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COOLING PERIOD

Abstracts from “Business Barometer, July 2006”
Published by the Egyptian Center for Economic Studies (ECES)

Analysis by Réhab El-Bakry

Every six months, the Egyptian Center for Economic Studies (ECES) issues its “Business Barometer” report, an independent measure of the economy through the eyes of private and public Egyptian companies. The report covers four main aspects of business: the level of economic activity; price and wages; investment and employment; and the constraints facing the surveyed companies. Calculated using a sample of 320 firms from the manufacturing, construction and tourism sectors, the report showed decreased confidence in the economy during the first six months of 2006.

With respect to the past six months, firms’ perception of overall economic growth was less favorable compared to the previous survey... Regarding own activities (production, sales investment and employment) firms were more positive... [with regard] to their views about economic growth, with the exception of tourism firms due to the terrorist bombings that took place in Dahab in April 2006. Overall, firms’ evaluation of the economy and their own activities (except for employment and investment) were less favorable in the past six months compared to the previous survey.

Most repondents perceived a reduction in the pace of economic reforms. Although there has been much movement in some sectors such as telecommunications, which saw the IPO of Telecom Egypt (TE) followed by anticipation of the issuance of the third mobile license, the privatization program of other government assets appeared to slow down. The Cairo & Alexandria Stock Exchanges (CASE), one of the world’s top-performing markets for two years in a row, also experienced a cooling off period, dropping sharply in March and May. It also became increasingly clear early in the year that the much-anticipated Egypt-US free trade agreement (FTA) was on hold indefinitely. This left many uncertain of the pace of economic growth. However, this was more an issue of perception than reality.

It is clear that firms’ evaluation and expectations of the overall performance of the economy diverge from actual and forecasted government figures for economic growth and to some extent from firms’ evaluation of [their] own activities. Boosting expectations requires improving the macroeconomic environment by pursuing more rigorous economic reforms. Also, more attention should be paid to the quality of growth, especially distribution and governance, in order for the impact of growth to be widely felt by the population.

While the perception of the overall performance of the economy was not as favorable, 48 percent of firms surveyed anticipated higher macroeconomic growth during the second half of the year, while 37 percent believed things would remain the same. The majority of firms also believe that their own activities will either improve during the second part of 2006 or at least remain stable. In terms of economic growth during the first two quarters of 2006, 38 percent of respondents reported a decline while 34 percent reported stable growth.

These views apply to all sectors, especially the tourism sector, which reported the largest decline. Expectations for the next six months are more favorable... The negative perception of economic growth in the past six months runs counter to official figures. According to the Ministry of Planning & Local Development, the real GDP growth rate in the third quarter of 2005-06 (estimated at 5.9 percent) was higher than the growth rate for the corresponding quarter in 2004-05 (5.1 percent) and for the first half of 2006-2006 (5.7 percent).

There are three explanations for this negative perception: the Dahab bombing in April; serious concern over the fiscal deficit, rising domestic public debt, poverty and unemployment; and the need for the government to better communicate its privatization plans to the public.

The majority of respondents reported higher (45 percent) or stable production (30 percent) during the first half of 2006. The most favorable views were reported by construction firms while the least favorable were expressed by firms in the tourism sector. Within the manufacturing sector, firms in mineral products, paper, printing and rubber industries reported the most favorable results.

At the same time, 73 percent of the surveyed firms anticipate higher levels of production for the remainder of 2006, with 20 percent expecting similar levels. Tourism had the lowest expectations, while the most favorable responses came from the ready-made garments, rubber, plastic, printing, transportation equipment, metallic products, beverage and tobacco industries.

The same pattern was reflected in prices and wages, where respondents reported stable or slightly higher increases in the final price of products. Around 50 percent anticipated the slight increase in the final price for products would continue for the remainder of the year, while 46 percent predicted prices would remain the same.

As for input prices, the majority of respondents reported higher (81 percent) or stable (17 percent) prices during the first six months of 2006... Regarding the coming six months, the majority of firms expect higher (70 percent) or stable (20 percent) input prices.

Similarly, wages have also increased during the first six months of the year with companies expecting them to increase nominally during the upcoming six months.

The majority of firms reported stable (51 percent) or higher (38 percent) investment level during the first half of 2006. Firms in the manufacturing sector reported the highest investments. As for expectations, all firms plan to increase (59 percent) or maintain (41 percent) the level of investment during the next six months.

In terms of the constraints for the firms surveyed, limited demand, lack of skilled workforce, access to finance and access to imports were identified as the main obstacles that they faced.

Abstracts reprinted with permission of ECES