Country outlook Egypt - CaixaBank Research
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Country outlook Egypt
Closing date of this issue: November 2019
Form of Government: Semi-presidential republic
Egypt Capital: Cairo
Official language: Egyptian Arabic
Population: 98 million inhabitants (2018)
Currency: Egyptian pound (EGP)
Exchange rate: 1 EUR = 18.01 EGP (31/10/2019)
1 USD = 16.14 EGP (31/10/2019)
GDP: $249 billion (1.0% of world GDP)
GDP per capita: $2,573 ($13,358 purchasing power parity)
Ease of doing business: 120th in the world out of 190
according to the World Bank (Doing Business)
Religion: Sunni Muslim: 90%. Coptic Christian: 9%
Country Outlook is a publication that is produced jointly by CaixaBank Research and BPI Research (UEEF) and it contains information and opinions from sources that we consider to be reliable. This
document is for information purposes only, so CaixaBank and BPI are not liable in any way for any use that may be made of it. The opinions and estimates are provided by CaixaBank Research and BPI and
may be changed without prior notice.Egypt
PIB. Variación interanual (%)
Economic GDP. Year-on-year change (%) CPI. Year-on-year change (%)
forecast 8
Forecast
25
Forecast
20
6
5.9 6.0 13.9
5.5 15
4 10.0
10
7.2
2
5
0 0
Average 2015 2016 2017 2018 2019 2020 2021 Average 2015 2016 2017 2018 2019 2020 2021
2010-14 2010-14
•
The Growth of the Egyptian economy will • After a sharp rise in inflation in 2017 (as a result
accelerate to 5.5% in 2019, thanks to the rise in of the devaluation of the pound, the reduction
imports and investment, on the demand side, in energy and food subsidies and the
and the improvement in construction, gas- introduction of new taxes), consumer prices
related activity and services, on the supply side. gradually slowed in 2018. We expect this trend
Ongoing improvements in these achievements, to continue throughout the rest of 2019, with
due to the implementation of fiscal consolidation the aim of reducing inflation to a single-digit
measures, a monetary policy that is slowly 25
figure by the end of 2020.
becoming more expansionary and the 8
20
liberalisation of the foreign exchange market, 6 15
should help to ensure a positive growth trend
in the coming years, in the region near to 6%. 4 10
5
2
0
0
Economic Benchmark interest rate (%)
policy and exchange rate (EGP/USD) Fiscal balance (% GDP)
Forecast Forecast
20 20 0
17.3
16.3 16.3
15 15
15.3 -5
13.8 -4.8
13.3
10 10 -7.0
-7.6
-10
5 5
EE. UU. Eurozona Emergentes
0Fuente: CaixaBank Research, a partir de datos deCitigroup y Bloomberg. 0 -15
Average Average 2015 2016 2017 2018 2019 2020 2021 Average 2015 2016 2017 2018 2019 2020 2021
2010-14 2010-14 2010-14
Benchmark interest rate (left scale)
Exchange rate (right scale)
Current account (% GDP) Public debt (% GDP)
Forecast Forecast
0 120
0
20 100 84.9 83.8 80.7
-2
80
-2.3 -5
15 -2.8
-3.1 60
-4
20
10 40
-6 -10
15 20
5
-8 0
Average 2015 2016 2017 2018 2019 2020 2021
10 Average 2015 2016 2017 2018 2019 2020 2021 -15
0 2010-14
2010-14
5
•
With the IMF financial support programme • Public finances are in a difficult situation, as
coming to an end, Egypt is undergoing 0 a can be seen by the high levels of both public
process of major economic reforms, with debt and fiscal deficit. However, the latter has
liberalisation of the exchange rate being of started to improve thanks to the introduction
particular importance. In 2017 this led to a of new taxes,
0 the withdrawal
120 of subsidies for
strong devaluation of the pound and to the various products (in the100medium term we
-2
Central Bank tightening of the monetary expect subsidies on fuel and electricity to be
policy to curb inflation. Once this goal has eliminated
-4 entirely), the80 reduction in the
been achieved, there will be a window of public sector wage bill and 60 the improvement
opportunity to lower interest rates, which we -6
of tax administration. Against
40 this backdrop of
believe will be used. Furthermore, greater fiscal consolidation,
-8
public20debt, which peaked
exchange rate flexibility has allowed the in 2017 when it exceeded 0 100% of GDP,
current account deficit to be reduced, a started to fall in 2018. We expect it to continue
process that will continue thanks to support along this path in the coming years.
