Egypt, despite having the Arab world's highest inflation rate and its largest stock market crash, is likely to weather the global economic crisis better than many of its neighbours, experts on its economy say. A cultural aversion to debt and a cautious banking sector means a profound credit contraction is unlikely. And growing internal demand, stimulated by reformist economic policies, is slowly building the foundations for a more resilient economy.
"This is not an indebted society," said Angus Blair, the head of research at the Cairo-based regional investment bank Beltone Financial. "We have been saved by our lack of development, and by the conservatism both in the society and in the banks." With an average loan-to-deposit (LTD) ratio of just 54 per cent - less than half the figure for most developed-world banks - Egypt's banking sector has excess liquidity, which financial onlookers agree could be put to use in the form of increased lending to stimulate the economy.
Combined with the savings of the 90 per cent of Egyptians who do not use banks at all, it makes for a large amount of liquidity available for spending and investment. Sources in two of the country's major retail banks said their strategy was to remain stable at existing LTD levels. In practice, this means continuing lending to existing customers, while cutting back on extending credit to new applicants.
Simon Kitchen, the chief economist for EFG-Hermes, agrees that the likelihood of a credit crisis is low, but believes the broader economy is likely to come under increasing strain. "The banks themselves aren't vulnerable, and we don't expect to see the sort of sudden stop in the availability of credit that you might see in some other markets," he said. "But in the real economy, Egypt is exposed to developed markets, to the GCC - through things like tourism, the Suez Canal and remittances from abroad.
"When we think about growth in the economy in the next couple of years, that is what we are really concerned about, rather than a sudden stop in the availability of credit." Remittances from Egyptians working abroad are the country's second-largest source of foreign currency, with almost US$6 billion (Dh22bn) recorded last year. More than one third of this comes from the US. Combined with money from the Gulf, which makes up another 42 per cent of the total, the remittance economy is heavily impacted by fluctuations in the US dollar.
A strengthening dollar could boost earnings from both remittances and exports, said Abdel Fattah el Ghibaly, the head of economic research at the Ahram Centre for Political and Strategic Studies, a think tank. The economic slowdown in the US and Europe could affect Egypt in ways other than a decrease in trade, tourism and remittances, Mr Ghibaly said. Exporters in China and East Asia may start looking to new markets to compensate for the slowdown, increasing Egyptian imports and widening an already large trade deficit.
But he believes the government's economic reform programme, which began with the appointment of the cabinet of prime minister Ahmed Nazif, is stimulating internal demand that will boost the domestic economy. In cutting taxes and duties and reforming the country's archaic system of laws and regulations governing businesses, the government has received praise from liberalisation advocates like the World Bank and the World Economic Forum.
It has made Egypt's elite even wealthier. An increasing number of new BMWs and Mercedes now share the streets with the 30-year old Fiats and Peugots of Cairo's past, and the city's huge malls and vast new shopping centres attract enormous crowds. "The growth in private consumption has been quite narrowly based - you have a vast population, most of whom have limited disposable income, if any at all," said Mr Kitchen. "It will take maybe a decade before you really get a deep consumer market developing in Egypt. Having a deep consumer market is something that economies can rely on to push growth forward as external demand slows - and Egypt is not yet in that position."
The country's demographics both enable and demand brisk economic growth. More than 50 per cent of the country's 73 million people are younger than 15, according to a 2006 census. At current growth rates, the population will reach 90 million by 2020. This means a yearly economic growth rate of 5 per cent is needed just to keep the unemployment rate stable at its current level of 8 per cent, Mr Ghibaly said. To reduce that rate, and increase average incomes, he said growth would need to exceed 7 per cent, a feat achieved last year but unlikely to be repeated next year.
Egypt's trade and industry minister, Rachid Mohamed Rachid, on a visit to Abu Dhabi last week said that as the global slowdown threatened to hit the export and tourism sectors, the government's challenge was to make sure economic growth did not fall below 6 per cent. "Last year our economic growth was 7.2 per cent and this year our goal is not to fall under 6 per cent. In order to do that we need to diversify our trade and take advantage of the opportunities in this situation," he said.
Egypt's inflation, which had reached a 16-year high of 23.6 per cent, fell to 20.2 per cent in the year to last month, the government statistics agency Capmas said yesterday. "Inflation will continue to ease as the international prices of commodities drop," Mr Rachid added. Creating jobs for the hundreds of thousands of young people entering the workforce each year is a challenge that Egypt shares with many of its neighbours.
The country's industrial sector aims to create 270,000 new jobs next year, said Adham Nadim, the executive director of the Industrial Modernisation Centre, a government-backed industry body. A boom in foreign direct investment, which has spiked from US$2.1bn in 2006 to $11.6bn last year, has been largely based on investments in manufacturing and heavy industry. The sector's success has opened the door to an unexpected challenge that is symbolic of the contradictions in Egypt's growth. Some of its largest export partners, big US and European businesses, are finding it increasingly difficult to get letters of credit to fund their imports, and are appealing to Egyptian industrial businesses to offer them extended credit terms.
"All of a sudden these huge blue-chip companies are asking Egyptian factories for credit," Mr Nadim laughed. "This is not something that we had thought about two years ago." email@example.com