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  • Dr. Nilgün Birgören
    Dr. Nilgün Birgören    Premium Member   Group moderator
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    The Road To Recovery
    *Egypt has weathered the worst of the economic crisis, but some longstanding social problems could hamper a return to rapid growth.*



    It was the end of 2008 and work at Orascom Construction Industries (OCI), the country’s third biggest company by revenue, had all but stopped. With the world’s credit markets frozen and consumer demand plunging, several of the firm’s industrial and commercial clients were forced to mothball projects.

    The crisis that began with the meltdown of some of the United State’s biggest lenders was spreading across the world, and for the first time in 80 years, a global depression was a real possibility.

    Things were looking bleak for Orascom until Egypt’s first economic stimulus package, worth LE 15 billion, kicked in during the spring.

    With the majority of the money going to infrastructure projects, OCI suddenly had its hands full with everything from roadwork to water treatment facilities.

    As 2010 began, OCI, like Egypt, seems to have weathered the worst of the economic slowdown thanks to a combination of stimulus packages, a wider global recovery and the good fortune of having an underdeveloped banking system.

    The government is expecting GDP growth, which slipped to 4.7% in FY2008/09, to reach between 5% and 5.5% this year as its main drivers — tourism, foreign direct investment and Suez Canal revenues — continue to improve.

    The country, though, is not out of the woods, say experts.

    Hiccups, like the recent debt crisis in Dubai and a slower-than-expected recovery in the United States and the European Union, could slow growth.

    Meanwhile, there are concerns that a global food crisis is looming, along with another bout of runaway inflation, and that the unemployment rate will spike as the stimulus runs out.

    The Long Road to Recovery
    Emerging markets such as Egypt, China and India and were among the few countries to register GDP growth during the worldwide slowdown. But the rate slowed, in some cases dramatically, as economies in the developed world tanked.

    Last year’s struggles ended four straight years of at least 7% growth. Foreign direct investment (FDI) fell almost 40% during FY2008/09. Exports also plunged, while Suez Canal revenues slumped and tourism and manufacturing posted only minor gains.

    But since July, the country has been on the rebound. The Suez Canal has seen steady, if small, month-on-month growth since the summer. In October, receipts hit $398.9 million (LE 2.1 billion), up 4.3% compared to September. Tourist numbers are also on the rise and Deputy Finance Minister Hany Kadry Dimian says FDI was up 5% year-on-year during 1Q2009.

    “I wouldn’t say it’s a sign of confidence that has put us in a relaxed mood, but at least it’s a sign that fears of losing FDI are [receding],” he says. That will help spark a return to the growth rates the country is accustomed to, he believes.

    “It will come in gradually, at least during the [next] couple of years,” says Dimian. “Then it will pick up at faster rates, breaking the 7% barrier in no less than three years.”

    Analysts attribute much of the country’s recovery to the government’s three stimulus packages, which pumped a combined $33 billion (LE 181 billion) into the economy, with most of it going to labor-intensive infrastructure projects.

    Angus Blair, head of research at investment bank Beltone Financial, says the quick injection of cash was essential.

    The strategy was born from Egypt’s own liquidity woes in the late 1990s, when a rapid appreciation of the pound left commercial banks without enough cash to cover their debts.

    “I think the Egyptian government reacted much more quickly than the British government because the legacy of Egypt’s last economic crisis is very fresh in everyone’s mind,” says Blair, who forecast GDP growth to reach 5.1% this fiscal year.

    That number will be closely tied to the recovery of the global economy, he says, and there are signs that it is improving. The world’s largest economies, particularly the US, are forecasting a return to growth.

    “The expectation of a long period of recession is changing,” said Olivier Blanchard, chief of research at the International Monetary Fund (IMF), during a recent visit to Cairo.

    Short-term Solution?
    In September, Finance Minister Youssef Boutros-Ghali said the best way for the country to spur growth was to invest in large-scale construction projects.

    While that appears to have given the economy a jolt, some experts believe the growth will disappear once the money runs out.

    Economist Dr. Karima Korayem, a professor at Al-Azhar University, says pumping cash into infrastructure projects is a shortsighted approach.

    “It’s true that you should put a good part of the stimulus money into infrastructure, but not all of it,” she says. “The demand for labor and the income these projects generate will stop once [they are] built. When the factory or water sewage plant is done, that’s it — you’ll be back at square one.”

    Egypt’s much-disputed official jobless rate is just over 9%, down from a high of 9.5% last year, although experts estimate the real number is much higher.

