Due to the current political unrest in Egypt, the information on these pages may not reflect current conditions in the country.

Country Risk Rating

C
A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high. - Source: Coface

Business Climate Rating

B
The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.

Strengths

  • Large market: over 100 million inhabitants, youthful and growing population
  • Advantageous geopolitical situation, Suez Canal
  • Tourism potential
  • Gas (Zohr field) and mineral potential (gold, kaolin, potash, copper, zinc, lead, feldspar)
  • Political and financial support from Gulf monarchies and Western countries
  • IMF support program
  • Limited external debt (29% of total public debt)

Weaknesses

  • Poverty (one-third of the population), the low employment rate among young people, low female participation
  • Low government revenues (20% of GDP) and informal economy (half of all jobs)
  • Jihadists active in Sinai region
  • Tensions between the part of the Muslim majority and the Christian minority (10%)
  • Lack of water and dependence on the Nile
  • Public deficit and public debt: financing needs exceed 30% of GDP
  • Banking system vulnerable to sovereign risk, with the public sector absorbing 2/3 of credit
  • High cost of credit
  • Low and low value-added manufacturing exports, food dependency
  • Non-transparency of military-controlled companies (30% of the economy)
  • Corruption, lack of competition, and bureaucracy (including in foreign trade) detrimental to investment, particularly foreign investment

Current Trends

A return to strong growth 

Despite the COVID-19 crisis, the economy recorded positive, albeit slacker, growth in fiscal years 2020 and 2021. The rebound inactivity, which began in the second half of 2021, is expected to accelerate in 2022, helped by the ongoing easing of health measures and the global recovery. Despite higher inflation, mainly due to energy prices, household consumption (85% of GDP) is expected to rebound thanks to remittances and the introduction of a minimum wage for the private sector in July 2021. Household consumption will also depend on the gradual revival of the services sector (55% of GDP), particularly in trade, transport, and accommodation, which are recovering in step with the global economy, giving a lift to the many family businesses that support half of all households. Investment picked up in 2021 thanks to the development of gas and port facilities. With continued support from international funding, public investment, in particular, will continue in transport (rail and Suez Canal), seawater desalination, rural development, social housing, and the creation of the new administrative capital east of Cairo. After being cut from 10% to 8%, the central bank's preferential rate for SME loans is expected to be maintained in the fiscal year 2022, promoting private investment. Export earnings remained moderate in FY 2020/21, reflecting lower hydrocarbon sales (1/4 of merchandise exports), weaker demand in Europe (35% of exports) and North America for apparel, reduced Indian demand for fertilizers, and a lack of tourists. In 2022, energy projects (gas pipeline plans) will boost goods exports, supported mainly by a 5% increase in natural gas production and favorable world prices. After a nearly 70% drop in tourism revenues, the gradual lifting of travel restrictions, including the resumption of flights from Russia to Red Sea resorts, which were suspended in 2015, will support industry (10% of employment and 6% of GDP) and limit the negative contribution of net exports to growth.

Gradual resumption of fiscal consolidation

The government deficit is expected to continue to improve in 2021/22 thanks to higher energy royalties driven by the recovery of world trade and elevated prices. Fiscal consolidation will thus resume with a return to a primary surplus (balance excluding interest) of around 1.5% of NDP. Consequently, public debt, which is mostly held by domestic banks and which increased in 2021 with public spending on health and education, is expected to decline in 2022. Despite a reduction, debt interest will remain the largest expenditure item, absorbing 30% of government revenue, while subsidies will be the second largest at 24%, according to the 2021/22 budget.

The current account deficit widened in 2021 as non-oil export earnings (citrus, vegetables, electronics, electrical goods, gold) were more than offset by higher import costs (intermediate goods, oil, grains), reflecting the recovery of the productive economy and high commodity prices. In FY 2022, the current account deficit is expected to begin narrowing thanks to a recovery in tourism, increased gas exports, and strong Suez Canal revenues. The reduction of the current account deficit will rely heavily on the increase in the current transfer surplus, linked to the change in remittances. Besides official and commercial loans, portfolio investment (bonds), attracted by high real rates owing to the prudent policy pursued by the central bank, will continue to finance the deficit, fuelling moderate external debt (33% of GDP). Dependence on these investment flows and high external financing needs will remain a source of vulnerability. FDI, 40% of which is concentrated in the extractive sector, is set to increase with the global recovery and the privatization program for state-owned enterprises (digital finance platform, petrochemical company). Reserves stand at about six months of imports despite central bank interventions to support the Egyptian pound.

Concentration of power

Re-elected with 97% of the vote in 2018, President Abdel Fattah al-Sissi saw his powers strengthened after a 2019 referendum, which led to the adoption of constitutional amendments including the extension of the presidential term from four to six years and allowing him to run for a third consecutive term in 2024. The referendum also gave the president control over judicial appointments and strengthened the role of the army. Despite the low turnout (less than 30%), elections to both houses of parliament in 2020 confirmed the dominant position of the Future of the Nation party, which is close to the president. In October 2021, Egypt lifted the state of emergency in place since April 2017, to appease critics by the allies of its human rights record. The lack of freedom of speech and the detention of many political prisoners will continue to stoke significant social unrest.

The Egyptian regime retains a pivotal role in regional stability and the fight against terrorism, enabling it to maintain close relations with Europe and the United States, but also with the United Arab Emirates and Saudi Arabia. Following the construction of the Grand Renaissance Dam, discussions with Ethiopia on sharing the waters of the Nile are still tense. Relations with Turkey will continue to be strained over Libya.

Source:

Coface (03/2022)
Egypt