Egypt’s Non-Oil Activity Reaches 3-Year High. Here’s Why.

July 21, 2024

 

Egypt’s non-oil sector is finally showing signs of recovery after enduring years of contraction exacerbated by inflation and foreign exchange shortages. In June, the country’s non-oil private sector saw a notable increase in sales volumes, marking its first expansion since August 2021, according to the latest S&P Global Egypt Purchasing Managers’ Index (PMI) report.

The report reveals that Egypt’s headline PMI for the non-oil private sector climbed to 49.9 in June, up from 49.6 in May, marking the highest reading in three years. This indicates that operating conditions within the non-oil economy were generally stable by the end of the second quarter.

The PMI provides a composite measure of the health of the non-oil private sector, based on indicators such as new orders, output, employment, supplier delivery times, and stock levels.

The upturn reported was attributed to a significant increase in new business intakes, marking the first expansion since August 2021. The survey indicated that more firms reported improved demand compared to those experiencing reductions, across both manufacturing and services sectors.

What do the readings mean?

The rebound in sales was bolstered by improving conditions in both domestic and international markets. Notably, new export orders experienced a sharp increase in June, marking the strongest growth recorded in two-and-a-half years.

Analysts attribute this recovery to recent government economic policies aimed at easing price pressures, which have contributed to boosting demand and business confidence.

In June, output levels at non-oil firms decreased at the slowest rate in nearly three years, while the volume of input purchases increased for the first time since December 2021. Input cost inflation accelerated to a three-month high but remained relatively moderate, leading to a modest increase in selling charges.

Overall, the latest PMI data indicates a notable recovery in Egypt’s non-oil private sector, providing optimism for sustained economic growth in the coming months.

“Egypt’s non-oil economy concluded the first half of 2024 on a positive note, according to the latest PMI data. With the headline PMI reaching 49.9 and total new order volumes rising for the first time in nearly three years, businesses appear to be on the path to recovery,” said David Owen, Senior Economist at S&P Global Market Intelligence.

Although output levels continued to decline on average, Owen noted they were nearing growth territory, supported by increased input purchases.

“If we continue to see rises in sales and purchases in the second half of this year, firms should find motivation and necessity to expand their output. Another positive development is that price pressures have remained significantly lower compared to the first quarter of this year, amid the country’s foreign currency crisis,” he explained.

Positive response

Meanwhile, Racha Helwa, economist and director of the Empower Middle East Initiative at the Atlantic Council, told Business Monthly that the latest PMI indicates a slight uptick in non-oil business activities, though it remains below the 50.0 threshold that separates growth from contraction.

Helwa noted that the marginal improvement reflects a modestly positive response from the business community to recent structural reforms implemented by the Egyptian government in collaboration with the International Monetary Fund (IMF).

She added, “While June witnessed the fastest rise in input prices in three months, firms generally attributed this to market price volatility rather than an accelerating inflation trend.”

Egypt is actively engaged with the IMF in an $8 billion loan program extending until FY2026/2027. A cornerstone of this initiative is to empower the private sector, enhancing its pivotal role in Egypt’s economy and fostering job creation. The IMF’s Executive Board is slated to review the program’s third phase on July 29th, potentially unlocking a tranche of $820 million if approved.

Helwa highlighted key measures of the program, including the adoption of a flexible exchange rate, stringent monetary and fiscal policies, and reduced infrastructure spending aimed at curbing inflation and ensuring debt sustainability. These initiatives collectively aim to establish a conducive environment for private sector expansion.

“Continuing these reforms is crucial for enhancing Egypt’s competitiveness, improving the business environment, and supporting growth in the export sector and green economy,” stated Helwa. She emphasized that the IMF-supported economic stabilization program holds significant potential to benefit Egypt’s manufacturing sector. Helwa highlighted that further enhancements in access to credit and a more competitive exchange rate could stimulate growth in key industries such as textiles, chemicals, and renewables.

Boosting investor confidence

Helwa also noted that the recent government reshuffle is expected to bolster investor confidence. Egypt’s House of Representatives recently expressed confidence in the new Cabinet and its program for FY2024/2025 to FY2026/2027, which focuses on four strategic objectives, including creating a competitive economy and strengthening partnerships with the private sector.
Looking ahead, Helwa stressed the importance for the newly reshuffled government to continue advancing the IMF reform package in the coming months, especially in terms of enhancing the business environment and empowering the private sector to drive economic growth in Egypt.