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Egypt's economic growth to surpass 4 pct in 2015 - NBK report

The National Bank of Kuwait (NBK)
The National Bank of Kuwait (NBK)
KUWAIT, Aug 3 (KUNA) -- The pace of economic growth in Egypt 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 report by the National Bank of Kuwait (NBK) said on Monday.
A strong public sector investment drive has been a key source of growth, with a number of government-led capital spending initiatives underway.
According to the report, 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.
However, 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 donations have helped shore up public finances, but those are unlikely to be sustained in the medium term. Still, markets remain confident that authorities are taking the necessary reform steps, with Egypt's recent USD bond issuance a good example of that.
The report said that Egypt's economic growth has continued to improve in recent months. Real GDP growth accelerated to 4.3 percent year-on-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, growth is expected to maintain this pace before improving further thereafter.
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, the NBK report said.
Investment initiatives of around USD175 billion were announced then, most of those to be implemented within five years. An additional USD 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 and gas (USD 21 billion), power generation (USD 43 billion) and urban development (USD 58 billion).
Tourism and construction activity bore the brunt of 1Q15 weakness. Indeed, while tourism has recovered from 2013 lows, the sector has more lately been weighed down by domestic and regional security concerns and a weak euro (keeping Europeans at bay), the reports stated.
The number of tourists during 1Q15 rose by only 6.9 percent compared to double digit growth in 2014. More importantly, tourist-nights actually dropped by 8.4 percent y/y during the first three months of 2015. Figures in March alone were more upbeat, indicating the slump may have passed.
Grants provided by GCC allies have offered some relief since mid-2013, but those have declined over the last few months. They accounted for as much as 4.8 percent of GDP in FY13/14, but have declined to 2.3 percent in the last 12 months through April 2015 and are likely to decline further in FY15/16.
The current government is committed to fiscal reforms, as revealed by last year's fuel price hikes. Further subsidy reform is expected, including the introduction of a fuel ration card. The government also plans to take steps to boost revenues with measures such as a value-added-tax (VAT). However, the recent scrapping of new taxes on dividends and capital gains means some critical fiscal reform will be delayed.
The report noted that Egypt's trade balance widened by 25 percent over the last year through March 2015 as a result of solid imports growth and a decline in oil exports. At the same time, official transfers have virtually gone to zero (they accounted for 3.6 percent of GDP a year ago). While growth in service receipts (which include tourism revenues) and worker remittances has been healthy, they only offset some of the deterioration in the trade balance.
Higher foreign direct investment (FDI) has helped shore up Egypt's external position. FDI rose to its highest quarterly level since 2008 in 1Q15, helping to offset some of the deterioration in the current account.
Egypt is expected to continue to benefit from higher FDI on the heels of the March investor conference. Indeed, Siemens recently signed a $9 billion project for a wind farm. However, FDI levels remain far below pre-2009 levels.
On the Egyptian Exchange, after a strong 2014, the market has underperformed since it peaked in January 2015. The MSCI total return index was down by nearly 4.7 percent through June 2015. Softer economic data in 1Q15 and the new capital gains tax appear to have weighed on equities. (end) fnk.amh.msa