There hasn't been much good news coming out of Egyptian economy since the revolution. But ten pieces of good news in the past two weeks suggest that the economy may be turning a corner.
While nobody is suggesting that the economy is over all its problems - indeed, frustratingly, many Egyptians may not feel the benefits any time soon, there are signs that the economy is working its way through its myriad problems.
Egypt's economy has been struggling ever since the Arab Spring led to the departure of Hosni Mubarak's regime. But political freedom has come at a price: tourists have disappeared, reserves are low, real estate and infrastructures have been delayed and the economy is expected to grow by a mere 1.5% this year, compared to the sterling 5.1% growth in 2010.
The biggest fear has been that this economic malaise may not be as temporary as many hope and may extend well beyond the parliamentary and presidential elections later in the year.
But the past few weeks have seen a flood of good news suggesting that the economy is showing signs of life soon and reforms are under way.
Here is a list of nine significant positive developments - in no particular order - in the Egyptian economy.
Positive News #1: Real Estate Is Showing Signs Of Coming Back (Slowly) Embattled Egyptian property developer Palm Hills has said it deliver 1,210 housing units by end of the year.
Palm Hill Development has been one of the major real estate companies caught on the wrong side of the revolution due to its ties with ousted leader Hosni Mubarak.
While problem still persists, in a note to shareholders PHD said it had delivered 256 units since the revolution.
"We would like to point out that all land-related cases are isolated only to two projects, Palm Hills Katameya, on which the firm has finished 85 percent of construction, and Palm Parks, on which we are nearing 50 percent completion," said Mohammad Soltan, who has emerged as the company's new CEO.
A court ruled in April that a land sale to Palm Hills was illegal, one of a series of rulings that have alarmed investors in the country's once-booming property sector
Positive News #2: Capital Gains Tax Scrapped Egypt's government has scrapped plans to levy a capital gains tax, after investors objected to the move.
The plan for the 10 percent tax, announced along with government's 2011-12 budget last week in a bid to raise funds for higher state wages and subsidies, sent Egypt's main share index to its biggest drop in six weeks on June 2.
But the cabinet decided to drop the tax in a meeting on June 7 after pressure from the private sector.
Positive News #3: Inflation Is Down Consumer inflation has fallen from 12.1% in April to 11.87% in May. High prices had been one of the biggest bug bear for average citizens during the previous regime and it drove them on to the streets.
Positive News #4: Interest Rates Remain Unchanged The Egyptian Government has also maintained policy rates unchanged at 8.25% and 9.75%.
"In our view, the neutrality stance in effect since September 2009 remains to be appropriate for an economy trapped in shock-driven stagflation," notes Pharos Research. "In this environment, active monetary policy is unlikely to either contain supply-side inflationary shocks or fully restore investor and consumer confidence post revolution."
Pharos says there are three reasons why this is good:
First, the CBE will continue to focus on capping corporate borrowing costs given the deterioration in cash flow metrics across several sectors, particularly tourism and cyclical domestics.
Second, the persistence of tight liquidity conditions suggests that the CBE is unlikely to drain liquidity even further in the short-term.
Finally, tighter liquidity conditions have already started to spillover to retail deposit rates, which may trigger higher corporate lending rates going forward.
Positive News #5: Projects Are Alive! Drake & Scull International won an AED80million contract for a project in Sharm El-Sheikh Egypt.
While the contract may be small, Shuaa Capital thinks it is a significant development.
"The most important aspect to the press release was not the value of this tiny contract, but rather the indication that projects are coming back to life in Egypt," wrote in a note.
"DSI confirmed... that its AED 464mn Nile Corniche Project is going ahead by saying that work on this contract 'is on schedule with the full staff now on board performing engineering, procurement, and construction activities in one of the most critical stages of the project requiring intense and accurate coordination... We expect the re-activation of this project to be well received by investors.
Positive News #6: Stockmarket Gains The Egyptian stock market had its best month of the year, posting a 10.4% in May. Still, the market is down 22.7% for the year.
"Whilst, this latter figure admittedly still marks Egypt as the stand-out loser in 2011 so far, the gains made in the last month are particularly heartening given they came against the prevailing global current," says CI Capital Research.
Positive News #7: Aids And Financing Egypt has agreed on a $3-billion financing package with the International Monetary Fund.
"The proposed one year stand-by arrangement contains measures aimed at supporting economic recovery, generating jobs, and assisting low-income households, while maintaining economic stability. It will help Egypt lay the foundation for a more-inclusive economic program that encourages private sector-led growth," notes the IMF.
