Citi Research: 2012 a lost year for Egypt

Liliana Mihaila
5 Min Read

This year was a lost one economically for Egypt, according to a new report by Citi Research.

In the Egypt section of their latest report, Global Economic Outlook and Strategy: Prospects for Economies and Financial Markets in 2013 and Beyond, Citi Research said 2012 was a loss in terms of growth and economic reform.

The report mentions the political changes in August that swung power back to President Mohamed Morsy and the Muslim Brotherhood. The research also considers the new constitution and forthcoming parliamentary elections. The preliminary deal with the International Monetary Fund was seen as a positive change initiated by the political leadership to attract more investment. Dwindling foreign reserves was considered a constraint for the new government, giving it little room for manoeuvre and a strong incentive to “keep talking.” Although the signing of IMF deal should help stabilise the economy in the short term, the real question according to Citi Research is whether it will drive a return to higher long term growth rates and whether the current government really has a long-term vision for economic development. If the economy doesn’t improve in the short run, the long term outlook will be bleak.

The report forecast economic performance to 2014; predicting real GDP growth to rise from two per cent in 2012 to 4.2 percent in 2014, the final domestic demand growth to increase from 2.7 to 4.5 per cent, the private consumption growth rate to rise from 0.9 to three percent, and the fixed investment growth rate to double to 7.7 per cent by 2014. Unemployment rates will likely increase from 13 to 15 per cent and the value of US dollar is predicted to reach EGP 6.64 by the end 2014.

The report speaks broadly of emerging markets, saying that during much of the 2000s emerging economies enjoyed rapid export-led growth, large trade surpluses, appreciating real exchange rates and stronger balance sheets as public debt burdens fell and foreign reserves assets increased. The undervaluation of their currencies over the past 10 years helped emerging countries to support export-led growth, thus helped to keep their balance of payments strong.

Emerging markets growth thas fallen in the past couple of years but is expected to recover in 2013, rising to 5.1 per cent from 4.6 this year. The annual GDP growth in emerging markets averaged 6.5 per cent between 2002 and 2011, when weakened demand in the developed world, and decelerating growth of domestic demand in China caused an export-led slowdown in emerging economies.

The conditions for a revival in export-led growth don’t seem encouraging according to the report because the currencies of emerging markets aren’t as cheap as they once were. The more expensive currencies get, the more this is likely to bias growth towards the domestic rather than increasing net exports, a trend that is reinforced by the weakness of global demand growth, which will persist in 2013. GDP growth in advanced economies is forecasted to be 0.8 per cent next year compared to an average of 2.3 per cent from 2002 to 2007.

Globally, Citi Research expects that 2013 will be another year of modest global growth, reaching 2.6 per cent, increasing to 3.1 per cent the year after, a little below IMF forecasts. They anticipate faster growth of 3.5 to four per cent in 2015-17. They also expect the sizeable divergences between regions and countries to continue in 2013, but in the following years, global expansion will become more evenly distributed across countries and economic sectors, with growth in consumer spending and investment across many other emerging markets as well.

The report warns of the risk volatile public opinion poses to the investment environment, as demonstrated by 2012, which the authors not was an exceptionally politically unstable year.

From Arab Street to Main Street, concerns about income inequality and elite corruption have risen to the top of the political agenda, threatening to topple leaders when they least expect it, says the report.

The potential for public opinion to bring about change in policy or leadership has been accelerated by media and technology and the continuing weak economic outlook, substantially compressing the timeframe for galvanising political or protest movements.

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