_________________________________________________________________________________________________________________________________________________________ Country Report Egypt May 2013 Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom _________________________________________________________________________________________________________________________________________________________ The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. 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ISSN 2047-4679 Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Egypt 1 Egypt Forecast Highlights Outlook for 2013-17 3 Political stability 3 Election watch 4 International relations 4 Policy trends 5 Fiscal policy 5 Monetary policy 5 International assumptions 6 Economic growth 6 Inflation 7 Exchange rates 7 External sector 7 Forecast summary Data and charts 8 Annual data and forecast 9 Quarterly data 10 Monthly data 11 Annual trends charts 12 Monthly trends charts 13 Comparative economic indicators Summary 13 Basic data 15 Political structure Recent analysis Politics 17 Forecast updates 20 Analysis Economy 24 Forecast updates Analysis Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 2 Highlights Editor: Robert Powell Forecast Closing Date: May 8, 2013 Outlook for 2013-17 Political uncertainty will remain high in the early part of the forecast period as Islamists and non-Islamists clash over policy. The parliamentary election has been delayed and is now set for October—a date that looks realistic. The Muslim Brotherhood is once again expected to perform well, but it will not match its previous electoral success. More hardline Islamist parties, such as Nour, will benefit from disillusionment with the Brotherhood. There is potential for the political situation to stabilise once the parliamentary election is out of the way. However, ongoing social and political unrest, combined with weak economic prospects, poses downside risks. We have revised up our fiscal deficit forecast, after new data showed a sharp widening in the deficit in the first three quarters of the fiscal year, and a big rise in the allocation for public-sector wages in the 2013/14 draft budget. Real GDP growth weakened to 2.2% in the second quarter of 2012/13 (October December) owing to ongoing political uncertainty. We forecast that growth will average 3.9% in 2013-17, assuming greater stability from 2014. Despite measures by the Central Bank of Egypt to shore up the pound, it has continued to slide. We expect it to continue to weaken in 2013­14, but to re cover in 2015­17 as the political situation stabilises and the economy improves. Review In the latest indication of rising sectarian tensions between Egypt's Muslim majority and the Coptic community, eight people, including six Coptic Christians, have been killed in sectarian violence. The influence of the Muslim Brotherhood over the government has been enhanced following a cabinet reshuffle that was announced on May 7th. The Ministry of Finance has reported that the budget deficit soared in the first three quarters of 2012/13, and it now appears certain to surpass the government's already upwardly revised deficit target of 10.7% of GDP. The government's draft budget for 2013/14 (July­June) includes an allocation of E£172bn (US$25bn) for public­ sector wages and salaries—an increase of 20% on the budgeted 2012/13 figure, which is likely to displease the IMF. According to the latest data from the Central Bank, banks' Treasury-bill holdings rose by 39% between end- 2010 and end-2012, but total loans rose by just 13%, indicating some crowding out of private-sector lending. Qatar is seeking a 5% interest rate on the US$3bn in Treasury bonds it has pledged to buy from Egypt—well above the rate on the proposed IMF loan. Libya, meanwhile, has provided a US$1bn, five-year interest-free loan. Country Report May 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 3 Outlook for 2013-17 Political stability Political uncertainty will remain high, particularly in the early part of the forecast period, as the president, Mohammed Morsi, and the Muslim Brotherhood clash with non-Islamists over the direction of policy. A move in November by Mr Morsi to extend his already substantial powers and in effect place himself above the judiciary deepened the schism between Islamists on the one hand and liberals and leftists on the other, sparking large protests and counter-protests by the president's opponents and supporters. The extent of this polarisation was highlighted by the results of the referendum in December on the constitution, which was passed on a turnout of just 32.9%. Non-Islamists have questioned the legitimacy of the document on this basis and will continue to voice their concern over the concentration of power in the presidency and the Muslim Brotherhood. Amid these tensions, civil unrest may well escalate, including sporadic incidents of sectarian violence (as demon strated by the death of eight people, including six Coptic Christians, in early April). An important stepping stone in the increasingly disorderly political transition is the upcoming parliamentary election, which has been delayed from April to October. The opposition National Salvation Front (NSF), an umbrella group formed after Mr Morsi's move in November to consolidate his powers, had said that it would boycott the election in protest at the electoral law, which it argues favours the Muslim Brotherhood-affiliated Freedom and Justice Party (FJP). With the final form of the legislation now in question and the election delayed, the opposition may yet choose to contest the race, however. Whatever the opposition decides, it is unclear if the election will prompt an easing in domestic tensions. On the one hand, there is potential for the political situation to improve, should the election prompt strengthened accountability and the opposition to channel its grievances through the country's institutions (rather than via street protests). In addition, the population's appetite for street protests will probably ebb steadily as the public becomes disenchanted with the repeated disruptions to daily life. On the other hand, tensions between Islamists and liberals are likely to continue to have a destabilising effect, especially as the Brotherhood finds itself under pressure to adhere more closely to Islamist principles both from among its own members and from Salafi (ultra-conservative Islamist) groups. These tensions will only be further strained by the cabinet reshuffle in May, in which the government rejected the opposition's call for a national unity government; instead, the Brotherhood bolstered its own role in the cabinet, by appointing two further ministers with links to the movement. Unrest will be further encouraged by indications of growing authoritarianism on the part of Mr Morsi and the Brotherhood. The president in particular has become increasingly intolerant of criticism from within the media (although in April he decided to withdraw a host of legal complaints against journalists, ostensibly in deference to "freedom of speech"). In addition, the drafting of a law on judicial reform by