Egypt: Structural reform brings protest and economic risks

31 July 2017

The release of a second tranche of funding by the International Monetary Fund (IMF) will further bolster Egypt’s foreign exchange reserves, increasing access to hard currency. However, the wide-ranging structural economic reforms required under the loan agreement will weigh on near-term economic growth, as subsidy cuts and tax rises inhibit private consumption. Inflationary pressures will also elevate the risk of civil unrest.

Security Environment

In recent months there has been an uptick in attacks linked to Egypt’s ongoing Islamist insurgency. Between 1 June and 17 July 2017, 29 attacks were recorded in Egypt, up from 21 in February-March 2017. On 14 July 2017, two German tourists were stabbed to death at a beach in Hurghada. No group has claimed responsibility for the attack. However, it was likely carried out by a supporter of Islamic State (IS) or pro- Al-Qaeda group Hasm Movement. The uptick in attacks is a result of increased activity by Hasm Movement and IS’ expansion beyond the Sinai Peninsula.

In the medium term, the security services will remain a primary target. However, foreign personnel may be targeted in improvised explosive device attacks on tourist resorts. Companies with links to countries in the anti-IS coalition may also be targeted, including foreign businesses in Greater Cairo.

Structural economic reforms, required under the terms of an IMF Extended Fund Facility (EFF), will elevate protest risks in the 12-month outlook. A 55% increase in diesel prices and electricity price rises of 16-42% for residential customers pushed the annual inflation rate to 29.8% in June 2017. Some steps have been taken to dissuade civil unrest, w

ith civil servants and private sector workers receiving 10% pay rises in June and July 2017. However, sporadic protests are likely in response to specific government actions. For example, attempts by police in July 2017 to evict people from illegal settlements in al-Warraq were met with protests. One person was killed when the police deployed live ammunition. Protests may become violent, elevating the risk of property damage, death and injury.

Trading Environment

Following a review of Egypt’s EFF, on 13 July 2017 the IMF released a USD 1.25 billion tranche of funding, bringing the total distributed to USD 4 billion. The release of further funding reflects Egypt’s continued adherence to structural economic reforms, including subsidy cuts and tax hikes. The disbursement will further bolster Egypt’s foreign currency reserves, which have rebounded following the free float and devaluation of the pound in November 2016. Reserves reached USD 31.3 billion by the end of June 2017, the highest level since March 2011. Increased reserves will alleviate hard currency shortages, reducing currency inconvertibility and transfer risks in the coming months.

In the near-term, structural adjustments will weigh on Egypt’s economic performance. Elevated inflation rates have undermined household purchasing power. As a result, private consumption will remain weak in 2017, with growth forecasted at 3.5% y-o-y in 2018. This will limit headline growth figures, with real GDP growth forecasted at 3.1% in 2018.

Investment Environment

Structural adjustments will encourage strengthened investor interest in Egypt in the medium term outlook. In an indication of greater confidence in Egypt, the country’s financial sector has received USD 19.2 billion of inflows since November 2016. The Egyptian government is keen to encourage foreign investment, and has taken a series of steps to improve the business environment for foreign investors. For example, the Egyptian Investment Law was amended in May 2017 to enhance investor incentives, introducing a 50% tax discount for investments in undeveloped areas.

Despite this, a number of challenges remain for foreign investors. The legal system is inefficient and subject to political interference, particularly following the approval of legislation in May 2017 that grants President Abdel Fattah al-Sisi the power to appoint the heads of Egypt’s major judicial bodies. As a result, foreign investors will find it difficult to have judicial rulings enforced on commercial disputes and many foreign investors will prefer to seek arbitration in disputes.

Credit. Political and Security Risk update for Egypt

* Assuming the counterparty is National Bank of Egypt. Pricing would likely be 1.5% – 2.0% p.a. higher if it is Egyptian Natural Gas Holding Company or Egypt General Petroleum Corporation.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Mongolia, Algeria, Vietnam and Madagascar, all of which have been the subject of recent enquiries from JLT's client base.

Credit. Political, Security Risk update August 2017

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