Bloomberg News

Egypt GDP May Miss Growth Target, Stoking Unrest: Arab Credit

July 19, 2011

July 19 (Bloomberg) -- Egypt’s economy may fail to meet the government’s growth target, a Bloomberg survey showed, threatening the country’s recovery from an uprising that ousted President Hosni Mubarak this year.

Economic growth may slow to 1.6 percent in the fiscal year that started this month as private investment falters, according to the median estimate of 10 economists. Egypt’s government is predicting an acceleration to 3.2 percent from the previous fiscal year’s 2.6 percent. Prior governments had said 7 percent is needed to keep joblessness from rising.

“The biggest danger is unemployment because it could lead to social unrest,” said Mona Mansour, co-head of research at Cairo-based investment bank CI Capital, who is forecasting a growth rate of 1.8 percent. “For investors to come there has to be security and political stability.”

Slower growth and a widening budget deficit may also imperil Egypt’s credit rating, Mansour said, at a time when renewed protests are prompting investors to demand more money for the risk. The extra yield investors demand to hold Egyptian debt over U.S. Treasuries rose 15 basis points, or 0.15 of a percentage point, last week to 323, according to JPMorgan Chase & Co.’s Global Emerging-Market Index. Middle Eastern debt yields on average rose 1 basis point to 349, the data show.

Rising Unemployment

Fitch Ratings cut Egypt’s credit rating one level, to BB, on Feb. 3, leaving it two levels below investment grade. Moody’s Investors Service said in June the “political environment” was the main source of uncertainty in the most-populous Arab country. It lowered its rating of Egypt twice this year to Ba3, three levels below investment grade.

Egypt’s default risk surged 12 basis points last week, the third-highest rise in the Middle East and North Africa after Dubai and Morocco, to 333, according to data provider CMA. They were 337 at 2:20 p.m. in London according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to debt agreements.

Mubarak was toppled as protests against police repression, corruption and high food prices turned into demands for an end to his three-decade-rule. Joblessness rose three percentage points to 11.9 percent in the first three months of 2011, while the rate among people aged between 25 and 29 was 23.5 percent, according to the state-run statistics agency. The economy contracted 4.2 percent in the same period.

‘Ambitious Targets’

The budget foresees an 18.7 percent increase in revenue to 349.7 billion pounds ($58.7 billion) and a 14.7 percent rise in spending to 490.6 billion pounds. Both targets are “ambitious,” said Simon Williams, chief Middle East and North Africa economist at HSBC Holdings Plc in Dubai.

“Given the likely rate of economic growth, controlling spending in this kind of environment will prove challenging,” Williams said in a telephone interview on July 17.

The government forecasts a budget deficit equal to 8.6 percent of gross domestic product. The budget foresees a 22.6 percent increase in public-sector wages to 117.5 billion pounds.

Egypt’s Ministry of Finance announced plans to increase sales of local-currency debt by 7 percent in the first quarter of the fiscal year after turning down a $3 billion loan from the International Monetary Fund. Yields on treasury bills have declined from their highest levels since 2008 after the central bank on June 30 canceled the first auction in the year because investors demanded rates that were too high.

Egyptian Consumers

The ministry sold 2 billion pounds of three-month securities on July 17 at an average yield of 11.839 percent, 10 basis points lower than at a sale of similar-maturity notes last week, according to Central Bank of Egypt data on Bloomberg. The yield on 3.5 billion pounds of nine-month securities dropped six basis points to 12.757 percent from last week.

The yield on Egypt’s 5.75 percent 10-year dollar bond maturing in April 2020 fell four basis points today to 5.69 percent. The yield climbed 49 basis points this year, while the average yield on Middle East sovereign bonds fell 19 basis points to 5 percent on July 18, according to the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index.

To be sure, some economists, such as Alia Moubayed of the London-based Barclays Capital, say domestic consumption may sustain economic expansion this fiscal year. “It doesn’t look like consumption will be severely hit moving forward,” she said in an e-mailed answer to questions on July 15, forecasting a growth rate of 3.4 percent. “It should improve as private consumption resumes on the back of higher wages.”

‘Biggest Challenge’

International companies are betting on Egyptian consumers. Electrolux AB, the world’s second-largest appliance maker, agreed this month to buy a controlling stake in Olympic Group Financial Investment Company, in a transaction that values the Egyptian maker of products ranging from heaters to washing machines at $410 million. Greece’s Piraeus Bank SA said on July 15 Standard Chartered Plc is interested in buying its Egyptian business.

A slow transition of power from the Supreme Council of the Armed Forces that succeeded Mubarak and dissolved the constitution may pose “the biggest challenge” for the economy, Williams of HSBC said. The council said on July 13 it will delay parliamentary elections, originally due in September, to the following month or November.

“To get growth, fiscal dynamism and investments going in a straight line we need clarity on the near-term political outlook,” Williams said. “Without that, we are treading water at best and taking on water at worst.”

--Editors: Digby Lidstone, Andrew J. Barden, Louis Meixler.

To contact the reporter on this story: Alaa Shahine in Dubai at Rinat Gaynullin in Moscow at

To contact the editor responsible for this story: Claudia Maedler at

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