petrochemical production is expected to
continue increasing in the next 15 years due to a diligent government effort to minimize the
country’s chemicals import dependency and reach a phase of high export capability. To meet
that end, a 20 year plan was hatched in 2002 by the Egyptian General Petroleum Corporation
(EGPC) to increase production to a yearly 15 million tons, generating up to $7 billion in
revenues. Although the plan is facing countless challenges, including delays in constructing
facilities and an expected 2 fold cost expansion to $20 billion, the project is on the path of
concluding its second phase that will corroborate a spread of operations across seven different
sites and create up to 100 thousand new job opportunities. Furthermore, it has attracted
numerous investors from India and East Asia into the country, to develop their own production
zones and join the growing agglomerations.
Although Egypt’s manufacturing is one of the most advanced in the MENA region, it is still in
the early stage of development and cannot yet compete in international markets. This is
especially true concerning its investment goods and consumer durable goods, which are both
high-energy and high-skilled labor dependant. However, Egypt’s development in building
capacities as well as attracting FDI due to its huge consumer market and cheap labor force, are
initial positive steps towards satisfying its domestic demand. Furthermore, the spillover of
technology and expertise from multinational firms, boosted by government-supported joint
ventures and the continuing privatization of the industrial sector, is set to contribute
significantly to the development of the sector.
S A L The Egyptian Economy in 2009
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2. Agricultural Sector
Agricultural production in Egypt did not experience any considerable changes during the fiscal
year 2008/2009, despite the fact that it revealed an outlook of continuing expansion to be
boosted by domestic consumption. This positive outlook was reinforced by the evident growth
in the demand for local staple foods in accordance with rising levels of disposable income.
Conversely, export intended output witnessed a decrease in production in response to declining
world demand following the global financial crisis, as well as a government ban on exports for
some staple foods in an attempt to control domestic prices. In general, agricultural products
increased by an annual 3.4% in FY2009, including forestry, livestock, and fisheries, with a main
produce of wheat, rice, corn and sugar dominating the sector.
Graph5. Source: International Institute of Finance
Rice counts as the primary component of the Egyptian diet and has proven to be a demand
inelastic commodity with its consumption levels continuing to rise despite the increase in
prices. Rice output grew by an annual 0.13% in 2009 to 4.3M tons, relatively low in comparison
with previous years due to the government imposed ban on exporting the commodity,
implemented in 2008. The ban came as an attempt to control domestic prices and was
accompanied by a subsidizing scheme that rendered the commodity an appealing crop due to
its high-fetching price. However, the government aims to cut production in the coming years to
prevent irrigation water from being wasted, given that rice is a water intensive crop and Egypt is
a relatively water-poor country.
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This decrease in rice output due to smaller cultivated land will be partially offset by the rise in
the crop’s yield following the government’s adoption of genetically modified plants, which are
reportedly yielding 23% higher output than the average crop.
The cutback in cultivated rice area is intended to be replaced by higher grain production to the
purpose of cutting import dependency in the future, noting that Egypt imports more than 50%
of its local demand in wheat and corn. Accordingly, the government assumed a policy that aims
to increase wheat production to cover at least 75% of local consumption in the next decade,
especially following the decline in output to 7.8M tons in FY2009 from 8.2M tons a year earlier.
As for corn output, it is expected to continue its upward trend as it has become a popular
commodity with its use as cheap livestock feed, although it only expanded by 0.6% to 6.2M
tons in 2009. Furthermore, in FY2009 local consumption of grains outweighed production
considerably and grew at a much faster pace, rising by 3% and 4% for wheat and corn
respectively to 16.5 and 10.8 million tons, and indicating the heightened pressure by the market
to expand domestic productive capabilities.
ii Russian Wheat Export Crisis
Demand for wheat in Egypt hovers around the margins of 16 million tons per year making its
per capita consumption one of the highest in the world. Considering the country’s capacity
to produce only half of this amount, Egypt has become the world’s leading wheat importer,
mostly depending on Russia for the supply of the commodity. 58% of Egypt’s wheat imports
came from Russia in 2009, compared to 40% in 2007. Russia’s increase in Egypt’s import
share of wheat came after the former country slashed its offer price significantly,
undercutting the US’s export price by almost $20 per ton. However, the growing wheat trade
between the two countries has been far from resourceful for Egypt due to frequently rising
complaint’s regarding the quality of the imported product that is reportedly unsuited for
consumption. Egyptian authorities have rejected several Russian wheat shipments in recent
years, detained staff members from the official wheat buyer’s office, and started an
investigation regarding the possible forgery of inspection certificates, suspecting the
collaboration of Russian exporters with corrupt traders in Egypt. Russian traders on the other
hand maintain that Egypt is making false claims regarding spoilt wheat exports to extract a
better deal from suppliers. Although some of the consequent decline in Russian wheat
supply is being substituted with French imports, the situation is aggravating the already
afflicted bread market in Egypt, which is suffering shortages, mainly because of subsidies.
S A L The Egyptian Economy in 2009
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Another prevalent agricultural commodity in Egypt is sugar, extracted from sugarcane and sugar
beets. In FY2009, the total production of Egyptian sugar reached 1.6 million tons, up by 6.6%
from the previous year. However, this amount only covered around 60% of domestic
consumption leaving the remaining 40% to be satisfied by imports.
As sugarcane is another water intensive crop, the government has tried to keep the area for its
cultivation stable while expanding the area for the cultivation of sugar beets. Sugar output is
forecast to increase by 7-8% in 2010 due to the larger cultivated area of sugar beets as well as
higher yielding sugarcane crops, resulting from improved cultivation techniques. Furthermore,
the expansion of sugar beet cultivation area is expected to have multiple beneficial effects on
the agricultural sector, as sugar beets can grow in land with high salt concentration and absorb
the salt from the soil in 3 to 5 years, making the land suitable for other crops as well.
Graph6. Source: Business Monitor International
Taken as a whole, the agricultural sector in Egypt is gradually undergoing major changes to
match the country’s need for land and water, while providing for the country’s demand.
Furthermore, efforts are being made to improve the quality of Egyptian produce and its crop
yields. However, anticipated increases in population and urbanization levels in the next decade
pose a challenge for Egypt, demanding upgrades in its productive capacities and levels of
productivity. The current requirement for Egypt’s agricultural sector is perhaps not to become a
competitive agricultural exporting country in the next decade, but to be able to provide for its
domestic demand without having to rely heavily on imports.
