HSBC said that the economic reforms being implemented by the Egyptian government and the easing of the foreign exchange shortage in the wake of the devaluation of the Egyptian pound have fueled optimism among Egyptian businesses. Firms also expect the broad economic reform programme to aid the short- and long-term outlooks for trade. Middle Eastern countries, specifically Saudi Arabia and the United Arab Emirates, along with the US and UK, will remain top trade partners, but trade links with Asian economies will increasingly gain importance.
The impact of economic reforms on the economy and business environment
According to the report, the key turning point Egypt’s economy in recent years was the liberalisation of the exchange rate in November 2016, which ended the acute FX shortage and helped restore confidence in the local economy.
“Over the past year, a weaker pound has facilitated a significant narrowing in Egypt’s external trade gap, as export performance has improved substantially. Egypt is highly dependent on imports, so import demand has not been hit much. Tourism, which dominates Egypt’s services trade, is showing tentative signs of a rebound, and we expect this to continue unless the political or security environment deteriorates. The passage of the Licensing and Investment Laws—to streamline new projects and land regulations—bodes well for foreign direct investment (FDI) and infrastructure development. Both will be supportive of trade in the medium- to long-term,” the report read.
The report noted that economic reform has complemented an improving global economic outlook, which has helped boost demand for Egypt’s exports in recent quarters. In combination, those two drivers have underpinned business confidence. “Our survey data shows over three-quarters of respondents are upbeat about the trade picture in 2018,” it added.
HSBC pointed out that Egypt’s National E-commerce Strategy, launched in March 2017, should in the medium-term help leverage the digital economy to broaden internet provision and help firms boost global awareness of their offering.
Short-term snapshot
The HSBC report said that, consistent with the expectations of improved trade volumes, almost 70% of
Egyptian companies (above the global average of 62%), expect to increase their demand for trade financing in the coming 12 months. Moreover, 61% of respondents expect accessing finance to become easier in the year ahead, after the Central Bank of Egypt (CBE) removed the last currency controls in November 2017. That alleviated the risk that foreign firms would not be able to repatriate profits.
That said, HSBC noted that some barriers to trade finance do persist. “Although the currency has been stable for almost a year, the potential for volatility is sometimes flagged as a concern, given the move to a floating currency. While availability of US dollar finance has improved, high transaction costs remain a cause for concern for firms,” it added.
HSBC pointed out that almost two-thirds (62%) of Egyptian businesses expect higher volumes of trade in services over the coming year, with tourism and transport services to remain key sectoral strengths. The two sectors accounted for some 80% of total services exports in 2016. Tourism arrivals have picked up, supported by improved social and political stability. Arrivals rose over 54% in the first 10 months of 2017 compared to a year earlier, though they remain down versus 2015 levels. Security remains the biggest risk to further recovery in the sector. Meanwhile, Suez Canal shipping volumes and revenues will gain from rising global commerce.
Trade policy developments
HSBC noted that Egypt may have not signed any major new trade agreements over the past year, but it continues to exploit existing bilateral ties, even as political barriers to trade liberalisation have increased around the globe.
It said that the UK, already the largest investor in Egypt, is amongst the countries with which Egypt is seeking deeper ties. Survey data suggest the majority of Egyptian businesses fear no negative fallout from the Brexit vote (62%)—the large UK trade delegation to the country in early 2018 likely reinforced that sentiment.
In addition, trade links with the EU remain of critical importance, and Egyptian business activity
should benefit from further strengthening of bilateral ties. The report noted that the ongoing talks regarding the Deep and Comprehensive Free-Trade Agreement (DCFTA) between the EU and Egypt should foster business opportunities, including through joint ventures.
“Likewise, 45% and 34% of businesses, respectively, believe China’s Belt and Road Initiative and ASEAN 2025 will positively affect trade growth. Egypt has already benefitted from the Chinese engagement, attracting over $13bn in project finance, the most in the Middle East, since 2014. Most of that financing has been invested in the energy and transport sectors, and the government is seeking to deepen cooperation further with China,” it noted, adding that the US has signalled its willingness to strengthen cooperation with Africa. While nothing has been announced, Egypt could benefit from any liberalisation of trade between the US and Africa.
Long-term outlook for trade
The report noted that the string of reforms Egypt has delivered since 2016 has been difficult for the
domestic population but has gained praise internationally and lifted long-term prospects for trade.
It said that primary goods exports, mainly petroleum and agricultural products, will continue to be the primary sources of export revenues and growth, but in the latter, trade will shift toward higher-value products. Still, the role of high-value exports, such as ICT equipment, will play a marginal role. Transport and tourism will continue to constitute the bulk of services trade, but the business services will be the fastest-growing category, benefiting from ‘nearshoring’.