from exports.Egypt
Financial Private credit (% GDP) Gross external debt (% GDP)
conditions 40
Forecast
40
Forecast
32.9 31.1 31.6
34.1 30
30
30.5
27.8
20 20
10 10
0 0
Average 2015 2016 2017 2018 2019 2020 2021 Average 2015 2016 2017 2018 2019 2020 2021
2010-14 2010-14
• The banking sector remains healthy, with low • Although the level of external debt is not
non-performing loans ratios that continued high, the fact that it has grown rapidly
to fall in 2018, although the fact that some since 2014 is a cause for concern. However,
40
banks have been lax in their lending the funding obtained from the IMF has
standards is somewhat worrying. With regard boosted
30 the country’s level of reserves, which
to private credit, we expect this to grow due has helped to reduce external debt since last
to a rise in business investment as a result of 20
year and we believe that this will continue in
the structural reforms. the
10
medium term.
0
Political • The presidency of Abdulfatah al Sisi continues • Although the process of transitioning to the
situation to provide an environment of political new political regime is complete, the
stability. The country is improving its weakness of the institutional framework and
international relations with the US, the EU social discontent (partly due to the effects of
and most of the Gulf countries. the ongoing macroeconomic adjustment and
because of growing social inequality) may
hinder political decisions.
Long-term GDP growth (%) Population (milions of inhabitants)
outlook 6 120 117.2
5.1
5 115
3.8 110
4
105
3 98.4
100
2
95
1 90
0 85
Average 2009 -18 Average 2019 -29 2018 2028
•
The long-term growth prospects are not • In a context of notable demographic growth,
positive due to the country’s weak one of the country’s main challenges is to
institutional situation, the lack of policies to reduce its high unemployment, especially
promote private investment, and the among young people. Important changes
excessive concentration of power in the must be made in the education system, which
hands of domestic companies. Nonetheless, is not adequately covering demand needs.
the commitments made to the IMF entail a
reform approach that should improve the
country’s economic environment and we
expect higher growth over the next 10 years.Egypt
Country CDS* 5 years (basis points)
Last OECD credit risk rating
Rating Outlook
risk changed 400 373.2 (from 0 to 7, with 0 being the best)
350 310.3
B 11/05/18 Stable 300
250
B2 17/04/19 Stable
200
150 5
100 7
50
B+ 21/03/19 Stable 0
Average 2015-18 31/10/2019
Indicates that the country has an “investment grade”. *Credit default swap: measurement of country risk that reflects
the cost of ensuring the non-payment of the sovereign bond.
Indicates that the country does not have an “investment grade”.
Risks SHORT-TERM LONG-TERM
• External vulnerability - + • Institutional weakness - +
• Increased geopolitical • Infrastructures - +
- +
tensions and instability • Youth unemployment - +
• Higher public deficit - + • Inefficiency of the labour
- +
and product markets
Business STRENGTHS WEAKNESSES
environment • Size of the domestic market. • Political stability.
• Natural resources. •Inefficient labour market.
• Demographic dynamism. • Workforce not suitably trained.
• Institutions (lack of confidence and
pending modernisation).
Main sectors EXPORTERS IMPORTERS
• Hydrocarbons (oil and natural gas). • Tourism and textile industry.
Agriculture: cotton.
