The tumultuous events of January and February that resulted in the collapse of President Hosni Mubarak’s regime have already had a dramatic impact on Egypt’s economy.

Demonstrations and strikes in the first quarter of the year brought manufacturing output to a near-standstill and political instability stopped tourism and foreign direct investment (FDI) in their tracks. Continued political uncertainty in the coming months is likely to mean a long wait for a return to the strong growth that Egypt enjoyed until the end of 2010.

The lack of comprehensive economic data for the past three months means that analysts are divided over the extent of the impact, but they all agree that it has been significant.

Among the more optimistic forecasts, Cairo-based Beltone Financial expects gross domestic product growth (GDP) of 3.5 per cent in 2010-11 and 4 per cent in 2011-12. This compares with 5.1 per cent in 2009-10. Riyadh-based Banque Saudi Fransi, meanwhile, has downgraded its forecasts for 2010-11 twice this year, first to 3.7 per cent and then to 2 per cent.

Egypt’s economic slowdown

The transitional government’s own expectation is for growth of about 2.5 per cent, a view shared by Moody’s Investors Service, an international ratings agency. “Given everything that has happened in Egypt in the last couple of months, economic growth will slow down to 2-3 per cent for 2010-11,” says Nondas Nicolaides, a banking analyst at Moody’s.

Those that will be hit most will be tourism, manufacturing and construction activities … financial services

Mohamed Rahmy, Beltone Financial

FDI is expected to fall about 40 per cent year-on-year, according to Moody’s. John Sfakianakis, chief economist at Banque Saudi Fransi believes that it could drop more than 60 per cent. Consumer spending is also likely to be weak in the coming months, due to the combination of high unemployment, ongoing strike action, rising inflation and political uncertainty.

Unemployment is likely to worsen as a result of the slowdown in the economy. Before the global economic downturn of 2008-09, Egypt’s government estimated it needed to achieve GDP growth of 7 per cent a year just to absorb incremental demand for jobs.

“There will be a rise in unemployment,” says a Cairo-based economist. “Some people have already lost their jobs in recent months, and, in addition, there are between 650,000-750,000 new entrants to the job market each year.”

The financial pressures on Egypt’s citizens will be exacerbated by rising living costs. “Inflation is clearly an issue,” says Richard Fox, head of Middle East and Africa sovereign rating at ratings agency Fitch Ratings.

“The value of the Egyptian pound is drifting down and interest rates are quite high. There’s quite a lot of strike activity too, which is not going to help.”

Banque Saudi Fransi has increased its forecast for inflation in 2010-11 from 10 per cent to 11.1 per cent. “Domestic inflationary pressures will keep on piling,” says Sfakianakis. “The expectation is for inflation to continue to rise for the rest of 2011.”

Tourism slump in Egypt

When it comes to generating national income, some sectors are feeling the impact more than others. “Those that will be hit most will be tourism, manufacturing and construction activities, as well as financial services,” says Mohamed Rahmy, an economist at Beltone Financial.

Provided the elections take place on time…confidence will probably come back again over the next two years

Nondas Nicolaides, Moody’s Investors Service

The impact on tourism has been particularly severe. Beltone estimates that fiscal receipts from tourism will fall to $8bn for the 2010-11 financial year, which ends on 30 June, compared with $12bn in 2009-10. “At the beginning of the revolution, occupancy rates fell to 0-5 per cent,” says Rahmy. Tourist arrivals in February dropped by an estimated 80 per cent compared with the previous year.

Although Egypt benefits from a diversified economy, the decline in tourism earnings is significant. “In terms of its share of the economy, tourism represents about 5 per cent of GDP,” says Rahmy. “But if you take into account the indirect impact on other sectors and the effect on liquidity, it’s more like 10 per cent. Tourism is a major earner of foreign exchange reserves for the economy.”

The construction sector has also been severely hit. “You will not see new projects being awarded or launched in the near future,” says the Cairo-based economist. “We are waiting for the award of $2-2.5bn-worth of PPP [public-private partnership] projects, but it’s not likely to take place in 2011.”

The real-estate development market is particularly vulnerable. It is not only affected by the wider economic climate, but also by the fall-out from investigations into alleged corruption in the award of contracts by the Mubarak administration.