S A L The Egyptian Economy in 2009
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3. Construction and Real Estate
1. Construction
For a year that was characterized by a slump in the global housing market, construction in
Egypt sidestepped the downturn of the world economy in FY2009, growing by an impressive
13%. This was accomplished with the aid of new infrastructure projects initiated by the
government, as well as real estate ventures by the private sector. Correspondingly, demand for
building material drastically increased during the year, inciting the government to place a ban on
cement exports. The objective of the ban was to meet domestic demand for the product after
cement consumption had expanded 26% y-o-y by year end.
In the Construction industry, the Egyptian government launched massive infrastructure projects
during FY2009 targeting water waste processing, power generation, and transportation
networks. The initiated projects that amounted to LE15 billion ($2.64 billion) contributed on a
broad basis to economic activity during the year, bearing forward linkages into multiple sectors
such as manufacturing and trade. For example, several new cement production facilities were
issued licenses during the reported year to the aim of satisfying local demand. The number of
new production entrants is expected to reach 14 by 2015.
Following the outstanding upshot in the economy in response to the first capital injection, the
stimulus package was reinforced in June 2009 with an additional LE9 billion ($1.64 billion).
Graph7. Source: Oxford Business Group
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2. Real Estate
In Real Estate, demand was favorably diversified during FY2009 towards residential,
commercial, and tourism projects. Correspondingly, the sector advanced at a fast pace by
capitalizing on the improvement of the country's finance and services sectors, as well as its
growth in population and urbanization levels.
Initially, Egypt’s current population count of 80 million citizens is forecast to exceed100 million
in the next 15 years, thereby creating a huge additional demand for housing units, especially for
medium and low grade housing. This realization has boosted the number of suppliers in the
Egyptian Real Estate market, attracting major multinational and regional firms such as
Lebanon’s Solidere International and Abu Dhabi’s Emaar Properties, which are subsequently
diversifying from debt stricken Dubai.
The real estate demand for residential has been met by a relatively incompatible mode of
supply in recent years, focusing on higher priced housing, despite the severe shortage in units
and the unavailability of vacancies in medium and lower grade units. As a result, the levels of
occupancy for new projects are still low, estimated at 20%. In FY2009, the Egyptian
government began debating a new tax policy for the real estate sector that would increase the
yearly tax for new buildings valued at LE1 million or more, and exempt those valued less than
LE450,000; thereby encouraging additional supply for low income housing.
Similarly, and with Egypt gradually becoming a new favorite location for foreign investment in
the MENA region, the demand for commercial real estate has increased significantly over the
past year. As a result, firms have reportedly started buying into the higher priced residential
projects, and property developers have picked up on the trend, allocating a large portion of their
projects to satisfy commercial demand inside the capital and on its East and West outskirts.
In addition to residential and commercial properties, Egypt is a major market for tourist related
projects, including hotels, as well as entertainment and shopping districts. The demand for
such projects became especially significant after the number of tourists in Egypt almost
doubled from 6 million in 2003 to 12.5 million in 2008. According to SODIC, a major Egyptian
real estate firm, there is a deficit of 22,000 hotel rooms in Cairo alone. Other property firms
such as ERC target Egypt’s Red Sea resorts that attract half of the tourist influx every year.
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Graph8. Source: International Institute of Finance
Egyptian Real Estate has witnessed a massive boom in activity within the growing East and
West Cairo, which has been mostly focused on luxury and high-end apartments. This has left
the majority of the Egyptian population in demand of middle rate primary housing within the
capital that continues to see climbing population levels and a rise in average incomes.
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4. The Tourism Sector
Tourism in Egypt was negatively affected in 2009 by the reduced purchasing power of mainly
European tourists following the global financial crisis. Nevertheless, tourist arrivals had only
decreased to 12.4 million visitors by the end of the year, from 12.7 million in FY2008. The
delivered performance was therefore much better than originally expected as it was boosted by
several exogenous factors coupled with strengthening measures by the Egyptian government.
The relatively improved European economic activity during H209 mitigated the fall in the
number of tourists from the 9.5% year on year decrease in H109. This was especially evident by
the reignited surge in the number of tourists from Russia that constituted 14% of total visitors
to Egypt during the year.
On a local scale, the government-backed promotional strategies that included the subsidization
of some of the empty flight seats from Europe and the exemption of hotels from tourism
promotion fees, paid off significantly in campaigning for Egypt as a low-cost tourist destination,
eventually limiting the yearly decline in arrivals to 2.3%. Furthermore, tourism was shored up by
the low value of the Egyptian currency with respect to the Euro and the British Pound, making
Egypt one of the most affordable tourist destinations in the region.
Graph9. Source: Business Monitor International
Tourist expenditure in FY2009 slipped by 1.9% from FY2008, a slower pace than that of tourist
arrivals, indicating a higher amount of money spent per tourist. The 10.6 billion dollar revenue
from tourist spending during the year accounted for 5.5% of GDP compared with 6.6% a year
earlier. This effect was also related to the depression of consumer prices in Egypt during
FY2009, most notably food products.
S A L The Egyptian Economy in 2009
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Regarding the number of tourists that stayed in hotels, it decreased by 2% to 10.2 million in
FY2009 from 10.86 million in 2008. This number is expected to improve next year with hotels
expanding their coverage area in Egypt and their capacity to accommodate a larger number of
visitors in anticipation of a rise in tourists to Red Sea resorts. Moreover, according to the
ongoing construction projects, the number of hotel rooms is expected to increase by 6% in
2010 to 299,000 rooms, after having increased by 16% in 2008 from 2007.
On a regional level, Egypt accounts for almost 36% of all tourist inflows to North Africa and
around 8% of the total number of tourists coming to the Middle East. Its first three source
countries in FY2009 were Russia, Germany and the UK, with 1.3M, 0.96M, and 0.89M visitors
respectively. The number of Russian tourists began rising after 2006, surging by more than 50%
to 1.5M in 2007, representing 14% of tourist arrivals. All in all European tourists represent 70%
of all visitors to Egypt.
Graph10. Source: Business Monitor International
With tourism soaring by more than 40% between 2006 and 2008, the sector has become an
essential element of the Egyptian economy, contributing much more to growth than to GDP
through its constructive influence on other sectors. For example, tourism has provided almost
1.6 million jobs during FY2009 extending domestic consumption capabilities, in addition to
creating demand for Egyptian consumer goods. Furthermore, it has highlighted the need for
upgrading the infrastructure r such as transportation and telecommunications, motivating public
ventures that benefit the entire economy.