The World Bank has pledged $4.5 billion in support to Egypt over the next two years to address budget and reserve shortfalls and to finance reforms that strengthen its credit and investment prospects. The United States said it will offer also offer up to $1bn in debt relief and lend or guarantee up to $1bn in borrowing; Saudi Arabia pledged a package of $4bn to Egypt which will include $1bn deposit at the CBE, $500mn in bond purchases and $500mn for general budget support. Qatar, European Bank for Reconstruction & Development and Africa Development Bank has all pledge support and aid.
Deutsche Bank had predicted a financial gap of $10-billion also highlighted that the growing budget deficit had already begun to pressure fiscal dynamics as banks' took on additional government debt while loans to the private sector had declined.
"We are now more optimistic on this pressure point as well with part of international support to be used for budget financing and also given that the IMF program and other financing schemes may be a pull factor helping to revamp non-resident appetite for local government bonds," said Deutsche Bank.
Positive News #8: Foreign Investor Confidence Slowly Returning Kingdom Holding, led by Saudi Prince Al Waleed Bin Talal, finally signed an agreement with the Egytian government on Toshka land, which had been the subject of dispute.
The case was an important test for foreign investors who have been worried about the rise of cases regarding projects signed during Hosni Mubarak's reign.
The case shows a quick resolution is possible.
Egypt is setting up a committee to settle similar disputes with other local and regional development companies.
Positive News #9: Budget Announced While not all analysts were enamoured by the overall content of the Egyptian Government's budget for 2011-2012, it ticked a number of boxes for the citizens who have been out on the streets demanding social and economic relief.
The 2011/12 fiscal year budget that increases expenditures and revenues by 24.5% (by 101bn EGP) and 22.6% (by 64.5bn EGP), respectively. As a result the budget deficit will increase by 29% (to 167bn EGP) and reach 11% of GDP.
"Given Egypt's strong long-term potential - provided that the GoE is moving ahead with its commitment for reform - more investment should flow into the country," said CI Capital optimistically.
While the budget may have its short-coming - indeed many think the budget has been geared toward populist policies such as subsidies and minimum wages - but it is an important milestone. Increase in subsidies (54bn EGP) make up about half of the increase in expenditures in FY2011-12.
Even the World Bank chief Robert Zoellick has hinted at curbing handouts.
"When we are now in discussion with Tunisia and Egypt, who need to have socially inclusive policies. The first recourse of Egypt is, as it has been in the past, to increase everybody's wages and increase broad-based subsidies," Zoellick said. "That's an extremely expensive way to go. We're trying to share the (Brazilian) experience but it will take time."
Although the rise in deficit seems sizable the banking system seems to be liquid as deposit growth has remained relatively strong, which is a positive for financing in the near term, says Deutsche Bank.
Positive News #10: Reserves Have (More Or Less) Stablized
In the second quarter of 20122, current account deficit was $1-billion as the trade deficit was lower by 23% compared to the first quarter of 2010 and surplus in services declined by 49% year-on-year. "The latter mainly came on the back of a sharp fall in tourism revenues (35% YoY) and relatively small fall in Suez Canal receipts (by 11% YoY)."
"Much of this reserve loss occurred in 1Q ($13bn) while the decline in April and May was $2.2 and $0.8bn, respectively," notes Deutsche Bank. "The recent developments indicate that reserves have more or less stabilized. Reserves need to be increased but the current level is reasonably strong (six months import coverage) and we are likely to see continued stability in the near term despite the current account deficit."
The German banks expect recovery in tourism, official financing disbursements and non-resident interest in Egyptian markets to take hold around the fourth quarter, which should lead to a gradual restoration of reserves.
Conclusion
Nobody is suggesting that the worst is over for Egypt. Indeed, there might be many hurdles and new twists as Egypt regains its economic energy and pushes through with political and social reforms in the middle of a very charged regional environment.
Egypt's budget deficit has widened in recent months, owing to extraordinary spending measures taken by the government as a result of the protests.
Latest government figures suggest tourism, FDI and portfolio investment fell during the political unrest.
During the last quarter tourism - a key export earner -- dropped to $1.8-billion against $2.7-billion a year earlier, while FDI registered an outflow of existing investments.
"This came in below our expectation of a minimal USD0.5bn worth of foreign investments, vs. USD1.7bn in the comparable quarter of a year earlier," says CI Capital Research.
Huge foreign selling in equities and bonds increased portfolio outflow to $5.5-billion, against a net $1.3-billion a quarter earlier.
But the past two weeks shows that the authorities are working their way through the challenges ahead - and that's good news enough.
Essential Reading:
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Egypt real estate sector needs to deliver 550 new homes every day till 2015
© alifarabia.com 2011
