Inflation aggravates difficulties facing non-oil private sector

Hossam Mounir
4 Min Read
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Egypt’s non-oil private sector remained entrenched in a downturn during December, although business conditions deteriorated at a slightly reduced rate, according to Emirates NBD Egypt Purchasing Managers’ Index (PMI).

The survey, sponsored by Emirates NBD and produced by IHS Markit, contains original data collected from a monthly survey of business conditions in the Egyptian private sector.

It added that output, new orders, and input buying all dropped considerably, continuing trends observed throughout the latter part of 2016. “Sharp inflation was a key factor behind firms’ difficulties,” the report concluded.

Moreover, the report said that purchase costs rose at a near-record pace, leading to a lack of raw materials at some companies. This restricted output, while a subsequent rise in charges (designed to protect margins in the face of greater costs) had a damaging effect on client demand.

Jean-Paul Pigat, a senior economist at Emirates NBD, said that the silver lining to the report is that new export orders decreased at the slowest pace since September 2015. “Although the process will not be immediate, a weaker Egyptian pound following November’s devaluation will eventually help boost export growth, which will clearly be welcome as the rest of December’s survey continues to point to weak domestic demand,” he added.

The report estimated PMI—a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy—at 42.8, remaining consistent with a marked downturn in December. Despite rising from November’s 40-month low of 41.8, the latest reading was among the lowest seen over the past three-and-a-half years. Moreover, it rounded off the worst quarter on average (42.2) since data collection began in early-2011.

Moreover, it noted that substantial cost pressures have affected the sector’s performance throughout the final quarter of 2016. The report stated that purchase prices have risen sharply in each of the past three months, with around 80% of surveyed firms noting an increase in December. “Anecdotal evidence mainly linked cost inflation to a depreciation of the Egyptian pound relative to the US dollar. There were also reports of higher oil prices and the implementation of a value-added tax,” it read.

According to the report, costly raw materials led to shortages at some firms, as per anecdotal evidence in December. “Output continued to fall sharply and purchasing activity showed a similar trend, with unaffordable materials contributing to a steep downturn, while input stocks dropped markedly as a result,” it added.

In addition, the report stated that higher prices also had an impact on client demand, as greater costs were partially passed on to their customers. The latest increases in costs are among the steepest since the survey’s inception in April 2011.

As for the jobs front, the report explained that the non-oil private sector employment in Egypt declined for the 19th consecutive month during December.

Finally, the report pointed out that there was further evidence of pressure on supply chains in December. “Average lead times lengthened substantially, albeit to a lesser extent than in the previous two months,” it highlighted.

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