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5. Oil and Gas
The Petroleum industry played a fundamental role in leveraging the Egyptian economy in
FY2009, remaining one of its main sources for foreign currency. With crude oil and natural gas
making up 44.8% of the county’s total exports, energy in Egypt directly accounted for 15.5% of
nominal GDP through mining and refining. Furthermore, oil dependant sectors such as
transportation, storage, and electricity generation contributed by 5.4% to GDP.
The contribution of Petroleum to the development of Egypt’s manufacturing sector added
significantly to its economic weight. Of the domestically consumed 78% of natural gas in 2009,
23 billion cubic meters (bcm) went to the generation of electricity, 3.6 bcm to steel production,
3.4 bcm to nitrogenous fertilizers and 2.7 bcm to cement; all of which constitute basic input
materials to productive sectors (construction, agriculture).
Regarding crude oil, the discovery of new wells in recent years (especially in the Gulf of Suez
that currently contains more than 65% of the country’s reserve capacity) has brought up Egypt’s
proven oil reserves from 4.1 billion barrels (bbl) to 4.49bbl in 2009. Nevertheless, Egypt’s oil
production has been declining at an almost steady rate since its peak in 1996 when output was
at a record 921,000 barrel per day (b/d). The fiscal year 2008/2009 was no different from the
downward trend since then as production fell to 685,000b/d from 722,000b/d a year earlier on
account of a decrease in world demand. Data by the International energy agency (IEA)
estimates a fall of 2% in worldwide energy production in 2009, the first decline of a kind since
1981.
Conversely, the yearly decline in Egypt’s oil extraction was balanced by the 11% rise in gas
production to 65 billion cubic meters (bcm) following the discovery of new reserves offshore
the Nile Delta and the West Desert. Consequently, natural gas emerged as the new dominant
energy commodity in FY2009 accounting for 55% of total fuel extractions, jumping to 8.3% in
value added to GDP from less than 1% in 2003.
S A L The Egyptian Economy in 2009
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Graph11. Source: Oxford Business
In oil refining, Egypt is the largest center in Africa with a combined processing capacity of
726,000 bpd across nine refineries. The government plans to increase production of lighter
products, petrochemicals, and high octane gasoline by upgrading existing facilities. In addition,
the government is promoting two new projects – a 500,000 b/d unit near the Suez Canal and
another at Ain Sukhna with a capacity of 130,000 b/d.
Graph12. Source: Ministry of Economy and Trade
S A L The Egyptian Economy in 2009
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As for oil transportation, Egypt holds a strategic importance owing to its operations of the Suez
Canal and Sumed (Suez-Mediterranean) pipelines, which are two crucial routes for
transportation of oil from the Persian Gulf. The Sumed pipeline for example is responsible for
75% of oil exports from Saudi Arabia, Kuwait, Egypt, and Iran to Europe.
6. Telecommunications
The growth that was witnessed in Egypt’s telecom sector during the past 5 years is yet another
example of the country’s significant demographic advantages that can be well employed when
coupled with healthy management. On one hand, Egypt’s already robust population growth and
urbanization rates have attracted private and foreign service-providers into the sector,
heightening the competition for market control and encouraging innovation in the
communications industry. On the other hand, the government’s continuing liberalization of the
telecom sector and its commitment to fulfill the sector’s need in infrastructure contributed to
the extension of telecom services to most of the regions and income classes of the country.
Primarily, the fastest growing segment of the telecom industry is mobile services. Mobile
penetration rates have surged from 40% in 2007 to over 70% in 2009 with a total number of
subscribers reaching 57 million by the end of the year. In FY2009, the rise in subscription rates
iii. Egypt’s Wind and Solar Power
In an effort to limit greenhouse gas emissions and ease domestic oil dependency, Egypt is
currently adopting new policies to develop its renewable energy production. The primary
aim that has been established by the Ministry of Electricity & Energy is to meet 20% of
electricity demand from renewable energy sources by 2020. Wind energy is set to play a
major role in this design, supplying 60% of the intended mark. The Egyptian government
has already financed 400 megawatts of wind-energy capacity in the Gulf of Suez with the
aid of the World Bank’s IFC. Although the 2020 objective of producing 7200 megawatts in
wind farms is still far from being achieved, additional projects have been already geared up
and are set to kick off in the next few years. Furthermore, projects that aim to reduce gas
emissions from transportation are underway, with new bus and light rail networks being
built to connect Cairo to the growing Eastern and Western Suburbs. Finally, solar based
power facilities are already under construction in the South of Cairo and are projected to
supply 2,900 megawatts once the plant is in operation.
S A L The Egyptian Economy in 2009
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was similarly influenced as other sectors by the financial crisis, and therefore grew by only 26%
compared to 44% a year earlier. Although the market has been deemed saturated by some
experts, mobile penetration is expected to pick up in coming years, especially with a spread in
infrastructure to previously unconnected areas as well as the rising popularity of 3G
subscriptions. Service providers are currently adopting innovative strategies in capturing a
larger market share, using 3G subscriptions to attract their customers to longer term post-paid
accounts from the pre-paid ones; noting that the latter currently accounts for 90% of the
market. This is consequently contributing to a fall in the prices of regular subscriptions and
therefore, higher penetration rates.
With regards to fixed lines, they continued to decline in numbers during FY2009 and as was the
case in many countries worldwide, they were replaced by mobile coverage. The rate of fixed
line penetration thus fell from 15.3% to 13.7% during the year, with the number of active
subscriptions totaling 10.3 million. The entire fixed-line operation is still controlled by state
owned Telecom Egypt (TE) that limited the decline in its earnings by expanding its internet
services, as TE picked up on the technological boom further developing the infrastructure to
provide broadband facilities. Accordingly Internet utilization witnessed a much higher than
expected surge of 45% in 2009, with the number of internet users estimated to have reached
16.5 million by the end of the year compared to 11.5 million in 2008. 39% of the rise in internet
usage was met by Dial-up and IDSN connection, 46% was occupied by ADSL connections,
whereas broadband took a 10% stake of the market.
Graph13. Source: Oxford Business, BMI
S A L The Egyptian Economy in 2009
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II. The External Sector
As the global appetite for investment and consumption diminished in FY2009, the structural
disadvantages in Egypt’s trade balance and the fall in foreign capital inflow weighed down on
the country’s external sector, preventing it from ending the year with a positive balance of
payments (BoP). Accordingly, Egypt’s (BoP) endured a deficit of $3.4 billion in FY09 against a
$5.4 billion surplus in FY08. As such, the current account recorded a deficit of $4.4 billion, while
the capital account achieved a net inflow of $1.4 billion.
