05/08/2015 05:57 AST
The acceleration in economic growth appears to have been sustained despite a soft patch in 1Q15.The pace of real growth is set to surpass 4 percent for the first time since 2010, boosted by a more stable political environment, financial support from GCC allies and improving business confidence.
A strong public sector investment drive has been a key source of growth, with a number of governmentled capital spending initiatives underway (including the expanded Suez Canal). Various recent data support the recovery story, including real GDP growth, the Purchasing Managers’ Index (PMI), private credit growth and employment. While some of these figures, including the PMI, have shown some softness in 1Q15, the overall picture continues to indicate a gradual recovery in economic activity.
Private credit in particular has been strong, with growth in real terms rising to its highest level in over seven years. The risks for Egypt remain significant, though they have been receding. While the political and security situation has improved significantly, they remain somewhat vulnerable. The other uncertainty is the country’s large fiscal deficit which has yet to improve despite some subsidy reforms implemented a year ago. Large GCC donationshave helped shore up public finances, but those are unlikely to be sustained in the medium term.
Still, markets remain confident that authoritiesare taking the necessary reform steps, with Egypt’s recent USD bond issuance a good example of that. Recovery has been picking up pace Economic growth has continued to improve in recent months. Real GDP growth accelerated to 4.3 percent yearon- year (y/y) in 4Q14 and for 2014 as a whole. More recent data indicate that the economic recovery remains on track despite some softness in 1Q15. Growth is expected to come in at 4.3-4.5 percent in FY14/15. In FY15/16, we think growth will maintain this pace before improving further thereafter.
Improving activity has been led by robust private sector growth. Private sector growth accelerated to 6.6 percent in 2014, approaching pre-Arab Spring levels. The numbers benefited from strong basis effects in 3Q14, particularly in the tourism sector. Investment spending has also been picking up, though levels remain subdued. Aggregate investment (nominal) rose by 20 percent in 2014, with nearly half of the growth coming from the private sector.
Aggregate investment rose to around 13.5 percent of GDP during 2014, up marginally from 12.9 percent in 2013. By comparison, investment before the Arab Spring averaged a higher 20 percent of GDP. An investor conference in March 2015 in Sharm El-Sheikh was a resounding success and should provide further support to investment as well as to external reserves. Investment initiatives of around $175 billion were announced, most of those to be implemented within five years. An additional $6 billion in CBE (Central Bank of Egypt) deposits were also pledged by GCC allies, to provide much needed short term support.
The bulk of investment plans were in oil & gas ($21 billion), power generation ($43 billion) and urban development ($58 billion). Credit growth has also been accelerating, seeing its strongest month in nearly five years in March 2015.The pace has picked up to 16.2 percent y/y. When adjusted for Egypt’s relatively high inflation rate, credit grew by 5.8 percent y/y, the fastest pace in over seven years. Growth in lending to the corporate sector has been particularly strong thus far in 2015 compared to a year ago.
Markit’s Purchasing Managers’ Index (PMI) has shown some softness in 1Q15, but this appears to be temporary. The index fell below the critical 50 mark in January and remained there for several months. Though the index improved to 50.2by June compared to a low of 46.8 seen in February, it remained weaker than most of the second half of 2014. According to the survey, activity in exports and tourism was hit by i
Arab Times
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