Economy

Egypt’s business activity rises as inflation pressure falls

June 5, 2024, 1:38 PM

A worker unloads wheat in Qalyubia, north of Cairo. Analysts warn that a rise in bread prices could harm imnproving business sentiment — A worker unloads wheat in Qalyubia, north of Cairo. Analysts warn that a rise in bread prices could harm improving business sentiment

Non-oil sector close to growth
PMI report shows 33-month high
Warning over austerity measures

A softening of inflationary pressures and an increase in the availability of foreign exchange helped improve business activity and confidence in Egypt in May, according to central bank data and an influential survey.

But experts warned that government austerity measures, including a rise in the politically sensitive prices of bread and petrol, may dampen business optimism.

S&P Global’s latest purchasing managers index (PMI) for Egypt, released on Tuesday, showed a jump to a 33-month high in May, suggesting that the non-oil sector is close to reaching growth territory.

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The index recorded a reading of 49.6, still below the 50.0 mark that divides economic growth from contraction, but up from 47.4 in April, and the highest since August 2021.

At the same time, the Central Bank of Egypt reported on Tuesday that foreign exchange reserves reached an all-time high in May, rising to $46.1 billion from $41.1 billion the previous month.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said: “The clearing of import backlogs and the greater availability of FX liquidity would also have boosted economic activity and sentiment.”

In a note accompanying the survey, S&P senior economist David Owen said the reading was “the first indication that the rapid cooling of price pressures is starting to boost the Egyptian non-oil private sector”.

The data for the report was collected three months after Egypt floated the Egyptian pound, after the signing of a $35 billion deal with ADQ, a UAE sovereign wealth fund, to develop Ras al Hekma, a resort city on the north coast.

Egypt has since received the money in full, which includes $24 billion in fresh dollars, as well as the first tranche of a $8 billion International Monetary Fund package.

James Swanston, an economist at Capital Economics in London, said a rise in export orders mentioned in the PMI “suggests the weak pound is benefitting export-facing sectors.”

The S&P report also found that Egyptian companies were increasingly willing to bring in new employees, while wages rose at one of the fastest rates in 3½ years.

The PMI found that confidence over the next 12 months rose in May “as firms' hopes that economic conditions will strengthen grew.”

The analysts all said that inflation in Egypt is likely to ease slightly. Capital Economics predicted that headline inflation would fall to 31.4 percent in May, from 32.6 percent in April.

While data in the report suggested that inflation was softening, Swanston said that “upcoming hikes to local fuel prices and electricity will mean inflation remains elevated for some time.”

Economists predict that subsidy cuts, announced last week, will increase inflation by between 1 percent and 1.5 percent.

Mohamed Abu Basha of EFG Hermes said the rise “will not prevent the disinflation path,” which is supported by the positive impact of an increase in foreign currency availability and “the undershoot of the EGP, post float”.