1. Current Account
The setback in Egypt’s balance of payments in 2009 was partially alleviated due to the
government’s effort to attract capital through FDI and Tourism, and reduce imports by
developing domestic productive capabilities. Moreover, Egypt’s abundant resources and its
potential for self sufficiency in various consumer products allowed the country some room to
restructure its import needs for the year despite its inability to forgo the purchase of major
commodities such as pharmaceuticals and certain staple foods. Nevertheless, internal efforts to
reduce the deficit only paid off modestly, as Egypt’s dependency on its oil sector and services
receipts as major sources for foreign capital proved to be costly after the financial crisis took its
toll on international economic activity and commodity prices. Accordingly, the current account
registered a deficit of $4.4 billion, with current receipts and payments amounting to $57.2
billion and $61.6 billion respectively.
Starting with the trade balance, both exports and imports declined in Egypt following the global
financial crisis as consumption and demand fell, negatively weighing down on external trade.
As a result, Egypt’s traded volumes narrowed by 8% to $75.5 billion in FY2009 from $82.2
billion a year earlier, with export earnings amounting to $25.2 billion and import payments
adding up to $50.3 billion.
As exports slid by 14.3% in FY2009 compared to a 4.6% decrease in imports, Egypt’s balance
of trade widened by a yearly 7.5% to $25.1 billion. The greater part of the endured loss came as
a result of a decrease in oil and gas earnings by 24% to $11.4 billion, accounting for 45.2% of
total exports. The descent in petroleum proceeds resulted from a drop in world prices for the
commodity following the decline in global demand for oil. Moreover, non-oil exports scaled
down by a yearly 4.8% to $14.2 billion due to a fall in foreign demand for food products and raw
materials.
S A L The Egyptian Economy in 2009
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Graph14. Source: International Institute of Finance
Likewise, raw material import payments fell by 33.2% to $6.5 billion on account of their lower
international prices. Moreover, imports of intermediate goods such as steel products,
chemicals, and car parts, which made up 33% of total imports, dropped by 1.1% to $16.7 billion
due to a production cut by Egypt’s manufacturers following a fall in international as well as
domestic demand for such products. Accordingly, import payments for consumer durable
goods that include transport vehicles and domestic appliances tumbled 14.1% to $2 billion.
Although the balance of services continued to register a surplus in FY2009, it was 16.5% lower
than the previous year settling at $12.5 billion on account of a decrease in all of the constituent
receipts. To begin with, investment earnings from international markets slumped by 41.1%, as
foreign countries held their interest rates low in order to stimulate their economies that suffered
severe losses in 2008/2009. Similarly, foreign equities and sovereign bonds lost considerably
during the period, dragging down the value of Egyptian portfolio investments abroad and
adding to the shortfall of Egypt’s current account. Locally, transportation receipts from the Suez
Canal slipped by 8.4% on a yearly basis to $4.7 billion as international trade slowed down and
the transit benefits from vessels using the Canal contracted, in addition to lower shipping
activity on fears from growing Somali piracy. As for revenue from tourist activity, the slowdown
in visitor arrivals and gross tourist expenditure compounded losses from the sector to 3.1%
from FY2008, finishing with a revenue of $10.5 billion.
S A L The Egyptian Economy in 2009
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Finally, other services receipts that include contracting, insurance and communications fees fell
by 31.9% to $3.6 billion. Finally, services payments, which are insignificant with respect to
receipts, also edged down during FY2009 on account of a decline in interest and dividend
payments on Egyptian bonds and equities, profit transfers to oil companies, tourism payments,
and government expenditure in Egyptian embassies abroad.
Remittances fell back in FY2009 after the lapse of international labor in September 2008, with
an estimated 20 million jobs lost on a global scale according to the International Labor
Organization (ILO). On top, considering the fall in cash and commodity grants, net unrequited
transfers to Egypt subsequently contracted by 11.7% to $7.6 billion.
Graph15. Source: International Institute of Finance
S A L The Egyptian Economy in 2009
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2. Capital Account
Foreign capital invested in Egypt’s emerging industries and into the oil sector customarily plays
a central role in counterweighing the deficit caused by the trade balance. In FY2009 however,
the capital account declined significantly from a year earlier finishing the year with a surplus of
only $1.4 billion, compared to $7.6 billion in FY2008.
The underperformance of multinational enterprises (MNEs) in 2009 hampered their international
investment capabilities, limiting their outward investment during the year. Accordingly, net
foreign direct investment into Egypt recoiled by 38.7% to $8.1 billion compared to $13.2 billion
a year earlier. Investments in factories, and production capacity ‘Greenfield investments’, fell to
$2.3 billion from $6.4 billion in FY2008. Conversely, oil sector investments grew by 31% to $5.4
billion following new gas discoveries in H209.
In addition, portfolio investment witnessed an outflow of $9.2 billion during the year, with
worries over waning government bond markets during the financial crisis, as $7.1 billion of the
outflow resulted from trade in treasury bills.
SGraph16. Source: International Institute of Finance
S A L The Egyptian Economy in 2009
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III. Fiscal Policy
Egypt’s Fiscal policy in FY2009 was balanced between promoting growth and maintaining state
sponsored social stability. The engaged approach was mainly achieved through investment in
huge infrastructure projects, the subsidization of strategic sectors, namely oil and gas, and the
restructuring of wages for lower income groups and civil servants. On one hand, the
government aimed to stimulate the economy through capital injections following the yearly
decline in export gains and the deceleration of investment activity by the private sector. On the
other hand, to tone down the budget deficit that resulted from increased spending, additional
taxes on individual incomes and business profits were imposed. This mix of policy succeeded
in boosting economic activity during the year, alleviating the negative effect of the financial
crisis while laying the ground work for future growth in private and foreign investment.
Following this firm stance against an extensive spillover of the financial crisis into the domestic
economy through stimulus spending, Egypt’s government budget was at a deficit of LE71.8
billion ($13 billion) by the end of FY2009 compared to LE61.1 billion ($11.1 billion) in FY2008.
Consequently, the primary budget deficit amounted to LE19 billion ($3.4 billion) compared to
LE10.6 billion ($1.93 billion) a year earlier. Government treasury bonds were used to finance
two-thirds of the overall yearly deficit, whereas external debt was used to finance the remaining
one-third.
