From a distance, it is easy to conclude that Egypt is an arid environment for investors. Accounting for only 0.13% of the MSCI Emerging Markets Index, the country is often overlooked given its questionable democracy, high rate of inflation, recent currency devaluation and twin deficits. Since the global financial crisis, Egypt has suffered a difficult decade characterised by political instability and economic turmoil.
Yet on closer inspection, things are beginning to change. An increasingly stable political and economic climate, coupled with low labour costs, high literacy levels and a series of economic reforms, suggest that the country’s future may look brighter than it has for a decade or more. Gary Greenberg, Head of Emerging Markets at Hermes Investment Management, explores these factors and explains why Egypt is becoming distinctly more attractive.
Egypt’s economy has gyrated, along with its leadership, since the financial crisis, recovering only to be hit by the Arab Spring and President Mohamed Morsi’s election and later removal.
Investor confidence in Egypt has been in short supply since the Arab Spring and the establishment of ‘order’ by the military under el-Sisi initially did little to restore it. However, there are signs that confidence is beginning to improve, as Egypt’s economic policies have come under the guidance of the IMF.
President el-Sisi’s challenge is to enact tough reforms while ensuring social stability in a country where 28% of the population lives below the poverty line. Intervention from the IMF last year saw the currency devalued by 100%, with the Egyptian pound crashing from 8.9 to the US dollar in 2015 to 18.1. While this led to a spike in inflation, it also spurred a dramatic change in policy. The IMF forecasts that the government will run a small primary surplus this year, increasing to 2% of GDP for the ensuing few years. This should reduce debt to well below 100% of GDP by 2023.
Given the volatility of oil and wheat prices and the exchange rate, the only price levers that the government can control are subsidies for petrol and diesel. However, removing public subsidies in a single blow would be a difficult move following the currency crash and inflation shock, which slashed purchasing power for much of the population.
However, two or three smaller hikes across the next two years could result in the complete disappearance of the fuel subsidy by the beginning of the 2019-20 fiscal year. Equally, if Egypt’s electricity price increases continue to match those of previous years, Egypt’s inflation profile would remain close to 12% through June 2020, with the potential to drop into single digits in subsequent years.
Firing up the gas
An important milestone for the country’s economic health is the development of its offshore gas fields. With the addition of 22tn cubic feet (Tcf) of recoverable gas in the Zohr field, Egypt’s gas reserves stand at 65 Tcf, making them the 16th-largest in the world. As production from Zohr ramps to 2.7 bn cubic feet (Bcf) per day by 2019, the country should have a self-sufficient gas supply, moving the current account from a deficit to balance.
Egypt is not the only country discovering gas in the Eastern Mediterranean. The development of Israel’s giant Tamar field is also good news for Egypt; unlike Israel, it has two inactive liquefied natural gas (LNG) plants on the coast, which can be revived to process Israeli gas for export.
An aspiring workforce
When it comes to the labour market, Egypt’s demography could emerge as a significant source of competitive advantage. First, its population of nearly 100m is young (more than 50% are under the age of 25 and roughly 40% are between the ages of 25-54) and it is growing much faster than its closest competitors both in Eastern Europe and the Middle East and North Africa (MENA).
There is also a historical correlation between literacy rates and economic development. Low literacy levels among adults may explain why former President Hosni Mubarak’s reform plan to build a manufacturing base failed to take off in the early 2000s. But since then, literacy rates among Egyptians breached 70% in 2010, reached 76% in 2015 and is estimated to hit 80% by 2020.
Labour costs are another advantage. Wages in North Africa are roughly half those of the cheapest country in Europe. Egypt seems particularly competitive, where wages are half those of Tunisia, one quarter of those in Morocco and one eighth of the cost in Turkey. Together, labour costs, higher literacy and attractive demographics should support the case for Egypt being a destination for foreign investment.
Egypt: oasis or mirage?
Egypt’s economy has yet to achieve sustainable growth, but the development of the Zohr gas field and the improving tourist trade – which should benefit from the resumption of Russian flights to major resorts in April – should combine over the next two years to dramatically lower its current account deficit. This should arrest the climb in external debt as a percentage of GDP.
Other signs are relatively healthy as well. The Egyptian pound has depreciated enough, credit-rating agencies are likely to upgrade the country’s sovereign-debt rating as the government adheres to the IMF package, and demand for loans should increase as interest rates decline.
The country’s stock market has been becalmed since 2013: it now trades at an 11.2x price-to-earnings multiple (on a 12-month blended forward basis) in US dollar terms, roughly 0-1.5 standard deviations higher relative to both its own history and to global emerging markets. But with consensus forecasts of earnings growth of 46% for this year and a return on equity of 21%, we think the market provides an opportunity to access an improving macro story despite its relatively high current valuation.
With ongoing economic reform and progress, Egypt could truly emerge, and its large, long-suffering population could begin to experience the rising standards of living enjoyed by the Asian and Eastern European populations that have walked the path of industrialisation before them.
Are we witnessing an economic oasis or mirage? In our view, Egypt has begun to realise its growth potential and investment opportunities are within grasp, rather than forever shimmering in the distance.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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