Egypt's growth still below 2011 levels, but economy is on right track, says Moody's

Fiscal and structural reforms have reduced Egypt's deficit and led to an improvement in investor sentiment. However, government debt levels and unemployment rates remain high

  
Image used for illustrative purpose. An anti-Mursi protester waves an Egyptian flag as a military helicopter passes over Tahrir square during a protest to support the army in Cairo July 26, 2013.

Image used for illustrative purpose. An anti-Mursi protester waves an Egyptian flag as a military helicopter passes over Tahrir square during a protest to support the army in Cairo July 26, 2013.

REUTERS/Asmaa Waguih
Growth in Egypt's economy has begun to pick up following a series of market reforms, but remains below pre-revolution levels, according to a new note published by ratings agency Moody's.

It estimates that the government has managed to cut its primary budget deficit to 1.8 percent of GDP during its 2017 fiscal year (which finished on June 30). This was a considerable improvement on the 3.7 percent deficit the year before, and, based on its current reform programme, the country could return to a budget surplus by as early as 2019.

The agency, which has a B3 stable rating on Egypt's government finances, said that official government figures indicate that the country achieved GDP growth of 4.2 percent last year. It expects this to increase to 5 percent by 2019, driven mainly by private consumption.

It said there had been a negative impact on tourism as a result of "heightened domestic political instability" following the 2011 revolution. Similarly, investment sentiment weakened, but has "improved on the back of fiscal, monetary and structural reforms".

For instance, Egypt's Purchasing Managers Index (PMI), which is a measure of economic output, remains below 50 indicating the economy is still contracting, but last month it reached 48.9, which was its highest level since July 2016.

 Moody's said that growth is likely to be "more broad-based" in the coming years, due partly to improved exports and a recovery in tourism. The Suez Canal extension in 2015 has also led to the development of a large area along its banks aimd at growing the logistics sector, and there is about $20 billion worth of private investment due to go into the country's oil & gas sector over the next five years.

 This will not only help to support growth directly, it should also reduce the country's need to import liquefied natural gas (LNG) and eventually re-establish Egypt as an exporter of oil & gas.

However, the report also pointed out that government debt as a percentage of GDP remains high, at 100 percent of GDP in the 2017 financial year. And although the unemployment rate is gradually declining, it still stood at about 12 percent in June - and rates were much higher among the young and female population. The fact that more than 30 percent of the country's population is currently under the age of 15 means unemployment could remain a challenge for years to come.

"Investor sentiment has improved on the back of strengthened reform momentum," said Steffen Dyck, vice president and senior credit officer at Moody's, who co-authored the report.

 "We also expect that Egypt's high fiscal deficits and government debt levels will gradually reduce."

Further reading:

Egypt expects IMF review by end-October

Egypt targets 5 percent GDP growth by end-2017/18
Egyptian economy grows 4.3 percent in third quarter of 2016/17
Egypt's budget reforms

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