1. Expenditure
In total, government spending surged on a yearly basis by 24.5% to LE351.5 billion ($64 billion)
growing significantly in terms of investments, subsidies, and wages. Investment spending
accounted for the largest increase in the account, rising by 27% to LE43.4 billion ($7.9 billion)
subsequent to the LE15 billion stimulus package aimed at developing Egypt’s infrastructure.
Accordingly, projects such as construction ventures in water sanitation facilities and
transportation networks contributed significantly in boosting economic activity through internal
contracting and the creation of job opportunities. Conversely, projects targeting the
improvement of Egypt’s social services such as education and health were very small taking
respective GDP shares of 0.3% and 0.2%.
In line with supporting the manufacturing sector, easing transportation costs, and alleviating the
pressures on low income groups, Egypt’s government set aside almost half of its FY2009
budget for commodity subsidies and wage increases. Subsidies, which were consigned to
several goods, namely food products and fuel, jumped by 11.4% to LE93.8 billion ($17 billion)
S A L The Egyptian Economy in 2009
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taking up 26.7% of total expenditures. Accordingly, the most notable beneficiaries were the
General Authority for Supply Commodities (GASC) and the Egyptian General Petroleum
Corporation (EGPC). Primarily, GASC received 28% of subsidy increases for its wheat imports
following the rise in international prices. The subsidy on wheat is traditionally vital in Egypt’s
budget agenda as the population is highly dependant on wheat imports for bread, noting that
Egypt is the world’s largest wheat importer.
Egypt’s national oil and gas company EGPC on the other hand only received a 4.1% increase in
subsidies in FY2009 due to the decrease of oil prices during the year. In general, Egypt’s oil and
gas subsidies amount to more than two thirds of their export revenue, with the government
bearing almost 75% of world petroleum prices in the domestic market. The subsidy to EGPC is
to buy oil and gas from Egypt’s foreign firms to fulfill domestic demand.
The second largest constituent of government expenditure is public wages. Public employees’
wages and compensations climbed by 21.2% in FY2009 to LE76.1 billion ($13.8 billion) on
account of rises in fringe benefits and special allowances of which LE28.7 billion went to social
benefits. Accordingly, public wages represented up to 25% of total government spending in
FY2009, offsetting the decline in purchasing power of state employees caused by the rises in
consumer prices. Finally, the rise in domestic interest rates during the year contributed to an
increase in interest payments by 4.5% to LE52.8 billion, making up 15% of total government
expenditure.
iv. The Paradox of Petroleum Subsidies
Despite their positive impact on economic and social stability, oil subsidies to consumers in
Egypt arguably allow grave consequences to the development of the economy. Most
importantly, they help sustain monopolies in several productive sectors due to the privilege
they indirectly present to firms in oil-based manufacturing. The fertilizer industry for example
is controlled by 3 major companies in Egypt, profiting substantially from the subsidy due to
low operating costs. This format makes the fixed to operating costs ratio too high for new
firms to enter the market and be able to compete with already established producers.
Thereby, they limit additional competition and productivity in the sector by indirectly
aggravating the entry barrier into the market. On the other hand, eliminating oil and gas
consumption subsidies would negatively impact the overall economy by instigating a sharp
rise in inflation levels, considering that all sectors of the economy are either directly or
indirectly connected to the price of oil and gas.
S A L The Egyptian Economy in 2009
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2. Revenues
The rise in public expenditure in FY2009 was matched with an increase in revenues as the
Egyptian government adopted a new taxing scheme in an effort to contain the widening budget
deficit. In total, public revenues jumped by 27.6% to LE286.5 billion ($52.1 billion). Around
42.5% of the increase in revenues came form a rise in taxes, which subsequently added up to
LE163.2 billion ($29.7 billion). Sales tax for goods and services remained at their 10% rate in
FY2009 fetching LE62.7 billion ($11.4 billion) on account of higher levels of consumption during
the year. Sales tax on consumer products and basic inputs for production were reduced to 5%.
The increase in tax revenues mainly resulted from higher rates imposed on EGPC, in addition to
income taxes and company profit taxes. Conversely, custom duties increased at a much slower
rate due to shrinking international trading activity during the year, drawing in an additional LE71
million ($12.93 million) from 2008, and amounting to LE14.091Billion ($2.56 Billion).
Furthermore, property income taxes from EGPC, and the Suez canal contracted by LE7 billion to
LE36.5 billion during the year as the Suez canal authority scaled down its activity with its
receipts declining drastically during the year. This decline was however offset by LE7.9billion of
property income taxes from private real estate firms and license fees from cement and iron
factories, which flourished with the real estate boom.
In FY2009, the Egyptian government set down plans to levy new taxes on real estate in order to
guide the sector into complying with the needs of the market, while balancing the taxing
system in accordance with social aims through a form of progressive taxation. As such, it was
v. Private vs. Public Wages
The Egyptian minimum wage has remained at $6/month for the past 26 years despite the
large increases in consumer prices over the same period. According to a report by the
Egyptian Center for Economic Studies, taking inflation into account, Egypt’s minimum wage
to per capita GNP has decreased from 60% in 1984 to 13% in 2007 becoming one of the
lowest in the world. In general, public wages in Egypt averaged at $76 per week in 2008,
50% higher than private wages that averaged around $50 per week. However, the number
of employees in the informal sector, mostly lower-end self-employed individuals, makes up
a large percentage of the lowest income segment of the labor force, dragging down
significantly the average of private incomes. In terms of distribution over the two sectors,
official numbers estimated a 70-30% private-public employment ratio in 2005, with the
figure shifting considerably to the favor of the private sector in recent years.
S A L The Egyptian Economy in 2009
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suggested that an annual tax of LE660 ($120) should be levied on buildings worth LE1 million or
more, while those worth less than LE450 thousand would be exempt from the tax.
Graph17. Source: International Institute of Finance
Graph18. Source: International Institute of Finance
S A L The Egyptian Economy in 2009
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IV. Monetary Sector
During the first half of FY2009, the Central Bank of Egypt (CBE) adjusted its monetary policy in
response to inflationary signals by regulating the inter-bank lending and deposit rates while
withdrawing excess liquidity from the market. However, following the consistent cuts in rates
during H209, Egypt’s fiscal year ended with an increase in the total supply of aggregate money
without any significant hike in price levels. The pursued policy was thus in line with the overall
public effort to offset the negative impact of the global financial crisis on Egypt’s economy by
promoting internally driven growth through domestic consumption and investment.
1. Money Supply
Money supply continued to increase in FY2009 with domestic liquidity (M2) growing by 8.4%
(LE104 billion) compared to 15.7% a year earlier. By the end of June, M2 was at LE831 billion.
