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GDP contracts for first time in nine years in Q4 of FY 2020

The economy contracted 1.7% year-on-year in the fourth quarter of FY 2020 (April–June 2020), according to estimates announced by the Ministry of Planning and Economic Development. The reading contrasted the 5.0% growth recorded in the third quarter, and marks the first quarterly contraction since Q4 of FY 2011 as the full extent of the coronavirus-related containment measures enacted in late March pounded the economy. As such, GDP growth for the 2020 full fiscal year (July 2019–June 2020) slowed to 3.6% from 5.6% in FY 2019, marking the lowest rate of expansion since 2014.

Looking at the details of the release, Q4’s result was driven by a mild downturn in domestic demand and a much larger contraction in the external sector. Domestically, capital spending capitulated, with fixed investment falling 56.2% in the quarter (Q3: -20.0% year-on-year) as widespread uncertainty hindered spending plans. However, both private consumption (Q4: +11.5%; Q3: +7.2% yoy) and public spending (Q4: +14.0%; Q3 +2.6% yoy) accelerated in the final quarter of the fiscal year, somewhat tempering the overall decline in domestic demand. Panic-buying in the wake of the announcement of lockdowns, strong remittance growth, mild inflation and the Central Bank’s substantial 300-basis-point rate cut in mid-March all likely played a part in the uptick in household spending.

In the external arena, exports plunged 48.5% in annual terms in Q4, worsening from the 16.6% contraction clocked in Q3. Slumping demand in key international markets and a significant reduction in tourism figures likely weighed heavily on the quarter’s outturn. Meanwhile, imports dived 24.7% in Q4, deteriorating from the 20.6% contraction recorded in Q3, reflecting both weakening domestic demand and supply chain disruptions as a result of widespread international lockdowns.

Going forward, the downturn in GDP is projected to soften in the first half of FY 2021, before growth returns in H2. A recovering external environment should aid the improvement, as key international markets reopen following stringent lockdowns. However, despite a relatively low level of daily new Covid-19 cases domestically, the stubbornly high infection rate in Europe and the U.S. presents a key downside risk to growth in FY 2021.

Commenting on Q4’s results, Callee Davis, an economist at Oxford Economics, preached caution regarding the outlook:

“While economic growth in the 2019/20 FY surprised to the upside largely supported by remarkably strong consumption, it was still weak relative to previous years. We suspect that the uptick in consumption was temporary and forecast a gradual decline back to pre-pandemic levels by 2020/21 FY. Although we forecast a gradual recovery in real GDP growth going forward, supported by an uptick in investment and exports, real GDP will only recover to precrisis levels by early 2021/22 FY.”

FocusEconomics Consensus Forecast panelists project the economy to expand 2.3% in FY 2021 and 5.1% in FY 2022.

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Bond Yield13.700.0 %Dec 31
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