Petroleum products will lead export growth
The increase in gas production from the offshore Zohr gas field, which began operating in 2017, and other projects like Atoll and West Nile Delta, will raise the importance of fuels in export revenues and growth. Together with agricultural and chemical goods, which feature prominently in the current export structure, those industries will contribute about 45% to expected export growth in 2017-2020, according to HSBC.
Agricultural sector
The report noted that the agricultural sector is not one of the national champions under the government’s growth strategy, but as one of Egypt’s key employers, it will gain in importance over time. “Given productivity limitations, a move to higher value-added crops, like fruits and vegetables, offers promise to accelerate growth. Our forecast is for agriculture to become the second largest driver of export growth, and contribute 15% of the overall rise in exports, through the 2021-2030 period,” it added.
“Neighbouring Arab countries currently account for 31% of total Egyptian export revenues, and we expect the region to remain a key market for Egypt looking forward. Saudi Arabia and the UAE, the GCC’s two largest economies, are among the top five destinations. The UAE alone will contribute almost 10% of the forecast expansion in total merchandise exports between 2017 and 2030.”
Most prominent exports in 2017-2030
As growth rates between developed and emerging markets continue to diverge, the trade structure will shift even more in favour of the Middle East, the share of which in Egypt’s total exports should rise to 34%, according to the report, which added that other high-growth emerging economies such as India, Turkey, and Mexico will contribute almost a third of export growth between 2021-2030, with India taking the top spot (12%). Meanwhile, Europe, which currently accounts for about 36% of Egyptian export revenues, will fall to near 31%. The US will remain among the top export destinations and top sources of export growth, even as its contribution to expansion slows from an average of 17% in the near-term to 7% in the next decade.
Service exports
The report projected that tourism and transport remain the main contributors to service exports, holding a total share of 80-85% of all service exports. It added that both industries are well-positioned to benefit from stronger global growth.
“Egypt’s tourism industry is slowly recovering. Russia is gradually resuming flights to Egypt, the UK (both key markets) might also consider lifting its own (partial) flight ban in the coming months subject to security developments. Egypt is keen to capitalise on the rise in interest from the Asian markets, particularly China. The growing middle class in Asia will also boost tourism revenues, complementing a recovery in tourism arrivals from the traditional source markets, such as Europe,” the report explained.
“The 6X6 Tourism Impact Plan, launched in 2016, reinforces commitment to upgrade infrastructure through domestic (EgyptAir) and international partnerships to reach new market segments, including eco-friendly travellers.”
The report noted that Suez Canal revenues will be buoyed by sustained strength in global merchandise trade. The already-completed expansion of the canal will permit a doubling of shipping income, reaching $5bn by 2023, with further contribution from the development of the Suez Canal Economic Zone.
HSBC’s forecast is for the value of services exports to grow by an average of 11% annually in the near-term and just under 8% a year on average in 2021-30. Saudi Arabia will continue to be a major market, while Turkey and the Asian economies of India and Vietnam will emerge as significant export destinations by 2030.
Egyptian imports
HSBC said that Egypt’s merchandise imports will grow by around 10% annually between now and 2030, noting that the country’s relatively small industrial capital stock will mean that industrial machinery will be a key category for imports, contributing 20% of total import volume growth in 2021-2030.
“Meanwhile a rapidly-growing population and little domestic car production will mean transport equipment is a key sector for imports, contributing 10% of total exports. Finally, we forecast industrial chemicals to contribute just shy of another fifth of total exports—again in support of Egypt’s developing industrial sectors,” it explained.
Egypt’s import sources, currently heavily weighted towards Europe and the Middle East, will become much more diverse over the coming decade with Asia and North America becoming more important. China will remain Egypt’s largest partner in terms of imports overall. Together with Vietnam, India, and Malaysia, the four destinations will contribute 40% of expansion in import volumes through 2030.
This will lift Asia’s share to over 27%, from 16% in 2017. Imports from Saudi Arabia will grow at a slower pace (just under 8% per annum from 2021-2030), but nevertheless, Saudi will be one of Egypt’s top five import suppliers, just after Germany and the US. Despite strong trade links with the US, North America’s share in total imports will decline to 6% in 2030, from 8% now, according to HSBC.
Recommendations
HSBC believes that Egyptian companies should contribute to accelerating the pace of ongoing reforms by increasing awareness of their benefits and familiarising themselves with the opportunities offered by such reforms and preparing them well, such as improving access to finance and supporting e-commerce.
The Egyptian companies should intensify their efforts to participate more in Asian trade growth initiatives, particularly the Belt and Road initiative. Tourism companies should also attract Asian citizens by introducing promotional campaigns for tourism in Egypt.
The bank also stressed the importance of communicating with UK trading partners to identify the implications of the various scenarios for Brexit.