CIBI | CaixaBank POSITION PILLARS SUBPILLARS
Index for Business IN COUNTRY 1. Accessibility
Internationalisation RANKING 100
80
Top
56.3 60 Distance, communications,
46 5. Stability
40
2. Ease
and agreements with Spain
67 31.0
20
46.0 of operating Similar tastes to Spain
Investment relations
0
24.2 with Spain
55.0
Bottom
4. Financial environment 3. Commercial
and innovation attractiveness Credit and financial
development
— Africa — Egypt Institutional stability
(Min. 0 - Max.
100
100) Labour conditions
80
60
40
20
Source: CaixaBank Research, based on data from Bloomberg, IMF, OECD, Oxford Economics and Thomson Reuters Datastream.Egypt
Taxation The tax on individuals is progressive and varies in Egypt; the general rate is 10%. There are
according to the level of income: between 0% special taxes levied on the following product
(up to EGP 5,000) and 25% (over EGP 250,000). categories:
The general rate levied on corporate earnings is •5% for essential foodstuffs, fertilisers,
25%, except for some governmental authorities disinfectants and insecticides.
which are exempt, oil and gas exploration •25% for electronics, cosmetics, perfumery,
companies (40.55%) and the Suez Canal luxury vehicles and video cameras.
Authority and Central Bank of Egypt, with a tax •30% for televisions, radios and jewellery
rate of 40%. Stock breeding and fisheries products.
activities are exempt from corporate tax for a Egyptian law provides for some tax exemptions
period of 10 years from when the company for food products, books, magazines and
begins operating. natural gas, among other products. Other
With regard to sales tax, there are different special tax rates are applicable to medicines,
rates for imported products and those produced tea, coffee, alcohol, sugar and tobacco.
Investment In Egypt, foreign direct investment for 2015 was government’s plans are the modernisation of
6.885 billion dollars. This represents a 49% several airports and the construction of more
increase over 2014. Egyptian industry is currently than 500 km of coastline. It is also planning to
in the process of modernising and restructuring. extend the country’s hotel capacity. The main
The construction sector (machinery for sectors are petroleum, telecommunications,
construction and civil engineering) is one of the construction, financial services and agriculture.
biggest attractions for foreign investment. The Over the past two years, the main investor
sector of capital goods, such as electronic devices countries in Egypt have been the United
and vehicles, is another great attraction as the Kingdom, the US, Belgium, the United Arab
country does not have enough technology to Emirates and Saudi Arabia.
produce such products. Among the Egyptian
Establishment LOCAL COMPANY
Different types of companies can be set up in fully owned and managed by Egyptians. Joint
Egypt: stock companies are frequently used by foreign
• One-person company (only valid for Egyptian firms with large projects (such as the installation
nationals). of production centres). The minimum capital
• Simple general partnership. required to incorporate a joint stock company
• Joint stock company (JSC). is EGP 250,000 (subscribed capital in closed
• Limited liability company. companies) and EGP 500,000 for companies
• Partnership limited by shares. that are going to publicly list their shares. 10%
Joint stock and limited liability companies are of the share capital must be paid up at the
the most common forms. These companies can time of setting up and 25% in the following
be founded with 100% foreign capital provided three months. All the share capital must be
they comply with the legal requirements for fully paid up within a period of five years.
setting up each type. There is a series of A limited liability company is often set up in
restrictions regarding foreign ownership in the Egypt for small investment projects, trade and
aviation, banking and insurance sectors. service companies. There is no minimum
In the case of joint stock companies working in capital required, but this must be entirely paid
importation and representation of foreign up at the time of setting up.