    Hany Tawfik, the executive committee chairman of regional investment bank Naeem Holding, says stimulus money should have been used to create a social net for the unemployed. Increasing the purchasing power of consumers is a better long-term way to bolster the economy than lining the pockets of contractors, he believes, explaining, “Stimulus [dollars] should not go to a cement company so it can sell more cement.”

    Dimian defends the government’s decision to accelerate spending on infrastructure. “In our case, putting all of the money into infrastructure projects is the best thing to do. In the US or the EU, they need the money to bailout their financial sector. [] We have an infrastructure gap, so an accelerated spending on infrastructure will help for future growth.”

    Meanwhile, experts are worried that another round of global food shortages is on the horizon, something that has the potential to paralyze the country’s tentative return to high-level growth.

    When prices skyrocketed in the spring and summer of 2008, Egypt, which is heavily dependent on food imports, saw inflation hit 24%, sparking riots.

    The government was forced to spend billions of pounds to open the food subsidy program to thousands more unable to feed their families. (Dimian says the majority of those people are likely still using the program a year-and-a-half later.)

    While demand fell in the face of the global economic crisis, some of the triggers of those shortages — a fast-rising global population and increased demand for produce stoked by the rise of biofuels — are still present.

    Korayem, who is working with the Ministry of Social Solidarity and the United Nations World Food Program to revamp the country’s ration scheme, says food stores in developing nations have slipped 3% in the last two years.

    “I am not optimistic about what is next for Egypt and developing countries. The structural reason why food prices skyrocketed was not remedied at all,” she says. She believes the government should encourage the private sector to invest more in agricultural research and development.

    The state has invested in farming opportunities outside the country, including wheat crops in countries such as Sudan and Uganda.

    It has also spent billions of pounds on desert farming programs, with mixed results.

    Bumps in the Road
    As the debt crisis in Dubai reminded regional investors, the aftershocks of the global financial meltdown aren’t quite over.

    While local stock markets rebounded quickly — after falling 7% on the news of Dubai’s debt problems, the EGX 30 had recouped losses in three days — some industry players are worried Egypt could see a wave of nationals returning from the Gulf jobless.

    “Some people think that the crisis is over. This is unfortunately not the case,” says Tawfik from Naeem Holding. “We are going to be hit severely in 2010 by companies that went broke in Dubai and the other emirates. A lot of people are coming back [] and these people are going to add to the unemployment problem in Egypt.”

    However, Blair, Beltone’s head of research, says Egypt shouldn’t worry about Dubai’s financial troubles.

    Only a couple of local firms have exposure to the debt-laden emirate and the majority of Egyptian expats have already returned from Dubai, whose all-important property market has been languishing for months.

    Meanwhile, one of the primary reasons Egypt was able to maintain growth in FY2008/09 is because its banking sector did not deal in the financial products, such as sub-prime mortgages, that were the downfall of several Western lenders.

    Domestic liquidity hit LE 847.8 billion in September, up 9% versus the same month in 2008. Total deposits in the banking system, excluding deposits maintained by the Central Bank of Egypt, were worth LE 832 billion as of September 2009, some 9% higher than the aggregate a year before.

    But the very measures that protected the banks have led to under-leveraged mortgage and lending markets, making it difficult for low income home buyers and small and medium-sized enterprises (SMEs) to get access to credit, says Blair. “Banks need to lend more than they’ve been lending. [They] have been perhaps a little too cautious.”

    They also need to help SMEs learn how to apply for loans and tailor payment plans to meet their needs better, he believes.

    Deficit Spending
    While the government’s projections for the future are relatively rosy, Egypt’s deficit as a proportion of GDP, already one of the highest in the region, is rising. In FY2009/10 it will be an estimated 8.4%, up from 6.9% last year.

    The IMF’s Blanchard says leaders will have to make some hard decisions in the near future.

    “Many countries reacted to the crisis by implementing stimulus packages. [] This was the right thing to do, but you can’t do this forever. You’re going to have to grow your exports and phase out stimulus,” he says.

    Some financial experts are not overly confident about Egypt’s long-term prospects. A panel discussion hosted by the British Egyptian Business Association came to a halt when speakers began arguing about the state of the nation’s education system and whether authorities were doing enough to meet the needs of its poor.

    Some said Egypt’s chronic problems with poverty, illiteracy, youth unemployment and lack of vocational and professional training would continue to plague Egypt as it strives toward development.

    “We don’t have a [blueprint] to follow,” said Dr. Hossam Badrawi, the National Democratic Party’s education committee chairman. “We don’t have what you can call a master plan for our future. What is Egypt’s dream? I see that structural and political changes are needed. We need a breakthrough.”



    Source: Financial Times
    • 23 Jan 2010, 8:30 pm