This week, the drop in aggregate savings could be a cause for concern in the long run. To counter this, Egypt is expounding upon the post-June 30 economy to foreign investors, while opening up locally to cronies of the Mubarak-era. In addition, Egyptian foreign reserves are above the US$17 billion mark.
Over the past three years, levels of aggregate savings have witnessed a steep drop, attributed largely to the sluggish economy and rising levels of unemployment. The Central Bank’s December publication stated the figure had dropped from LE180 billion in 2011 to LE125 billion by the fiscal year-end, 2013.
The rate of saving as a percentage of gross domestic product (GDP) dropped to 7.2 percent from 13.2 percent for the same period.
Although expending personal savings means more money is brought back into the economy, the main issue is that it cannot thrive in the long run without savings. “They are necessary to invest in the future,” economist Mohamed Abu Basha at EFG-Hermes commented. The alternative is to run the economy based on borrowing and debt, which is more often a recipe for long-term economic decline.
Several factors may lead to a drop in savings, and consequently banking deposits, including a hesitant outlook regarding the economy’s performance, leaving households preferring to keep their money at home.
In 2012, the Central Bank of Egypt CBE) attempted to counter this drop in liquidity by permitting banks a lower cash reserve ratio of 10 percent, from the previous 14 percent required as a deposit with the CBE. The policy proved successful, raising domestic liquidity by 18 percent between June 2011 and June 2012.
The reserve ratio is often used in developing economies as a monetary policy tool to increase the amount of cash in the banking system, making more funds readily available for loans and in theory spurring investments.
However, investments remained subtle. The rate of loans to deposits dropped from almost 50 percent in June 2011 to 46 percent in June 2013. In October, the rate fell to 44.4 percent.
The problem is further exacerbated with high inflation rates, which may act as a deterrent to foreign investors. Egypt had 14.2 percent inflation last year, one of the highest among emerging economies. Abu Basha attributes the increase to 12-15 percent currency devaluation, in addition to the energy shortages.
The state’s men abroad
In an effort to polish Egypt’s investment outlook and curtail speculation on the country’s political and economic development, officials have been present at several major conventions to attempt to paint a positive image to foreign investors and governments.
The Minister of Trade and Industry Mounir Fakhry Abdel Nour, currently on a European tour, held talks with Lars Roller, the economic advisor to the German Chancellor Angela Merkel, about Egypt’s growing stability and lurking investment opportunities.
Abdel Nour insisted that Egyptians will no longer accept an autocratic regime, and Egypt will continue with its democratic path, as reported on the State Information Service.
His words come amid a state-led crackdown on supporters of the Muslim Brotherhood, journalists and activists. On Saturday, four members of the Popular Current Party were arrested for attempting to hang posters of presidential candidate Hamdeen Sabbahi.
Abdel Nour’s visits to Europe, to be followed by another to the US and Russia, are an attempt to promote trade and attract investments, while setting the record straight regarding the military-backed popular uprising of June 30.
Foreign Minister Nabil Fahmy was doing the same with his German counterpart, Frank-Walter Steinmeier, discussing matters ranging from the boosting of the economy to fighting terrorism, the spokesperson for the Egyptian Foreign Ministry said on Thursday.
On the same day, Members of the European Parliament “urged all political actors and security forces in Egypt to show restraint and avoid provocation and further violence” during a plenary session. A resolution by the European Parliament condemned “excessive force” used against protesters and journalists, and expressed “strong regrets at the violent clashes before, during and after the referendum.”
Two days later, the Foreign Ministry’s spokesperson Badr Abdel Atty said, “The Egyptian people are the only ones to determine their fate and future,” in a statement that was critical of the European Parliament’s resolution. However, Abdel Atty said he approves of the commitment between Egypt and the EU to restore smuggled funds and assets that belonged to members of the Mubarak regime.
Abu Basha believes the European Parliament’s statements won’t have much of an effect on the mindset of foreign investors, adding that they are waiting to see what developments are made institutionally before they invest.
Desperate times and cronies
While many business cronies from the days of Mubarak fled the country after the 2011 uprising, the government is now welcoming some of them back as they pledge to invest heavily in return for amnesty.
Most prominent among them is Hussein Salem, who made billions of dollars in the energy, arms and hospitality industries during the Mubarak presidency. According to a recent report by Foreign Policy, both were close acquaintances and had invested together.
Salem, a founding shareholder of East Mediterranean Gas Company (EMG), which supplied Israel with gas from June 2008, was accused of collaborating with EMG to profiteer from gas deals with Israel.
Salem is facing 37 years in jail on three separate charges relating to acquiring public property illegally, money laundering and squandering public funds. Despite the charges, the Egyptian government has been open to reconciliation with such business players.
A spokesperson for the cabinet, Hani Salah, previously mentioned that, “Egypt is now open to initiatives of reconciliation.”
Decreased business activity
Business activity in Egypt decreased in January for the first time in three months, indicating a fragile economy.
The HSBC Egypt Purchasing Manager Index (PMI) for the non-oil private sector fell to 48.7 points in January, down from 52 points in December. The 50-point mark separates contraction from growth. Since October 2012, the index has been below 50.
Suez Canal Authority to raise toll
The Suez Canal Authority has decided to raise the toll rates applied to crude oil, crude oil products, liquefied gas, chemicals and other liquid vessels — with a tonnage capacity of over 20,000 — by 5-7 percent, while the toll rates applied to dry bulk vessels will be decreased between 5-9 percent as of May 2014.
The rates applicable to container ships, car carriers, general goods vessels, passenger ships and private boats were left unchanged.
Despite the increase, passage through the Canal remains one of the cheapest international routes.
The Suez Canal has been witnessing more profound developments, with fourteen international contractors qualified to bid later this year on its development plan, in the hope of jump-starting the economy and securing the country’s geo-strategic status in the region.
The bidders should present their plans within a week, according to Sherif Attifa, adviser to the Minister of Investment for major projects. He said in a statement to Al-Mal newspaper that the application process obliges each contractor to present three main suggestions, the best of which would then be selected and proposed for national dialogue.
The project, which will draw on 76,000 square kilometre of land, should be finalized within six months, Attifa added.
Egypt’s foreign reserves rise for the first time in five months
Egypt’s foreign reserves witnessed modest growth of 0.42 percent to US$17.104 billion by the end of January, from $17.032 at the end of December, the Central Bank said in a statement on Thursday.
Governor of the Central Bank Hisham Ramez said that reserves would not fall in January, despite repaying US$700 million out of the debt owed to the Paris Club, and a monthly $500 million monthly to local banks.
The Bank also held an exceptional US$1.5 billion auction in late January for strategic imports. Last September, the Bank sold $1.3 billion in a similar auction.
Since December 2012, the Bank has been restricting access to US dollars by hosting regular dollar auctions, in an attempt to ration the supply of dollars and give priority to staple food imports.