Egypt economic indicators
  2007/08 2008/09 2009/10*
Real GDP growth (percentage) 7.2 4.7 5.1
Balance of payments ($m) 5,420 -3,378 3,356
Trade balance ($m) -23,415 -25,173 -25,120
Exports ($m) 29,356 25,169 23,873
Oil ($m) 14,473 11,005 10,259
Non-oil ($m) 14,883 14,164 13,615
Imports ($m) -52,771 -50,342 -48,993
Current account ($m) 888 -4,424 -4,318
*=Preliminary figures; GDP=Gross domestic product. Sources: Central Bank; Egyptian government

“Most of the corruption investigations are focused on land issues and real-estate companies are suffering the most,” says the Cairo-based economist.

The country’s industrial output has also been severely impacted. “Especially in the first week to 10 days of the revolution, the deteriorating security situation halted transport networks, closed ports and hit manufacturing,” says Rahmy.

But the oil and gas sector and the Suez Canal, both substantial generators of government revenue, have been relatively unaffected by the recent turmoil. “Suez Canal receipts have been very resilient and are forecast to continue to grow, and the oil and gas sector has also been very resilient,” says Rahmy.

Bright spots for Egypt’s economy

Even among those sectors most badly hit, there are a few bright spots. Many of the largest countries of origin for Egyptian tourists, including the UK, Germany, Italy and Russia, have lifted travel bans to the country in recent weeks, giving the sector a lift.

“There’s been a gradual increase in occupancy rates in the tourism sector,” says Rahmy. “Last month, it was about 20 per cent. The Finance Ministry has said in Sharm el-Sheikh and some areas of the Red Sea coast, occupancy is up to 45 per cent.”

Industrial output is also showing signs of recovery. “With the gradual improvement of the security situation, the lifting of the curfew and the re-opening of ports, factories have shown greater capacity utilisation,” says Rahmy.

But it is going to be a long time before Egypt’s economy returns to the growth levels seen in recent years, particularly when it comes to tourism. “We’re not going to suddenly get back to where we were by any stretch of the imagination,” says Fox. “Tourism revenues have taken similar hits before, but I get the impression that they will take longer to recover this time round.”

This is a view shared by the Cairo-based economist. “The security situation has improved markedly since February, but I still think it will take time for tourists to come back in the same numbers as before,” he says. “Tourism will continue to be weak in April and May and probably won’t be that strong during the summer. Maybe by the parliamentary elections in September, we might see some stability and see tourists coming back.”

FDI is also likely to remain depressed for some time to come as potential investors wait out the period of political uncertainty surrounding the elections in September and the planned changes to the constitution that will be made in the months after that.

“The political transition and the lingering uncertainty is weighing down on FDI and private consumption and it will continue to weigh them down until the second half of 2012,” says Rahmy.

Nicolaides agrees: “The confidence of locals, investors and tourists is down and will take some time to return to previous levels. Provided the elections take place on time and there are no new demonstrations, confidence will probably come back again over the next two years.”

The strength of the recovery will depend in part on the economic policies of the government elected in September and whether its focus is on public spending or private investment. The transitional government has already increased government expenditure, which will mean a larger budget deficit for 2010-11 than originally envisaged.

Among the measures taken are a 15 per cent salary rise and the early payment of year-end bonuses for government employees, along with an increase in food subsidies.

“It’s normal that all the measures taken so far are populist in nature,” says Rahmy. “The government has committed to insulating people from the economic impact of the revolution and to restoring confidence among the population. But this doesn’t imply that this will be its policy going forward. The [transitional] government says it is committed to investment in the economy by the private sector.”

No one knows what will be the economic priorities of the new government come September, but there is concern that the business-oriented policies of the later years of Mubarak’s presidency will be eschewed in favour of economic populism. “The outgoing finance minster [Yousef Boutros-Ghaly] said in December that there would be no more fiscal expansion,” says Fox. “Political imperatives may well change that calculation. But there isn’t much room for manoeuvre.”

Private investors

Any weakening of Egypt’s commitment to attracting foreign investment could have serious consequences for much-needed infrastructure development.

“The fiscal position is already stretched,” says Rahmy. “PPPs have been seen as the best way to develop infrastructure, which is in desperate need of development. But it’s impossible to say whether that will be the future policy or not.”

Equally, Egypt can no longer afford to neglect the welfare of the huge section of its population that lives in poverty. “In the last decade, Egypt has grown at a healthy rate and it has reduced its fiscal deficit, but no benefit has been seen in terms of improved living standards or reduced levels of poverty,” says Rahmy. “There has been a big divide between the headline figures and the reality on the ground.”

Ideally, the new government will find a compromise that combines an open environment for foreign investment, with more effective mechanisms for wealth distribution. Achieving this, however, will be far from easy.