And this is what we want to hear. Financial Times, by Steve Johnson
Egypt has not been a notable political or economic success story in recent years.
Violence, revolution and counter-revolution have left thousands dead and the army chief who overthrew the country’s first-ever democratically elected president firmly entrenched in Cairo’s Heliopolis Palace.
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Capital controls imposed to support the Egyptian pound — in the wake of a slump in tourism receipts and foreign investment and a halving of foreign exchange reserves — have left many businesses struggling to secure the dollars they need to pay for imports. Energy shortages mean manufacturers are having to contend with frequent power cuts.
Yet, according to one investment bank at least, Egypt’s economy has come within a whisker of overtaking that of South Africa as the continent’s second largest in dollar terms — heaping further ignominy on the latter, which lost its pole position to Nigeria in 2014.
“It is almost an aberration, but I still think it’s a shock,” says Charles Robertson, global chief economist at Renaissance Capital, who drew up the figures.
According to RenCap, Egypt’s gross domestic product will reach $315bn this year, just a fraction behind the $317bn of South Africa (see chart).
The figures represent a dramatic change from 2014, when Egypt’s GDP of $286bn was comfortably behind the $350bn of South Africa, according to figures from the International Monetary Fund.
RenCap has updated these numbers with its estimates for real GDP growth and inflation for the current calendar year, factoring in movements in exchange rates.
The latter factor has largely driven the move. While Cairo’s attempts to manage the slide in the pound has limited its decline to 8.7 per cent against the dollar this year, until a few days ago (when RenCap’s calculations were made) the rand was down 16.8 per cent against the greenback, although it has since covered a little of these losses.
Recent analysis by RenCap suggested that the Egyptian pound was now one of the most overvalued emerging market currencies, while the rand was perhaps the most undervalued.
“It’s a function of the exchange rate. Egypt is holding it together through capital controls but now has the most overvalued currency with a current account deficit in emerging markets and South Africa is now the cheapest,” says Mr Robertson.
“One thing that strikes me is how negative on their own country South Africans are. [They have] deficits, a lack of reform and no growth, and the rand is one of the proxies to short if you are negative on EM.”
Despite the unpropitious backdrop, RenCap’s estimates are based on reasonable real GDP growth of 4-5 per cent in Egypt this year which, combined with inflation of 10-11 per cent, would produce nominal GDP growth of around 15 per cent in domestic currency terms. In contrast, the South African economy failed to grow in the first half of this year, and inflation is a more muted 4.6 per cent.
“There is a growth story there. There was a great deal of uncertainty from 2011 into 2014 where people were not investing and there is [now] a need for infrastructure to be built. Since [Abdel-Fattah al-]Sisi took power, there has been greater confidence on the part of investors,” says Mr Robertson.
He points to the recently completely expansion of the Suez Canal, as well as plans to build a new capital 45km east of Cairo and August’s discovery of a “supergiant” gasfield off Egypt’s Mediterranean coast as factors underpinning renewed investor confidence in the country.
Opportunities may also exist in other sectors. “It’s the most underbanked country in the region. Just 10.5 per cent of people have a bank account, which is less than in Rwanda,” Mr Robertson says.
Jason Tuvey, Middle East economist at Capital Economics, agrees the Egyptian government is making “the right noises” around developments such as the Suez Canal, an area he believes could take off as a low-cost manufacturing hub for European companies in the way Tangier in Morocco has.
Nevertheless, Mr Tuvey estimates that economic growth, which was 4.3 per cent last year, slipped to 3 per cent in the first quarter of 2015 and has “slowed to a crawl” since June, meaning the calendar year figure is likely to come in at around 2.5 per cent. (Egypt has yet to release GDP data even for Q1).
“There have been persistent power outages. The government has been diverting gas supplies that were intended for factories to householders as a way of preventing unrest. The result is that the factories have not been able to get sufficient supplies to generate electricity and have lost many days of production,” Mr Tuvey says, adding that the “draconian restrictions” the central bank has placed on access to foreign currency have further “stifled activity”.
Nevertheless, Mr Tuvey does see signs for optimism. A new gasfield developed by Eni in the Nile Delta could come on stream as soon as November. Combined with delivery of a liquefied natural gas regasification unit, which will enable Egypt to import LNG from the likes of Qatar, he believes factories should soon be able to start working at full capacity.
Moreover, he sees “tentative” signs that economic reforms being pushed by the Sisi government “are starting to bear fruit”.
Mr Tuvey agrees the Egyptian pound is overvalued, and points to recent comments by government ministers arguing that the currency should be allowed to depreciate rather than the country burn through its remaining reserves ($18bn as of the end of August, three months’ import cover) in an attempt to defend the pound, as a sign that it will be allowed to weaken.
RenCap’s forecast is that the pound will depreciate 20 per cent against the dollar in the next 24 months, taking it near to its estimate of the currency’s average real effective exchange rate over the past 20 years.
If this happened, and the rand managed to stabilise, South Africa might once again pull away from Egypt in terms of its dollar GDP.
However, Mr Robertson believes Egypt’s faster growth rate will ultimately prevail.
“Take it out five years and even if the currencies have moved a little, I would imagine that Egypt would be overtaking South Africa permanently,” he says.
Mr Tuvey does not dismiss this notion. “It’s one of the most populous nations on the African continent. If it was to experience a period of rapid growth it could certainly overtake South Africa,” he concludes.
via www.ft.com
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