Complex Made Simple

Heading southward: what’s wrong with Egypt’s private sector?

In the past one and a half years, companies in Egypt were only heading southward as business conditions in the North African country worsened month after month.

It was no different in April as non-oil private sector businesses signalled deterioration in overall business expansion for the nineteenth consecutive month on the back of significant drop in output and new orders, a new survey has showed.

In response to fewer output requirements, firms decreased their payroll numbers and purchasing activity. Currency weakness and a general increase in market prices were the key factors that led to increases in input costs and output charges, according to Emirates NBD purchasing managers’ index data for the month.

But on the positive side, the rate of decline, however, was slower

“The slower pace of deterioration in the headline Egypt PMI is an encouraging start to Q2 as it follows on from a gradually improving trend already seen through Q1. It reinforces the perception that after bottoming in Q4 2016 the economic situation in Egypt is beginning to stabilize,” said Fox, Head of Research and Chief Economist at Emirates NBD

“As well as being the strongest overall reading in nine months, particular comfort can be taken from the fact that the new export orders index grew for the first time in nearly two years which is likely to reflect the positive impact of a weaker exchange rate,” Fox added.

The Emirates NBD PMI for the non-oil private sector rose to a nine-month high of 47.4 in April, from 45.9 in March, but yet it was well below the 50 mark that separates growth from contraction.

“While this was consistent with a solid deterioration in business conditions, the rate of contraction was notably weaker than the average recorded over the current 19-month sequence of decline,” says Fox.

Survey highlights

In line with the trend for output, new business across Egypt’s non-oil private sector declined at a marked, but slower, pace. High prices and currency instability continued to weigh on domestic market demand for Egyptian goods and services, according to anecdotal evidence. In contrast, new export orders rose for the first time, ending a 21-month sequence of contraction. Respondents linked the increase to opportunities arising from new export markets.

Job cuts

In response to fewer output requirements, firms reduced their payroll numbers, extending the run of contractions to just under two years (although the rate of job shedding eased to the weakest in 19 months). Panellists reported that some employees either retired or voluntarily left their jobs to search for better opportunities.

Reduced volumes of incoming new business discouraged firms to raise their input buying. Subsequently, stock of purchases reduced again in April.

Egyptian pound floating

On the price front, the weakness of the Egyptian pound relative to the US dollar and a general increase in market prices continued to be key factors behind upward inflationary pressures. Despite easing to a 14-month low, the rate of overall input price inflation remained sharp. In general, companies that raised output charges commented on the pass through of greater cost burdens to clients. The rate of charge inflation was marked but also eased to the weakest in 14 months and was much weaker than the average recorded in this current sequence of inflation.