Egypt’s non-oil sector hit by weak demand, home and away

Reuters/Ahmed Fahmy

• Output contracted in September for a 13th consecutive month
• Exports also dropped despite the pound sinking against the dollar
• PMIs highlight gap between GCC and rest of region, analyst says

Egypt’s non-oil businesses recorded a decline in output in September as macroeconomic conditions worsened, according to the latest Purchasing Managers’ Index from S&P Global. 

The PMI stood at 47.6 in September, unchanged from the August figure and still below the 50.0 that separates growth from contraction. September was the 13th consecutive month of contractions. 

“Non-oil activity in Egypt continued to suffer from weak demand, geopolitical tensions and surging inflation in the final month of the third quarter,” said Shreeya Patel, an economist at S&P Global Market Intelligence. 

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“The energy crisis – brought about by Russia’s war on Ukraine – led to sharp uplifts in energy costs and the introduction of energy rationing policies.” 

Unfavourable exchange rate movements against the US dollar, plus price hikes for a range of inputs, led to a quicker increase in overall input prices in September. Subsequently, businesses reduced their purchasing activity and inventory holdings.

This was shown in the PMI report for September: overall input prices worsened to 64.6 from 58.8 in August and purchase costs deteriorated to 64.5 from 60.8.

Egypt’s exports also tumbled. “There was a particularly sharp fall in the export orders component from 48.1 in August to 37.9 in September, only a touch above the reading for May 2020,” wrote James Swanston, Middle East and North Africa economist at Capital Economics, in a research note published on Tuesday. 

“With the global economy heading towards recession this is likely to have weighed on activity. It is notable that the fall in the pound to a record low against the dollar has not yet provided a fillip to exports.” 

However, there were a few bright spots in the data. 

On the employment side, headcounts rose for the third month in succession, albeit at a marginal rate. The outlook for future business activity in the non-oil sector improved marginally to 55.7, from August’s 53.5, but remained near a 10-year low of 52.5 recorded in March.

“Firms nevertheless remain hopeful that macroeconomic conditions would improve in the medium term but, for now, non-oil Egyptian businesses are challenged to operate in an environment which includes persistently high prices, weak demand and growing uncertainty,” said Patel. 

Swanston also pointed to worsening macroeconomic conditions. “We anticipate that the global economy will be tipped into a recession in 2023,” he told AGBI. 

“This will weigh on external demand and ultimately economic activity in the Middle East and North Africa.” 

To compound the challenges, Egypt has been suffering a severe shortage of foreign currency, with many analysts suggesting that Cairo will need to make a deal with the IMF to restore the country’s fiscal health. 

Egypt’s finance minister, Mohamed Maait, said last month that the country had witnessed $22 billion in outflows from the domestic debt market, but had not received any significant inflows since last March. 

Goldman Sachs and Bank of America have estimated that Egypt will need to secure $15 billion from the IMF, although the consensus among analysts is that the support required is $3 billion to $5 billion.

“Securing an IMF deal will help to restore investor confidence in Egypt and particularly its economic policymaking,” said Swanston.  

“However, there is not actually much work that the Egyptian government needs to do in order to put debt on a downward trajectory and officials have remained committed to keeping fiscal policy tight in the FY22/23 budget.”

Revised estimates from the budget show the government thinks the deficit will narrow from nearly 7 percent of GDP now to 6.1 percent of GDP by the end of 2022 or 2023. 

Swanston said: “There is admittedly some upward risks to the public debt-to-GDP ratio from the weakening of the pound, and our expectation of further weakness, given the share of FX debt and also higher debt servicing costs amid the tighter financing conditions Egypt faces.” 

Saudi Arabia’s PMI report was also released on Tuesday, with its headline rate edging down from a 12-month high of 57.7 in August to 56.6 in September. This is still above the average reading for this year, however, and Swanston pointed out that the latest figures suggest economic divergence between the Gulf economies and the rest of the MENA region. 

“September’s reading reinforced our view that the Gulf economies are continuing to outperform others in the region and there is scope that this could widen with differing government stances on fiscal policy.

“The Gulf states look set to use their vast oil and gas windfalls to loosen fiscal policy over the next year or so, whereas the non-Gulf economies, mostly those in North Africa, will be keeping fiscal policy tight amid large external strains,” he said.