Egypt has long been a hotbed for consumer goods consumption. “Egypt [is] among the world’s biggest consumer markets, [with] an average household consumption-to-GDP ratio of 82% since 2015,” said research from AmCham Egypt.
Data from the World Bank shows that ratio surpasses advanced economies like the United States, Canada and the United Kingdom. It is also above emerging economies like Jordan, Kenya, Tunisia and Brazil.
Statistics indicate residents are not spending beyond their means. The number of issued credit cards was about 5.6 million as of June, reported data aggregator Statistica. That is less than 9% of all issued payment cards, including debit and prepaid cards, which withdraw from existing funds.
Also, loans to households by commercial banks are noticeably low. The Federation of Egyptian Banks reported the loan-to-deposit ratio was almost 60% as of March. Investment glossary Investopedia says, “Typically, the ideal loan-to-deposit ratio is 80% to 90%.”
That untapped potential for more spending is enticing consumer goods FDI. Youm7 aggregated 25 international consumer product companies that have either opened factories or are under construction in 2024.
The primary risk comes from inflation rates that reached 26.2% in August, according to the CBE, a far cry from the official target of 5% to 9%. That is worrying because the eventual “reduction in disposable income is expected to negatively affect the consumer and retail sectors, as higher costs of living may constrain household spending,” said a June Fitch Solutions report.
Consumption as usual?
Between 2020 and 2023, Statistica, a data aggregator, said Egyptians spent the most on food and non-alcoholic beverages, followed by healthcare, clothing and footwear, hospitality and restaurants, communication services and equipment, and transportation.
Annual spending in local currency on those items and others increased almost 32% to EGP 1.9 trillion ($39.1 billion) between 2020 and 2023, according to data aggregator Trading Economics. The exception was in the second quarter of 2022 when spending dropped 11% in response to the Central Bank raising interest rates by 100 basis points and depreciating the pound by 16%. Another decline (12.2%) happened in the second quarter of 2023. The OECD Outlook said it was due to “high inflation and balance of payments difficulties.”
That mostly upward spending trajectory comes amid inflation rates rising from 5.4% in 2020 to 33.7% in 2023, causing a 7.32% drop in purchasing power, according to Africa Geoportal, a regional think tank, and CEIC Data.
That didn’t hurt gross savings rates, which remained flat at 7.8% in December, according to the Central Bank, which CEIC said aligns with averages since December 1969, when records began.
The dollar factor
Those relatively solid spending figures turn negative when considering the exchange rate, which went from EGP 15.8 in 2020 to nearly EGP 31 in 2023. In dollars, consumer spending declined 30.1% in those four years – going from $91.1 billion at the 2020 exchange rate to nearly $61.3 billion using the 2023 exchange rate.
That decline will likely continue. “The reappointment of Prime Minister Mostafa Madbouly suggests continuity of policies aligned with the IMF’s program,” said Fitch Solutions. “[That] indicates that these economic reforms and their effects on consumers and retailers are set to persist as the government maintains its current economic course.”
Ultimately, “the reduction in disposable income [from rising prices across the board] will negatively affect the consumer and retail sectors, as higher costs of living constrain household spending,” Fitch Solutions added.
Good business?
On the face of it, Egypt’s non-oil private sector isn’t doing well. Between June 2021 and July 2024, the country’s Purchasing Manager Index (PMI) score was under 50, indicating monthly purchases for production were shrinking. In August, the index recorded 50.1 points.
Yet, local and foreign consumer goods companies are turning high profits. A 2023 report from HSBC Global Research shows the “consumer sector … achieving higher profits during the fourth quarter of 2023. Margins remained resilient on the back of the sharp devaluation since October 2022,” when the dollar went from EGP 19.6 to EGP 24.
That is a reprieve as “profit margins of Egyptian consumer goods companies … declined in the second and third quarters of 2023” owing to ongoing devaluations and persistently high inflation.
“Gross margins were supported by low-cost inventory, while revenue growth was mainly driven by pricing,” the HSBC report explained. It calculated price-to-earnings for local consumer businesses reached 890% in July. That compares with 700% before the pound’s October devaluation, but was below the five-year average of 1,000%.
For the rest of the year, Fitch Solutions “forecasts a moderate uptick in consumer spending, with real household spending … projected to grow by 4.3% year-on-year.” That compares with the rating agency’s earlier forecast of 1.2% growth.
Those encouraging figures stimulated consumer goods FDI over the past 18 months. Sectors attracting those investments include mobile phones and electronic devices, household white goods, clothes and garments, packaged foods, beverages, and supplements. Others are manufacturing parts for local industries and spare parts, especially the automotive sector, including cables, windshields, chemicals, and electronic and glass parts.
Retail shops selling local and imported consumer goods should also perform well. In May, Tayf Egypt, a local investment management company, said in a note that despite rising prices from inflation and devaluation, “Egypt is one of the fastest-growing retail markets in the world, [fueling investments in] hypermarkets and supermarkets.”
