World Markets

Despite pitfalls, Egypt works toward economic stability

A skyline view of Cairo, Egypt
Mohamed El-Shahed | Getty Images

After several years of social and economic upheaval, Egyptthe most populous and one of the most strategically important nations in the Middle East — appears to be on a tentative road to recovery.

Although recent parliamentary elections were met with low voter turnout, analysts are encouraged by the economic reforms being spearheaded by President Abdel Fatah al-Sisi, who appears committed to boosting Egypt's long-term outlook.

Although ratings agency Standard & Poor's (S&P) cut the country outlook to "stable" earlier this month, S&P also said it expects Egypt's economic recovery to "remain gradual" and contingent on political stability.

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Despite years of civil strife that earned the Egyptian government the enmity of international human rights watchdogs, S&P expects to keep or even hike the country's 'B-' credit rating — which it raised just two years ago.

Egypt will "largely remain politically stable and its economy will continue to progressively grow in the face of important macroeconomic headwinds," the agency stated, even as it raised concerns about its fiscal position.

For analysts and investors, however, cautious optimism is the order of the day when it comes to Egypt, and the reforms of the al-Sisi government. Economists at the International Monetary Fund and World Bank predict Egypt's economy will grow around 4 percent this year and next, a marked improvement from as recently as 2012-2014, when average growth languished just above 2 percent.

Meanwhile, multinational companies have plowed money into the $272 billion mixed economy. Earlier this year, British oil giant BP inked a $12-billion deal to produce 3 billion barrels of oil equivalent.

Watch that budget

That said, some of the enthusiasm has been curbed by fiscal factors, a key reason behind S&P's decision to lower its outlook on the country. The cabinet's recently approved budget is implementing ways to bring the gap below 10 percent of GDP this year, but some analysts are less sanguine. Investment bank Brown Brothers Harriman (BBH) is forecasting Egypt's deficit to hit 11 percent of GDP this year, despite the phasing out of some subsidies.

"Because of this, the government has committed to further fiscal reforms that would help put public debt on a downward trajectory," said Win Thin, global head of emerging market currency strategy with BBH. Global economic headwinds and falling oil prices have clouded the near term outlook, Thin explained, even though Egypt has gotten some help.

"Foreign reserves have been falling steadily and are poised to fall below $15 billion for the first time since June 2013," Thin said. "This has happened despite several infusions of more than $20 billion in aid from Gulf allies Kuwait, Saudi Arabia, and the United Arab Emirates."

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In spite of an apathy that has resulted in low turnout in ongoing elections, analysts say that al-Sisi has enough support to push through structural reforms. Concerns about terrorist activity — the sort of which brought down a Russian passenger plane this month — remain a wild card.

"We note also that with persistent high unemployment, social tensions are likely to remain high and this could be fertile breeding ground for terrorism to take root," BBH's Thin said.

With that in mind, "the government has wisely signaled that it would like to boost spending on social programs," he added, but such spending could also worsen Egypt's fiscal position.