The largest stake of the yearly rise in money supply was captured by the quasi money account,
as time and saving deposits jumped by 10.3% (LE44.8 billion) to LE481.1 billion. This rise
demonstrated the high confidence in the Egyptian pound that had proven stable over the years
in relation to major foreign currencies, qualifying as an appropriate saving instrument.
On the other hand foreign currency deposits scaled up by only 4.6% or LE7.3 billion to reach
LE167.2 billion as capital inflows from Egyptian expatriates, which customarily contribute the
most to the bulk of the mentioned deposits, declined significantly over the period. As for the
narrow money aggregate, or M1, it spread during the year by 7.3% or LE12.4 billion as money
in circulation outside the banking system increased by LE13.5 billion after deposit rates were
reduced to 9% from 10.5% by the end of FY2008.
S A L The Egyptian Economy in 2009
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Graph19. Source: International Institute of Finance
2. Interest Rates and Consumer Prices
As for consumer prices, during the first half of FY2009 inflation surged to an average of 22.3%
as most commodities retained their pre-crisis rates. Accordingly, the Monetary Policy
Committee (MPC) increased the overnight lending and deposit rates over two stages by 1%
each to 11.5% and 13.5% respectively.
However, after December 2008, inflationary pressures subsided as the prices of most staple
consumer goods in Egypt declined following the fall in world prices. Concurrently, the negative
effects of the crisis had begun to take their toll on the economy weighing down on private
investment in some productive sectors; which was also evident from the increase in time and
saving deposits during the year.
Therefore, to encourage capital investments, the MPC reduced the deposit and lending rates by
a total of 2% and 3% over four different sessions to 9% and 10.5% respectively. The end of
year inflation finally settled at 10%, holding the average inflation for FY2009 at 16%.
S A L The Egyptian Economy in 2009
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Graph20. Source: International Institute of Finance
Money supply was not only influenced by interest rate policies and capital inflows during
FY2009, but was similarly affected by systematic improvements in the banking sector that
allowed smoother maneuvering of liquidity. The CBE was mainly aiming to better the payment
and settlement procedures by adopting a new technology based on an electronic payment
system for its personnel, and initiating the design to include the 12 million government
employees in the years to come; noting that public sector workers continue to receive their
salaries in cash.
Furthermore, the CBE launched the real time gross settlement (RTGS) system in FY2009 to
avert payment and credit risks. This system allowed higher processing efficiency, contributing
to a larger number of local currency transfers and faster checks’ clearance during the year. As a
result, domestic and international exchange of money increased in 2009.
3. Exchange Rate Policy
The Egyptian government has adopted different peg strategies to the US dollar since the 1950’s
starting with the conventional peg, and moving to the crawling peg and later to the crawling
S A L The Egyptian Economy in 2009
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bands regime. After the year 2000, a managed float regime was assumed for the Egyptian
Pound, and it was introduced for the first time to the unified currency exchange against its
foreign counterparts.
Prior to the global financial crisis, the value of the Egyptian Pound had been rising considerably
against the US dollar on hikes in the price of oil, and an increase in foreign investors’ interest in
the country’s industries. Between 2004 and June 2008, the Egyptian pound appreciated from
almost 6.3 LE/$ to 5.33 LE/$. This appreciation was however held back following the global
financial crisis that witnessed huge capital outflows. By the end June 2009, the Egyptian Pound
had depreciated by 4.7% to 5.59LE/$ from June 2008, compared to a 21% depreciation of
Brazil’s ‘Real’ and a 24% depreciation of Turkey’s Lira.
V. The Banking Sector
Egypt’s robust banking sector remained relatively sheltered from the global financial crisis,
mainly thanks to the ambitious reform plan launched by the Central Bank of Egypt (CBE) in
September 2004, and the consolidation and privatization wave it triggered. Furthermore, their
limited dependency on short term wholesale funding channels and the traditional composition
of their portfolios with limited exposure to toxic products enabled Egyptian banks to escape to
a great extent the spillovers of the turmoil.
In FY2009, banking activity measured by the growth in the sector’s total assets, remained
relatively stable and even registered a shy positive performance. In fact, total banking assets
inched up by 0.80% to $198.90 billion or 105.14% of GDP. However, the banking activity
witnessed an obvious slowdown from FY2008 when the sector’s assets soared by 15.50 %.
This deceleration was generated by two factors. First, obligations to local banks fell by $ 12.33
billion or 68.6%. This was an outcome of the decline in obligations to the CBE by $ 13.82 billion,
as the Central Bank withdrew its foreign currency deposits at banks in return for increasing its
foreign currency sales to them. In return, on the asset side, balances with the CBE contracted
by $ 20.42 billion. With the beginning of the global recovery, the Egyptian banking activity
gained momentum again as total assets jumped by 5.47 % in H2 FY2009 to $ 209.78 billion.
S A L The Egyptian Economy in 2009
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Graph21. Source: International Institute of Finance
On the liabilities side, deposits were the main driver of growth as they surged by 8.36 % during
FY2009, up to $147.48 billion or 77.96 % of GDP. This increase was mainly fueled by the
substantial expansion in government and households deposits that compensated the sharp
drop in business sector and non-resident deposits.
The latter retreated by 19.57 % to $ 869.76 million, as many investors repatriated their cash
holdings to cover their losses in financial markets. Of the remaining non-resident deposits in the
banking sector, there was a shift in currency holdings as deposits in the Egyptian Pound
tumbled by nearly 40% to $ 439.89 million whereas deposits in foreign currencies jumped
23.17% to $429.87 million indicating that a large portion of the non-residents, who kept their
assets in Egyptian Banks, transformed their holdings into foreign currency.
Furthermore, with the credit crunch on the international level and the slowdown of global
demand and trade that caused exports of goods and services to drop by 13 %, firms reduced
their cash balances and withdrew a significant fraction of their deposits to auto finance their
working capital and some necessary investments. Hence, total deposits of the private business
sector fell by 8.07 % to $ 29.62 billion following an upswing of 39.75 % in FY 2007/2008.
As for the deposits of the public business sector, they declined by 2.71 % to $ 6.84 billion. To
note that the private business sector’s deposits in foreign currencies slightly increased, adding
up 1.95 % to $ 10.62 billion, as firms repatriated their deposits with international banks that
were harshly hit by the crisis. This drop was compensated by a 17.4 % growth in households’
deposits that reached $93.58 billion, reflecting the solid confidence of the Egyptian public in the
local banking sector. Moreover, the government’s deposits climbed by 16.7% to $18.64 billion.