Higher prices are also not hurting startups, as “most … manage to thrive their way in the Egyptian market,” Tayf Egypt’s note said. Additionally, “the food sector in Egypt continues its rapid development,” particularly in malls serving satellite neighborhoods.
Those positive spending figures result from “the rise of secondary cities, increased internet and mobile usage, and investments in the development of smart cities,” Tayf Egypt said. The other reason is “shopping has become a lifestyle, not just for running errands.” That is fueled by “well-designed” supermarkets and shops that subconsciously entice visitors to buy more, Tayf said.
Subsidy dangers
In June, Fitch Solutions flagged the risk of removing subsidies on basics like electricity and fuel, saying it would “weigh on household budgets.”
This year alone, local electricity prices increased twice. The first was between 16% and 20% in January, and the second was between 14% and 50% in August for households and commercial facilities.
Passenger car fuel prices have also increased twice this year by up to 20%. In August, the government said it plans to eliminate the umbrella subsidies system by 2028, replacing it with a targeted cash-based one.
Subsidy cuts are at the behest of the IMF, which approved extending Egypt an additional $5 billion in March, on top of the $3 billion approved in December 2022. “Restoring energy prices to their cost recovery levels, including retail fuel prices by December 2025, is essential to supporting the smooth provision of energy to the population and reducing imbalances in the sector,” the IMF said in its third review of Egypt’s loan program, published in July.
Fitch Solutions also noted the 300% increase in bread prices in May, “accounting for about 0.3% to 0.4% of the consumer price index, [raising] month-on-month inflation by about one percentage point.”
For the rest of 2024 and 2025, the credit rating agency said those subsidy removal plans “mean the increase in the prices of fuel and electricity … will be more aggressive than we previously thought.”
After the August hike in electricity prices, Fitch forecasted inflation in 2024 and 2025 will be 32% and 20%. That will “significantly impact consumer purchasing power and potentially lead to social unrest, which makes interest rate cuts [which stimulate demand] less likely,” Fitch stressed.
Changing habits
Rising prices are unlikely to abate soon, as the government is still introducing structural reforms. Ahram Online reported foreign currency supply is barely enough, so high-demand periods like Ramadan and national holidays usually create a temporary currency black market. “This rise in the U.S. dollar [is] anticipated, particularly after … holidays, which leads to a backlog of currency exchange requests at banks,” Ahram Online reported.
Uncertainty over prices has invariably altered most consumer purchasing patterns. More consumers “resort at times to hoarding staples – rice, sugar, flour and cooking oil – in a bid to save money amid prices that are surging on a near weekly and sometimes daily basis,” reported state-owned Ahram Online.
Meanwhile, experts talking to local media say high prices are making locals refrain from regularly buying unnecessary products or not purchasing them at all.
Another significant change in consumption spending is the ongoing boycott of international brands. This phenomenon means international consumer goods producers could fail, even if the market is promising. The opposite is true for local brands.
In June, Spiro Spathiss, a local carbonated soft drinks producer, reported a 350% increase in local sales from Oct. 19 to Jan. 15, forcing them to double production capacity. “We’re running operations around the clock to keep up with market demand,” Youssef Talaat, the company’s commercial manager and partner, told the media at the time.
The same is happening with international coffee brands. Local brands saw sales grow 30% as local consumers boycotted foreign competitors. The tilt to local coffee brands will likely increase as the Ministry of Agriculture announced in June that “preliminary trials for coffee cultivation were successful.” Currently, Egypt imports 100% of its coffee beans.
Unsustainable?
The key to Egypt’s consumerism was never about residents having excess money to buy more products, as 27.3% of the population was under the poverty level in 2023. Instead, it has been about the large population size and pace of growth.
Accordingly, news that Egypt’s population growth went from highs of 2.3% in 2014 to 1.4% in 2023, according to official data, could mean trouble. “Low population growth … has implications for the economy – and for consumption patterns,” noted Sara Warden, a researcher for CZ, an analysis platform, in November.
Globally, another critical factor stimulating consumer spending in general is “a growing middle class,” Warden said. The growth of that segment of society would ultimately lead to more urbanization, giving “a lot of headroom for per capita consumption growth.”
For Egypt, relying on middle-income households to fuel consumption is not viable. An April note from AUC’s Alternative Policy Solutions found that when using Fitch Solutions’ definition of the middle class — those making between EGP 79,200 and EGP 112,000 — then “between 2021 and 2023, the share of families who fit into that category declined from 39% to 12%,” the report said.
That downward trend needs to be reversed. As a research note from the Working Group on Strategic Foresight and Futures Research explained: “The mechanisms through which middle class influences economic growth are: stable demand (stable demand has a positive effect on investment and investment boosts economic growth) [and] trust (the stronger the middle class, the more trust and stability there is in society and economy).”
This article first appeared in November’s print edition of Business Monthly.