companies (commercial agents), these must be
BRANCH
A foreign firm can establish a branch in Egypt if There are additional requirements that must be
it has a contract with a company in the Egyptian met by branches in Egypt: the branch must have
private or public sector to carry out the work in an Egyptian auditor and information and
Egypt. The branch may carry out commercial, documents must be reported annually (name and
financial, industrial and contractual activities nationality of the manager, copy of the balance
within the scope of the contract concluded. sheet, profit and loss account, earnings, personnel
Approval is required from the General Authority and payroll). There are limits on branches in terms
for Investment and Free Zones (GAFI) to set up of staff: the staff of a branch cannot be made up
a branch and it must be entered in the of more than 10% foreign nationals, and can
Companies Register and the Central Register of foreign employees cannot be paid more than
Foreign Companies (GAFI). Registration is valid 20% of the payroll, with the exception of
for five years. A branch can be managed by one managers. A branch in Egypt is subject to 20%
or more managers, who do not need to be corporate tax on its net earnings. A branch must
Egyptian nationals. Branches of foreign distribute at least 10% of its net earnings to its
companies must comply with Egyptian law on employees, up to a maximum of its total annual
taxation, labour legislation, social security and payroll. It must keep financial accounts and
exchange rate control. present annual audited financial statements.Egypt
Establishment REPRESENTATIVE OFFICE
(continuation) Foreign companies can set up a representative capital and address in Egypt, and the manager’s
office in Egypt with the aim of carrying out details. The representative office in Egypt must
market surveys and feasibility studies, but be run by one or more managers, although they
without carrying out commercial operations or do not need to be Egyptian nationals. The
commercial agency activities. A foreign firm representative office must comply with Egyptian
setting up a representative office in Egypt will law: the law on companies, taxation, labour
be subject to the Companies Act and the legislation, social security and control of
Commercial Agency Act. An application must be exchange rates. The representative office set up
made to the Enterprise Department of the in Egypt must present annual statements to GAFI
General Authority for Investment and Free Zones regarding its employees: names, positions,
(GAFI), containing the following details: name nationalities, salaries and other additional
of the office, nationality, objectives of the details of the representative. Foreign workers
company, capital and domicile of the foreign must secure a residence permit before working
firm, nature of the office in Egypt, activities, in Egypt.
Alliances FREE TRADE ZONE
strategic Egypt has 10 free trade zones to boost Public Free Zone, Suez Public Free Zone, Ismailia
investment and facilitate trade. It has both Public Free Zone, Damietta Public Free Zone,
public and private free trade zones; the main Medida Public Free Zone, Shebin El-Kom Public
ones are the following: Alexandria Public Free Free Zone, Qeft Public Free Zone, Port Said East
Zone, Nasr City Public Free Zone, Port Said and Port Public Free Zone.
JOINT VENTURE
Joint ventures and licensing agreements in Zones (GAFI). Egyptian Act no. 8 on Incentives
Egypt are detailed in the contracts between for Investment and Legal Guarantees allows
Egyptian firms and foreign firms. The details foreign investors to hold 100% of the capital in
are regulated by the agreement and not by projects in the vast majority of industries.
special law. The capital invested can be Equity in joint ventures between foreign and
repatriated without requiring approval from local firms depends on mutual agreement
the General Authority for Investment and Free between both parties.
Customs FREE TRADE AGREEMENTS
conditions Egypt is a member of the World Trade the four countries by eliminating tariffs. Egypt
Organization (WTO), through which an has signed bilateral free trade agreements with
agreement was signed that provides for the following countries: Lebanon, Syria,
progressive tariff elimination on industrial Morocco, Tunisia, Jordan and Turkey.
products imported from the EU, with a deadline With regard to the EU, Egypt has signed the
of 2019, although it should be noted that there EU-Egypt Association Agreement (2004). The EU
are significant non-tariff barriers (sanitary, has signed Deep and Comprehensive Free Trade
technical, etc.). Egypt forms part of the Pan- Area (DCFTA) agreements with Egypt and other
Arab Free Trade Area (PAFTA) and the Common partners in North Africa such as Morocco, Tunisia
Market for Eastern and Southern Africa and Jordan. Negotiations are currently under
(COMESA). Moreover, at a regional level, Egypt way between Egypt and the EU regarding the
forms part of the Agadir Agreement (2006), bilateral Dispute Resolution Mechanism (DRM)
together with Morocco, Tunisia and Jordan. This and the Agreement on Conformity Assessment
agreement establishes a free trade area between and Acceptance of Industrial Products (ACAA).
