Egypt: Short-term effects of floating of pound continue to weigh on Egypt's business conditions
January 4, 2016
Although the flotation of the Egyptian pound is expected eventually to help the ailing economy, the near-term ramifications of the weakening of the currency against the U.S. dollar are still being felt. In December, the Emirates NDB Egypt Purchasing Managers’ Index (PMI) edged up from a multi-year low of 41.8 in November to 42.8. Despite the increase, the PMI index is still below the 50-threshold that separates contraction from expansion in the non-oil producing private sector, where it has been since October 2015.
As in previous months, soaring inflation played a key role in the poor performance of operating conditions in Egypt. Against the backdrop of a weakening pound, a recently introduced value-added tax and higher oil prices, costs of raw materials continued to rise, becoming increasingly unaffordable and in short supply. This dragged on output, new orders and purchasing activity. Lower orders led to reduced staff requirements—although the pace of job shedding eased compared to November—, while low restocking activity prolonged the drawdown of existing stocks. In a bid to protect margins, greater costs were passed by firms onto customers. However, the increase in output prices, which rose at the fastest pace on record, had a damaging effect on client demand, as reflected in a drop in new orders.
Despite the dire situation of the Egyptian economy, glimmers of hope are seen in December’s print. On these, Jean-Paul Pigat, Senior Economist at Emirates NBD, comments, “If there is a silver lining to be found in this latest report, it is that new export orders decreased at the slowest pace since September 2015. Although the process will not be immediate, a weaker Egyptian pound following November’s devaluation will eventually help boost export growth, which will clearly be welcome as the rest of December’s survey continues to point to weak domestic demand.”
Author: David Ampudia, Economist