The Egyptian economy is under enormous pressure. For the government to finalise a US$12 billion loan deal, it will have to take measures to devalue its official exchange rate and remove caps on fuel prices.
No doubt the economy needs to be rebalanced after five long years since the 2011 uprising. The government faces large budget and current account deficits (almost 12 per cent and 7 per cent of GDP, respectively) as Egypt’s foreign reserves run dangerously low. Unemployment is at 12 per cent. Egypt’s inflation rate has been 14 per cent or higher since this summer, levels not seen for more than a decade.
The dollar trades on the black market at a more than 75 per cent premium to the official rate. So the government has tried to keep dollars in Egypt by, for example, limiting bank withdrawals. The demand for dollars has outpaced supply because of steep drops in tourism and foreign investment, key sources of hard currency. Fixing the currency will not be easy if the supply of currency is not addressed.
It is expected that the official currency will weaken from its current level of 8.80 to at least 13 upon completion of the loan deal. The only solution to the currency problem would be to move the Egyptian pound to a managed floating system from its current rigid system as long as there is enough backing by inflows of concessional foreign exchange. And as the official currency weakens further, inflation is set to rise as well. Authorities have been stockpiling key commodities, including fuel and sugar, to safeguard against possible price gouging.
Although it would be hugely unpopular, the authorities would have to make spending cuts. Civil service reform, cutting back on public sector salaries and reduced fuel subsidies will have to be tackled. Structural reform designed to boost productivity and investment and accelerate a wider development agenda centred on building out Egypt’s service sector (trade and tourism), manufacturing and industrial base, and agricultural capacity are essential to growth.
It seems that the worst for the tourism industry is behind it despite the crisis it went through over the past year. The country’s revenues from tourism dropped by 49 per cent to $3.8bn in 2015-16 from $7.4bn in 2014-15, the central bank of Egypt reported last month.
Attracting international investments would necessitate a change in the business environment. Doing business is still stifling and much can be accomplished if red tape is reduced. Egypt is 131st in the World Bank’s ease-of-doing-business ranking. An investor must get permits from 78 official bodies to start a project, according to the government.
Attracting new industries and business will require increasing incentives in an environment of higher energy costs. The Suez Canal Special Economic Zone could become an attraction for industry with fewer regulations and lower taxes than the rest of Egypt, along the canal. To date, few companies have signed up to join the zone – perhaps because of the government’s decision to raise the corporate income tax rate, even in special economic zones, from 10 per cent to 22.5 per cent.
In comparison, at Dubai’s Jebel Ali port, companies pay no tax for 50 years. Egypt’s parliament in August passed a law on value added tax, one of the reforms promised in exchange for the IMF loan, to be set at 13 per cent for 2016-17 and 14 per cent for the following fiscal year. The VAT replaces a sales tax of 10 per cent, although the government says about 50 services and products will be exempt, including bread. It could be that expected revenues from a VAT tax increase end up disappointing.
Egypt is too important to fail. The agreement with the IMF is likely to move forward, and aid from some of the Gulf states will flow in. Egypt has muddled through in the past, but the brunt of the population will now feel more pain over the short term. Politicians will have to be convincing on why reforms are tough but unavoidable.
John Sfakianakis is the director of economic research at the Gulf Research Centre in Riyadh.
business@thenational.ae
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What is graphene?
Graphene is extracted from graphite and is made up of pure carbon.
It is 200 times more resistant than steel and five times lighter than aluminum.
It conducts electricity better than any other material at room temperature.
It is thought that graphene could boost the useful life of batteries by 10 per cent.
Graphene can also detect cancer cells in the early stages of the disease.
The material was first discovered when Andre Geim and Konstantin Novoselov were 'playing' with graphite at the University of Manchester in 2004.
DEADPOOL & WOLVERINE
Starring: Ryan Reynolds, Hugh Jackman, Emma Corrin
Director: Shawn Levy
Rating: 3/5
Company%20profile
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COMPANY%20PROFILE
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
The view from The National
The Book of Collateral Damage
Sinan Antoon
(Yale University Press)
Company%20Profile
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Blackpink World Tour [Born Pink] In Cinemas
Starring: Rose, Jisoo, Jennie, Lisa
Directors: Min Geun, Oh Yoon-Dong
Rating: 3/5
Libya's Gold
UN Panel of Experts found regime secretly sold a fifth of the country's gold reserves.
The panel’s 2017 report followed a trail to West Africa where large sums of cash and gold were hidden by Abdullah Al Senussi, Qaddafi’s former intelligence chief, in 2011.
Cases filled with cash that was said to amount to $560m in 100 dollar notes, that was kept by a group of Libyans in Ouagadougou, Burkina Faso.
A second stash was said to have been held in Accra, Ghana, inside boxes at the local offices of an international human rights organisation based in France.
Greatest of All Time
Starring: Vijay, Sneha, Prashanth, Prabhu Deva, Mohan
Company Profile
Name: Thndr
Started: 2019
Co-founders: Ahmad Hammouda and Seif Amr
Sector: FinTech
Headquarters: Egypt
UAE base: Hub71, Abu Dhabi
Current number of staff: More than 150
Funds raised: $22 million
Company%20Profile
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BEETLEJUICE BEETLEJUICE
Starring: Winona Ryder, Michael Keaton, Jenny Ortega
Director: Tim Burton
Rating: 3/5
BORDERLANDS
Starring: Cate Blanchett, Kevin Hart, Jamie Lee Curtis
Director: Eli Roth
Rating: 0/5
SCORES IN BRIEF
Lahore Qalandars 186 for 4 in 19.4 overs
(Sohail 100,Phil Salt 37 not out, Bilal Irshad 30, Josh Poysden 2-26)
bt Yorkshire Vikings 184 for 5 in 20 overs
(Jonathan Tattersall 36, Harry Brook 37, Gary Ballance 33, Adam Lyth 32, Shaheen Afridi 2-36).