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Monday, 27 December 2021

The macro picture of our 2021 recovery

Our 2021 recovery by the numbers: Following a difficult first year of the pandemic, 2021 saw the economy starting to get back on track. Loosening international travel restrictions, stabilizing energy markets, and the global vaccine rollout have underpinned a resurgence in economic growth this year. Tourists are returning, exports are back to pre-pandemic levels, and corporate earnings are looking healthier.

It hasn’t been without its challenges though: Supply chain disruptions, surging commodity prices, and concern about an imminent rise in global interest rates have all caused headaches for businesses this year. And the absence of recovery in private sector activity is a cause for concern.

Let’s start with the headline figure: GDP. After being one of the few countries in the world to avoid a recession in 2020, the past 12 months has seen Egypt build on a recovery that began in late 2020. Annual GDP went from 2.9% in 1Q to 7.2% in the second quarter and 9.8% in 3Q — the fastest rate of growth seen in two decades — partly thanks to improving economic fundamentals and partly due to a favorable base effect from the lower growth rates in 2020. Egypt’s economy is expected to grow at a 6-7% clip in 2Q2021-2022, Planning Minister Hala El Said said this month. El Said noted, but we’re still on track to end FY2021-2022 with a GDP growth rate of somewhere between 5.5% and 5.7%.

The hospitality sector has been the crown jewel in Egypt’s economic recovery this year, benefitting from the restoration of flights, the global vaccination rollout, and diminishing public concerns about Egypt’s covid epidemic. Quarterly tourism revenues are now not far from pre-pandemic levels, helping output in the hospitality sector to rise some 430% y-o-y in 2Q and 182% in 3Q from a year earlier, according to data from the Planning Ministry. Growth in manufacturing — the largest sector of the Egyptian economy — has been more muted but has still seen a rebound, rising 10.5% and 15.2% in the first and second quarters respectively.

But strong economic growth ≠ a strong private sector recovery: Non-oil private sector activity has been in contraction all year even as corporate earnings have recovered from the year-that-must-not-be-named. Firms have continued to suffer from a combination of depressed demand and rising costs, resulting in only three months of growth in the 21 months since March 2020.

Public finances have strengthened: Egypt beat its deficit targets during the previous fiscal year, narrowing the budget deficit from 8.0% of GDP to 7.4% and generating a 1.5% primary surplus. The Finance Ministry had initially targeted a 0.9% primary surplus and an overall deficit of 7.8%. It has been a slightly different story so far in FY2021-2022, with the most recent figures (pdf) showing that the deficit widened y-o-y during the July-October period from 2.7% to 3.1%, and the primary balance fell into a slight deficit.

Tax everything that moves: The Finance Ministry has worked overtime searching for new ways to tax people and businesses this year as it tries to raise revenues and strengthen public finances. The big one as far as resident investors are concerned is the 10% capital gains tax on EGX transactions, which the ministry decided to go ahead albeit with a package of sweeteners to quieten the industry backlash against the proposal and mitigate any blowback on EGX trading volumes.

Tax policy has focused equally on squeezing money out of the existing tax base — and on widening it: A 10% levy is being placed on all new mobile phones that aren’t SICO-made, while plans are afoot to impose a 2% development fee on durable goods and soft drinks, and a 5-20% tax on the costs of entry to entertainment venues and leisure facilities. Others are being brought into the tax system, including illegal private tutors and online content creators. The latter is also being asked to charge and remit VAT on ad revenue made through online platforms such as Google. New customs and e-invoicing systems being rolled out aim to make it much harder for tax cheats to avoid paying the state its due.

Speaking of rising prices: Egyptian consumer prices haven’t been immune from rising commodity prices abroad, which have pushed up the headline rate of inflation, particularly in the second half of the year when rising food and energy costs drove the rate to a 20-month high of 6.6%. Inflationary pressures seem to have so far been contained, with consumer prices never rising above the lower bound of the central bank’s 7% (±2%) target range and the headline rate currently averaging 5.5% for the year.

Rates have remained unchanged: The Central Bank of Egypt has kept interest rates on hold since November 2020, prioritizing foreign inflows and an inflation hedge over further economic stimulus.

And this has been good for the carry trade: Egypt has maintained the world’s highest real interest rate through the year, ensuring a steady stream of portfolio inflows into local debt by investors searching for yield in a world of historically-low rates. Portfolio investments also turned positive in FY2020-21, recording a net inflow of USD 18.7 bn this year, compared to a net outflow of USD 7.3 bn in the FY2019-20. Total investment in Egyptian debt hit a record USD 33 bn in August, though since then we haven’t heard anything from the Finance Ministry or the central bank, giving us little indication of how the beginning of the Fed taper in November has impacted inflows.

Foreign direct investment, on the other hand, has slipped: After showing signs of recovery at the tail-end of last year, FDI flows went into reverse during the first half of the year, falling to a mere USD 427 mn in 2Q, down two-thirds from 2Q2020 (aka the lockdown quarter) and the lowest quarterly figure since 4Q2011. The central bank is yet to publish the balance of payments figures for the third quarter.

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