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Economy will continue to grow despite global slowdown, says analyst

CAIRO: While the ripple effect of the US sub-prime crisis has reached the global economy, recent economic milestones indicate that Egypt is cushioned against the impacts of recession. “Egypt has seen a resurgence of confidence in the private sector which is required to help find economic growth. That has been seen in the growth of …

CAIRO: While the ripple effect of the US sub-prime crisis has reached the global economy, recent economic milestones indicate that Egypt is cushioned against the impacts of recession.

“Egypt has seen a resurgence of confidence in the private sector which is required to help find economic growth. That has been seen in the growth of tax revenues, growth of foreign direct investment (FDI), which has gone from $400 million a few years ago to $11 billion last year, said Angus Blair, head of research at Egypt-based investment bank Beltone Financial.

“The good news about that FDI is that much of it is construction-related and will call for the creation of many thousands of new jobs. For me, that is a very positive dynamic which will help further fuel growth within Egypt.

Egypt s economy is growing at its fastest yearly pace in decades, peaking to 7.1 percent last year. FDI is in excess of $11 billion (LE 55 billion), with estimates it could soar to $15-18 billion end of this year. The country has witnessed more than 40 percent growth in private sector investment per annum, with roughly 9,000 new companies established and 1,750 companies expanded. These investments spread across an array of sectors including oil and gas, tourism, financial and banking services, IT, construction and real estate, as well as agriculture.

Government officials have said Egypt is on track to match last year s growth, with foreign investment outweighing any negative effects from a global slowdown.

“Egypt is much more broadly diversified and has a good strong domestic consumer market which is only now being realized. I still see the retail boom continuing for quite a long time in Egypt, and I don’t think the industry has yet caught up with inherent demand in Egypt because it’s never been tested since the Revolution, Blair pointed out.

“Suddenly, investors are realizing Egypt’s massive domestic market, and the country is going to see a very strong growth in retail space and its domestic market. It’s not a tourist phenomenon and that is a very positive dynamic.

Despite growing international recognition for Egypt’s reform process, domestically the population remains dissatisfied with the effects, as the poor majority has not yet seen the benefits of buoyant growth.

“The whole perception of Egypt has altered in the last few years under the Prime Minister and his Cabinet. They are definitely on the right track, but there needs to be further institutionalization of that reform across all levels of government as well as the need to tackle wages of the public sector to incentivize people of their work conditions and to make people proud of where they are and where they work, Blair added.

Spiraling food costs have recently aroused public unrest over low salaries in Egypt, a major food importer country where about one-fifth of the population of roughly 80 million lives on less than $1 per day.

Inflation rates rebounded in the first three months of 2008, after decelerating in the second half of 2007. Consumer Price Index inflation surged 10.5 percent year-on-year in January and 12.1 percent in February, up from 6.9 percent in November and December.

“Inflation is a key issue in Egypt where you have an inefficient agricultural sector, and therefore, you have to import a lot more food than you should otherwise do, Blair explained.

“Egypt could supply much more of its food if there was agricultural reform as well as an efficient use of water in agriculture. I think that should be a key priority for the government going forward: to enable Egypt to feed itself and to cut more of its food imports.

In April, urban inflation in Egypt jumped to a fresh three-year peak as food prices continued to surge. The central bank has already raised rates three times this year, saying inflation figures had exceeded its comfort zone. Urban inflation rose to 16.4 percent in the year to April, from 14.4 percent in the year to March, driven mainly by higher food prices, which rose 22 percent in the year to April.

President Hosni Mubarak responded last month by promising a 30 percent increase in public-sector salaries. To raise the extra revenue, the government decided early May to hike prices of several commodities including high-octane fuel, natural gas prices for energy-intensive industries, and cigarettes as well as vehicle license fees. The decision has boosted gasoline prices between 35-45 percent, which has further raised inflationary concerns.

According to Beltone Financial, the government’s move “will have a compounded impact on inflation which is already high. Consequently, the investment bank estimates that CPI will surge at least 20 percent in the next few months.

The UN s World Food Program estimates that the average household expenditure on basic foodstuffs and services in Egypt has risen by 50 percent since the start of the year.

One way to combat rising food costs, Blair suggested, is to ensure that food subsidies go to the right people at the bottom. “You have to increase and redirect subsidies to let the poor have more food, and the government is already doing that, he said. “You don’t want to subsidize an industry. You’ve got to create an efficient platform so that when you remove subsidies, businesses can stand on their own.

The government is currently making an attempt to overhaul its subsidies policy by gradually lifting subsidies off industries and redirecting it towards the needy. In 2008/9 the government will spend LE 20 billion on food subsidies compared to LE 15 billion for 2007/8, which ends on June 30.

For decades, Egypt has provided cheap bread to its working poor to help them survive and to ward off discontent. However, the country has seen this year lengthy queues for subsidized bread – the price of which has risen 26.5 percent over the past year – and at least 12 Egyptians have died in lines since early February.

Prime Minister Ahmed Nazif said in March that people who were once willing to pay extra for free-market bread could no longer afford it, adding to demand for subsidized loaves.

“Subsidies are a very big issue for a country with a large population. It’s a shame in many ways that if this reform process had started five years earlier, we wouldn’t have seen this division. But because the reform process started only a little bit ahead of this rise in global commodities prices, the government has been hit by it, Blair stated. “Unfortunately, people might be blaming the government for this rather than blaming the global situation.

Rising food prices have weighed on economies worldwide. The UN agency has seen prices of grains, pulses, and vegetable oil rise 40 percent in the past nine months. The relentless upsurges in food costs have hit food-importing developing nations such as Egypt the hardest, as large percentage of salaries is spent on food.

“You need to continue having confidence in the government and its policies so that economic growth continues to be at its maximum and to ensure that the flow sees through, Blair explained.

“There’s always a time lag between the action and the effect, and they’ve only had four years of government. In four years, there’s already been a massive turnaround in Egypt, and you can see it in many ways from economic growth to FDI. But they [the government] need to have a number of few more years to be able to benefit the whole economy, he continued.

He added that with the size of FDI and the government’s spending on upgrading basic infrastructure of roads, employment rates will go up and tens of thousands of construction workers will get employed within the coming months. “That’s a real trickle-down effect.

He referred to ongoing development of new cities around Cairo as well as residential and commercial space being created across the capital and several resorts.

“All that is feeding through into new jobs. I’m not a subscriber to the fact that it has not reached the street. It has already reached the street, but just not to a great degree. We will see more of that into the second half of this year and next year as thes
e construction projects really kick in.

But on the counter side of that lies Egypt’s heavy population growth which could jam this trickle-down effect without proper education and training. “You also need to improve quality of education to improve the overall standard of people within the market which can help the economy grow even further.

Topics: FJP

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