FREE TRADE ZONE
Egypt’s public and private free trade zones are exempt from customs duties, sales tax and tax on
authorised by the Investment Incentives Act, capital goods and intermediate goods.
governed by GAFI decree. Free trade zones are In 2015 Egyptian law established a 1% duty on the
located within Egypt’s national territory but are value of goods entering for storage and 1% tax on
considered as territory outside the country’s goods exiting for production and assembly
customs borders, which grants companies more projects.
freedom in transactions and trade. Companies Limits have recently been introduced on
producing primarily for export (generally 80% or investments in free trade zones related to energy,
more of their total production) may set up in these and licences will not be subsidised in free trade
free trade zones and operate in foreign currency. zones for projects in the following sectors:
Free trade zones are open to investment in any fertilisers, oil, steel, production of natural gas,
sector, both for foreign and national investors. liquefaction and transport, and other energy-
Companies operating in the free trade zones are intensive industries.Egypt
Customs GENERALISED SYSTEM OF PREFERENCES (GSP)
conditions Egypt is one of the countries that grants tariff preferences by applying zero duty or reduced
(continuation) tariffs to beneficiary countries (less developed countries).
Negotiations BUSINESS CULTURE
and protocol Egyptian businesspeople tend to use other as some trust needs to be built up before closing
languages in addition to Arabic, such as English a deal. Bartering is always present in a negotiation,
or French, depending on the sector of activity. although this should be carried out in a friendly
Although Egypt is one of the Arab countries with manner. Business hours in Egypt are from 8 a.m.
the greatest influence from Western culture, to 2-3 p.m., Sunday to Thursday. It is important to
certain rules still need to be followed when remember that Thursday and Friday are days of
closing a deal. It is advisable to start doing rest in Egypt. Timetables are more flexible in
business in the country through a local partner. commercial establishments. Timetables tend to
Egyptians do not tend to be punctual for be shorter during Ramadan (June-July).
meetings, and negotiations are likely to be slow
Top fairs • Plastex. • Food Africa.
• Fabex. • Cairo Build.
• Mife.
Websites • Government Information Service: http://www.sis.gov.eg/Es/
of interest • Egyptian customs: http://www.customs.gov.eg/
• Egyptian Chamber of Commerce: http://www.tpegypt.gov.eg/Eng/Default.aspx
• Investing in Egypt: http://www.gafi.gov.eg/english
Payment MEANS OF COLLECTION
and charging All means are freely available and, in principle, It is not compulsory for the documents to be
methods unrestricted, whether for cash against issued through a bank, although the importer
documents, advance payments or deferred will require a document called FORM 4, so that
payments. customs clearance can be given to the
The means of collection is also unrestricted; it documents. This document is issued by financial
can take the form of transfers, remittances or institutions, certifying to customs that the
documentary credit. Free of payment need only payment has been made or that there is a future
appear on invoices if payment is collected in commitment to do so.
advance.
MEANS OF PAYMENT
If payment is received through a transfer, for being made into its account is due to a
the funds to become freely available the commercial transaction (by submitting invoices,
Egyptian company will again be required to bills of lading, as applicable).
provide documentary proof that the payment
EXCHANGE RATE INSURANCE
The currency is unstable. At the beginning of to combat the black market in foreign exchange.
2015 the Egyptian pound fell by 6% against the It is advisable to take out exchange rate insurance
dollar. However, this downward pressure should for common transactions with country in dollars
be limited thanks to restrictions being introduced or euros.
CaixaBank The main objective of the Egyptian office is to they are foreign trade or investment and
in the country improve communication channels with local deployment projects. They also offer consulting
financial institutions, supporting CaixaBank and accompany Spanish companies that wish to
customers’ activities in the country, whether develop their business abroad.CaixaBank Bogotá (Colombia)
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Egypt representative office
Plot 45, 90th Northern Road 6 fl.
Cairo - Egypt
Director: Luis Aspe Sagarná
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