S A L The Egyptian Economy in 2009
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Graph22. Source: Central Bank of Egypt
On the assets side, the growth was driven by the expansion of banks’ portfolios and by a solid
albeit slower rise in credits. Concerning the former, the total value of securities and Treasury
bills held by banks augmented by a significant 64.76 %, up to $ 60.58 billion, resulting from a
93.92 % upsurge in the sector’s portfolio of T-bills in local currency that reached $ 47.73 billion.
This rapid accumulation of T-bills in Egyptian Pound points out to the fact that banks have
become more risk averse in the context of the global financial crisis and sought for safer
investment opportunities by acquiring sovereign bonds.
S A L The Egyptian Economy in 2009
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Graph23. Source: Central Bank of Egypt
Hence, even if Egypt did not suffer from a credit crunch, the pace of lending activity moderated
as banks adopted a cautious strategy due to the aggravation of risks on a global and regional
level but also due to a weaker demand for funding as many firms postponed their investments.
Total loans advanced by 7 % in FY 2008/2009 to $77.86 billion. This compares to a 13.35 %
expansion in FY 2007/2008 and a 9 % growth in FY2007. Worth mentioning that the growth of
loans to the manufacturing sector accounted for 35.86% of the total increase in loans while
services sector and trade activity accounted for 25.3% and 13.7% of the rise in stakes.
All in all, the results of major performance indicators in FY 2008/2009 reflected the sturdiness of
Egypt’s banking sector. To elucidate, the capital adequacy ratio (ratio of the capital to risk-
weighted assets and contingent liabilities) of the sector was 14.3 % beating the required
minimum of 10 %. Furthermore, Egyptian banks had a very high liquidity with an average ratio
of 44.3 % against a required minimum of 20 %. Despite their high liquidity that could harm
profitability, the local banking sector had acceptable earning ratios with a return on average
assets of 0.8 % and a return on average equity of 14 %.
S A L The Egyptian Economy in 2009
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Egyptian banks have continued to expand their local network during FY 2008/2009. While the
number of banks operating in the country fell by one to 39 institutions, the number of branches
increased by 4.36 % or 150 to 3,441. However, the Egyptian market remains underserved as
there are 22,300 residents per branch compared to an average of 15,000/branch in India and
2700/branch in the US.
With that said, the Egyptian banking sector still suffers from some flaws related to transparency
issues and to high leverage ratios. In comparative terms, the debt-to-equity ratio of listed
Egyptian banks is 69.65 % against 50.31 % for Qatari counterparts, 14.37 % for Lebanese
banks and 6.03 % for Saudi institutions. Pressing forward with the reform plan of the sector
should help deal with these frailties.
Such problems were partially addressed in the first stage of reforms implemented by the CBE
between 2004 and 2008, centered on the consolidation and privatization of the banking sector,
financial and managerial restructuring of State-owned banks, the problem of non-performing
loans, and upgrading the Supervision Sector. It has resulted in major international banks
increasing their presence in Egypt as well as in the consolidation of the banking sector, with 39
banks now in operation compared with around 60 before the reforms. Additional efforts
towards banking sector consolidation should bring down the cost of private sector credit and
fuel small business growth.
Accordingly, the ECB launched the second phase of reforms in 2009, and the process is
expected to last until 2011. This second phase aims at raising the efficiency and soundness of
the Egyptian banking sector, and enhancing its competitiveness and ability for risk
management. The main measures of this phase mainly pertain to the restructuring of state-
owned banks, the application of Basel II standards and encouragement of loans to small and
medium-sized enterprises (SME).
VI. Financial Markets: Egyptian equities shadowed US stocks following the market crash in September 2008 as
investors were alarmed by the general tone in world trade and subsequently sold off most of
their holdings in Egypt’s listed firms. As a result, the country’s main stock index, the EGX30,
more than halved by the end of 2008 plunging 56.4% to 4,596.5 points. The downward trend
continued throughout the first 2 months of 2009, as the EGX30 extended its losses bottoming
out at 3,389.3 points. However, as US equities started to rise again by March 2009 signaling
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improved market sentiment, Egypt’s EGX30 followed suit surging 108% up to 7,199 points by
October before settling back at 6,208 points by the end of the year.
By the end of FY2009, the Egyptian market’s capitalization had slumped 38.2% to $72.6B from
FY2008 as a result of the ensued losses, as well as the de-listing of more than 20% of quoted
firms from the market. This loss could be further seen through the respective changes in
volumes and values of traded shares, where the former increased by a yearly 36.4% to 25.6
million shares while the latter declined by 43.5% from $81.7Billion to $46Billion.
The Egyptian stock exchange was dependent on individual investors for 65% of its traded
values in 2008. A lot of those investors tried to profit from markets that provided a recurring
income, such as the real estate firms that offered dividends from rental proceeds. Accordingly,
the high level of investment in the housing market prior to the financial crisis made the entire
stock market especially responsive to international markets’ fluctuations that were similarly
driven by changes in the risky real estate market. This started with the sub-prime mortgage
crisis in the US, and following the first recovery, it was similarly hit by negative sentiment from
Dubai’s debt burden in 2009.
Nevertheless, several factors in Egypt’s dynamic makeup made the recovery of its stock market
much faster than that of world and peer economies. First of all, the robust demand for the
produce and services of Egyptian firms, supported by a massive domestic consumer base
boosted the performance of the country’s listed firms. Furthermore, the huge population count
and a severely undersupplied housing market contributed significantly to the performance of
the real estate sector, which occupies a good portion of the country’s listed equities. And
although this particular sector continued to be influenced by the pessimistic sentiment from
Dubai’s debt crisis, a complementary effect of the discouraging regional status of real estate
was the shift of investor interest from Dubai to Egypt, outweighing the negative force of
investor caution.
• The following Graphs compare the performance of the EGX30 to Dubai’s Stock Market
index, Palm Hills Development, Egyptian Gulf Bank, and El Sewedy Electric respectively:
S A L The Egyptian Economy in 2009
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42
Source: Egypt Stock Exchange; Thomson Reuters
Source: Egypt Stock Exchange; Thomson Reuters
Source: Egypt Stock Exchange; Thomson Reuters
S A L The Egyptian Economy in 2009
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43
Source: Egypt Stock Exchange; Thomson Reuters
Egypt’s stock market generally projects the country’s overall performance with regards to many
factors, including financial and economic development, regulatory reform, and the ability to
attract domestic and foreign investment,
Concerning economic growth, the listing of firms in manufacturing, construction, and financial
services indicates the movement of Egypt towards a more advanced economy that is capable
of recycling its capital in order to achieve higher levels of production and self-sustainability, with
consumers and financing agents becoming one and the same. This change similarly indicates
Egypt’s move towards a more regulated market that protects the ownership rights of investors,
as the fluidity of transactions in public financial markets requires a better equipped and clearer
system of protection and enforcement of the rule of law.
