Egypt’s private sector begins to feel impact of reforms

John Wreford/SOPA Images via Reuters Connect

• Egypt’s non-oil economy expands
• Impact of currency strategy
• S&P Global PMI measures 50.4

Egypt’s non-oil private sector economy expanded for the first time in three years as the impact of the government’s currency strategy and international investment drive begins to trickle down to the business community.

The country’s economic outlook was transformed in February following a $35 billion investment deal for Emirati sovereign wealth fund ADQ to develop Ras El Hekma on the north coast.

The deal facilitated a devaluation of the Egyptian pound and an $8 billion IMF package in March.

---

---

Since then “it took the market some time to adjust to the final official exchange rate,” said Omar El-Shenety, managing partner at Zilla Capital. More than six months after the Ras El Hekma deal, El-Shenety said, “the economy is growing again and creating new jobs”.

S&P Global’s latest monthly purchasing managers index (PMI) for August, which was released on Tuesday, shows evidence of this.

The index measured 50.4, the first time the PMI has reached north of the 50.0 line that divides contraction from growth since November 2020.

In a note accompanying the release, David Owen, senior economist at S&P, reported “increases in output, employment and purchasing activity showing that firms were confident enough to expand their activity and capacity”.

Aside from a slight drop in total new orders, business conditions showed improvement across all areas. 

• Funding flows to fintechs wooing Egypt’s eager borrowers
• ADQ’s Egypt project lights fire under region’s real estate
• IMF urges Egypt to expand private sector after loan release

“Business expectations were also up,” Owen wrote, “adding to signs that firms are hopeful that economic conditions are set to be more stable.”

James Swanston, a Mena economist at Capital Economics, said that the news made Egypt “the main positive story” in the region for August.

“The breakdown suggests that domestic demand is still struggling,” he said. “But the external sector is benefitting from the weaker pound that has improved Egypt’s competitiveness – the new export orders component hit its highest level since the survey began in 2011.”

Inflationary pressures

However, Tuesday’s PMI release also highlighted increased inflationary pressures.

In May, annual headline inflation dropped below 30 percent for the first time in over a year but remains above 25 percent, which El-Shenety predicts is unlikely to drop substantially for the next two to three months. 

In August there were “the fastest uplifts in costs and charges for five months”, Owen wrote in the PMI note.

Since March, the Central Bank of Egypt has held the overnight lending rate at 28.25 percent in an attempt to curb inflation. The bank’s board is scheduled to meet on Thursday and is widely expected to keep interest rates as they are.

El-Shenety said he expects interest levels to drop only towards the end of this year or the beginning of 2025. He said that almost half a year of record high interest rates are a source of frustration for businesses looking to borrow money but that “from a central bank point of view, you have to weigh the pros and cons: Do you want to get inflation under control to stabilise the economy or do you want to incentivise businesses? 

“The objective is obviously, in the short term, to get inflation under control.”