_________________________________________________________________________________________________________________________________________________________ Country Report Egypt April 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 6 International assumptions 6 Economic growth 7 Inflation 7 Exchange rates 7 External sector 8 Forecast summary Data and charts 9 Annual data and forecast 10 Quarterly data 11 Monthly data 12 Annual trends charts 13 Monthly trends charts 14 Comparative economic indicators Summary 14 Basic data 16 Political structure Recent analysis Politics 18 Forecast updates 18 Analysis Economy 24 Forecast updates 31 Analysis Country Report April 2013 www.eiu.com © Economist Intelligence Unit Limited 2013 Egypt 2 Highlights Editor: Karin Maree Forecast Closing Date: April 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. New parliamentary elections have been delayed and are now set to begin in October. 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 parliamentary elections are out of the way. However, ongoing social and political unrest, combined with weak economic prospects, poses downside risks. Economic policy will combine a focus on social justice and economic growth. Faced with a large fiscal deficit, the government will be forced to make some progress on increasing taxes and cutting energy subsidies. 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. We expect the current-account deficit to narrow from 2.8% of GDP in 2012 to 2.4% of GDP in 2013, as exports pick up and the services surplus widens. This trend will continue up to 2017 with the deficit averaging 1.2% of GDP. Review Several people were killed in sectarian violence in early April. The Muslim Brotherhood's Freedom and Justice Party condemned the violence, but blamed "dubious parties determined to cause discord". A technical team from the Fund returned for talks in Cairo over a US$4.8bn stand-by credit facility. The government has so far rejected the possibility of emergency funding. The government has introduced changes to customs tariffs aimed at helping to conserve foreign exchange by dampening import demand, and at boosting customs revenue for the budget. The government has increased the price of a 12.5–kg canister of liquefied petroleum gas, known popularly as butagas, by 60% for domestic consumers. It doubled the price for larger canisters. The Central Bank raised interest rates in late March in an effort to tackle rising inflation and support the currency. It followed the move be reintroducing deposit operations seeking to absorb excess liquidity. The current-account deficit narrowed to US$6.9bn in 2012 from US$7.6bn in 2011 on the back of higher remittances and tourism revenue. Country Report April 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 late 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 on the constitution held in December—an estimated 63.8% of voters cast their ballots in favour, but turnout was just 32.9%, meaning that the document was passed with the backing of only 20.9% of eligible voters. 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. Renewed serious violence since the second anniversary of the January 25th 2011 uprising has further demonstrated the fractured state of Egyptian society and has exposed the failings of key institutions, including the presidency, the judiciary and the forces of law and order. Civil unrest may escalate and sporadic incidents of sectarian violence will continue. Parliamentary elections have been delayed from late April with Mr Morsi stating that they will now go ahead in October. The opposition National Salvation Front (NSF), an umbrella group formed after Mr Morsi's November move to consolidate his powers, had said that it would boycott the elections in protest at the electoral law, which it argues favours the Muslim Brotherhood. With the final form of the legislation now in question and the election delayed, the opposition may yet choose to contest the race. The Economist Intelligence Unit expects the Muslim Brotherhood's Freedom and Justice Party (FJP) to perform well, but it will not match its previous electoral success. Salafi (ultra- conservative Islamist) parties, particularly Nour, stand to gain from disillusionment with the Brotherhood and the secular opposition's poor organisation. Given that Nour has distanced itself from the Brotherhood, siding with the NSF in calling for the formation of a government of national unity ahead of the elections, the FJP may enter into coalition with other Salafi parties in order to secure a majority in parliament. However, Nour could revise its position, particularly with the promise of government portfolios, after the election. The Brotherhood will find itself under greater pressure to adhere more closely to Islamist principles while at the same time facing opposition from secular groups. There is potential for the political situation to improve following elections, but tensions between Islamists and liberals are likely to continue to have a destabilising effect. Although the military has taken a back seat since Mr Morsi took office, it may intervene in the event of a significant deterioration in the political or security situation. It will remain reluctant to take on overt political powers again, however. Election watch Mr Morsi has said that elections to the House of Representatives (the lower house of parliament), which had been due to begin in late April, will now start in October, with parliament to be sworn in by the end of the year. Given ongoing legal issues, and with the slowdown in activity in the summer months, the timetable appears realistic. The Shura Council, the upper house of parliament and currently the sole legislative authority, in late March preliminarily approved a revised draft electoral law. In parallel, the presidency has appealed a ruling by the Supreme Administrative Court that suspended the elections on the grounds that the original electoral law had not been passed to the Supreme Constitutional Court for a second review. Under the new constitution, a new election to the Shura Council is due to be held within a year of when a new lower house convenes.