Finally, given a growing market that offers diverse profit outlays, and an improving business
environment, Egypt’s Stock exchange is bound to attract individual and institutional investors in
the medium and long term, and continue to advance at a considerable pace.
S A L The Egyptian Economy in 2009
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44
VII. Business Environment As productive dependency on the private sector in Egypt has been rising since 2004, additional
regulations regarding the organization of business procedures and the dealings between
suppliers, producers, and consumers have become vital to the country’s economic progress. In
addition, the recent boom in foreign direct investment and the improvement of corporate listing
have extended the demand for Egyptian business standards to correspond to international
benchmarks. Accordingly, Egypt has been adopting a thorough set of reforms in the past 5
years, targeting government regulations in an effort to promote a healthy and efficient business
environment, although it remains relatively underdeveloped.
According to the Doing Business report by the World Bank that examines 11 different criteria
defining ease of doing business, Egypt ranks 106 out of 183 countries worldwide in the
advantages of its business environment. Egypt still ranks behind peer countries such as the
UAE and Saudi Arabia, However, this rank marks an improvement from pre market reform years
with the country ranking 126/183 only one year earlier.
The factors used in this study include basic standards that determine the cost, time, and initial
capital required for a firm to start up a business and to maintain a competitive and law-secured
position in the market. As such, the ease of obtaining a production license, access to financing,
bureaucratic procedures required to initiating business, investor protection, as well as external
costs (political interference, corruption, consistency of business law) all contribute to the
assessment of the country’s business environment.
Source: International Institute of Finance
S A L The Egyptian Economy in 2009
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45
A. With regards to starting a business, Egypt’s global standing improved considerably in 2009
from a year earlier pushing its global rank up to 24/183; one notch behind the UAE’s global
position and better than UAE’s and Jordan’s ranking at 44 and 125 respectively. This change
came as the cost of starting a business (as a percentage of per capita income) decreased from
28% in 2008 to 18%, and the initial capital required for the project fell from almost 13% to 2%
of the same value. The mentioned improvements that also included the reduction of days and
procedures to starting up operation marked an important step by the Egyptian government
towards embracing a market oriented economy that eases all bureaucratic deterrents on
prospective entrepreneurs.
B. Given that access to credit is a major instrument that contributes to the development of a
country’s private sector and consequently its productive capabilities, Egypt’s financial
institutions have been trying to improve credit information techniques to tap into growing
demand for financing new projects. This progress however is yet to be sufficiently matched by
the legal constitution of the service, which would properly define and protect debtors’ and
creditors’ respective rights and obligations. However, Egypt’s lending institutions continue to
grow annually and ease their policies while maintaining a relatively low risk policy. As such,
Egypt ranked 71/183 on a global scale in 2009, compared to 61/183 for Saudi Arabia and
127/183 for Jordan.
vii. Informal Institutions
Protection of property and business rights comes as a primary concern to entrepreneurs
who are looking to invest in a country and expect a relatively consistent return on their
ventures. When such rights are not properly defined, enforced, or are subject to political
interference, informal channels usually come into the picture to make up for the regulatory
deficiencies. In China for example, an estimated 70% of all business before the year 2000,
took place through informal networks between suppliers, distributers and producers. Those
were initially built upon family and previously established social connections. The dominance
of social networks was inspired by a severe lack of regulatory presence, and a vaguely
defined law that was often manipulated by government officials. Naturally, corruption was
wide spread during the period, exhorting extremely high costs on the country’s economic
progress by limiting the scope of internal business to immediate connections, while making
it difficult for foreign firms to enter the market without any established relations and political
backing. Those problems were eventually confronted by the market through publicly
developed institutions such as business associations that indirectly guaranteed the reliability
of their members through their proven reputations rather than having business transactions
secured by law. Such networks formed the country’s informal institutions.
S A L The Egyptian Economy in 2009
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C. Ranking in Other Measures of Business Environment With Respect to Regional Economies
Source: International Finance Corporation; World Bank
Source: International Finance Corporation; World Bank
S A L The Egyptian Economy in 2009
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47
VII. The Egyptian Economy in Figures
Indicators 2005 2006 2007 2008 2009 Real Sector
Nominal GDP ($, Billion) 98.08 112.51 135.66 163.29 189.18 Real GDP Growth (%) 4.5 6.8 7.1 7.2 4.7 CPI Inflation (end of period, %) 4.8 7.2 8.5 20.1 10.0
External Sector Balance of Payments ($ Billion) 2.92 1.76 2.23 0.88 -4.42 Total Imports ($ Billion) 24.19 30.44 38.30 52.77 50.34 Total Exports($ Billion) 13.83 18.45 22.01 29.35 25.16 Balance of Trade ($ Billion) -10.35 -11.98 -16.29 -23.41 -25.17 Remittances ($ Billion) 5.42 5.54 7.06 9.33 8.24 Foreign Direct Investment ($ Billion) 3.86 5.96 10.51 12.12 6.77
Public Finance Sector Public Revenues ($ Billion) 24.21 32.04 37.45 45.32 52.55 Public Expenditures ($ Billion) 32.45 42.36 47.69 57.63 65.74 Primary Balance ($ Billion) 2.7 3.04 2.93 2.59 3.04 Fiscal Deficit ($ Billion) -8.24 -10.31 -10.23 -12.3 -13.18 Public Debt ($ Billion) 101.39 101.66 108.78 114.52 137.96 Debt-to-GDP ratio (%) 103.4 90.4 80.2 70.1 72.9
Banking Sector Deposits in LE ($ Billion) Foreign Deposits($ Billion)
57.2 11.9
64.5 14.4
82.9 16.9
93 21.4
10.6 226
Loans to the Private Sector ($ Million) - 1 12 196 200
Monetary Sector Money Supply M3 ($ Billion) 106.29 121.97 144.62 170.71 184.73 CBE Domestic Credit ($ Billion) 85.02 92.816 96.77 103.993 126.653 CBE Foreign Assets ($ Billion) 14.73 24.29 39.82 55.31 46.29
Financial Sector EGX30 (end of period) 6,325
6,973
10,550
4,596
6,209