David Butter
The Egyptian government is looking to 2019 as the year in which it will start to realise clear dividends from previously-enacted economic reforms. These have included changes to the petroleum regime that are already yielding benefits in the form of a rapid ramp-up in natural gas production. On the political front, one of the key issues will be whether President Abdel-Fattah el-Sisi prepares the ground to extend his mandate beyond 2022, when his second, and supposedly final, term is scheduled to end.
The $12bn IMF programme that commenced in November 2016 is now in its final year. The main elements have been putting in place a flexible exchange rate system, bringing down the fiscal deficit through increased taxation and cuts in energy subsidies, and seeking to improve the environment for private investment. The programme has also included social protection measures, in particular increases to food subsidies and the development of schemes targeting assistance at vulnerable groups.
The effects of the reforms, both positive and negative, have been evident in Egypt's main economic indicators. Real GDP growth has accelerated from 3–4pc to over 5pc, and the government is aiming for growth of 5.8pc in the fiscal year that ends in June 2019 and for 6.5pc the following year. These targets are achievable, partly thanks to the surge in gas output and the recovery of tourism, but the relatively weak rate of growth in private consumption is likely to persist, reflecting the pernicious impact of high inflation on living standards.
The devaluation of the Egyptian pound pushed inflation up to 30pc on average in 2017. The rate came down sharply in H1 2018, but rose to about 16pc on average during the second half of the year, largely as a result of the passing through of increases in prices of subsidised fuel and electricity. The government and the central bank are anxious for inflation to fall to single digits in 2019, which would open the way for cuts in interest rates.
One of the clearest indicators of Egypt's improved economic position has been the rise in foreign exchange reserves and the fall in the current-account deficit. However, Egypt's external debt has also risen rapidly over the past three years, and is likely to reach $100bn in early 2019. The reduction in LNG imports, which have now been stopped altogether, has provided a $2bn boost to the trade account, and non-oil exports are also increasing, as the devaluation has provided a competitive advantage to Egyptian businesses. Tourism numbers are rising steadily as the effects of the 2015 terrorist attack on a Russian airliner fade, and Suez Canal revenue has risen, thanks partly to the expansion of the waterway, which allowed for more rapid transits. The devaluation has also been reflected in a significant increase in flows of remittances from workers in the Gulf—although there are growing concerns about the effects of moves by Saudi Arabia to reduce the numbers of expatriate workers.
There is a risk that the Egyptian pound could come under further pressure during 2019 as a result of the strength of the US dollar. During 2018, the currency weakened as part of the surge of inward portfolio investment that was attracted during the previous year was withdrawn. This could be offset by increased inflows of foreign direct investment, in particular into the oil and gas sector.
Egypt's natural gas production increased by about 20pc in 2018 to reach 60bn cm, and it is likely to rise by a similar margin in 2019 to at least 72bn cm as the Zohr field is ramped up to its long-term plateau level of just over 30bn cm/y. In early 2019 Eni is likely to announce the results of its initial exploration of the Nour block, to the east of Zohr. There are strong expectations that Nour will add significantly to Egypt's reserves, providing assurance of continued growth in total production over the next decade. Several new oil and gas blocks will be awarded from the two bids rounds held in 2018, and IOCs will be invited to take part in the first bid round in the Red Sea, for which enhanced contract terms will be on offer.
As gas production has increased so has consumption, but by the end of 2018 Egypt showed its first gas surplus since 2013. The pipeline to Jordan has been reopened, and is transporting the equivalent of about 2bn cm/y. Cargoes are being dispatched from the Idku LNG plant with greater frequency, although it will continue to operate well below capacity during 2019. The Damietta LNG plant could resume limited operation during the coming year, with the government's revenue share allocated to meet the compensation awarded to the foreign operators for its closure in 2012.
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