1. Egypt and the Global Economy
Despite economic growth expected to decrease to 5% this year, policymakers have a good
opportunity to improve Egypt’s position for the pending global economic upturn
Cairo: The effects of the global financial crisis and economic downturn in the Middle East have
not been as severe as in the US or Europe. Egypt’s economy will feel the effects of the global
downturn in 2009, and tourism, transportation, finance, and real estate are especially vulnerable,
finds a new report by Booz & Company.
More than 30 percent of Egypt’s government revenue is tied to oil and global trade and will be
under pressure in 2009, while the private sector should be largely insulated. “The economic crisis
presents policymakers with an opportunity to take immediate steps to lessen the recession’s
impact and position Egypt for growth when the global economy rebounds,” stated Nabih Maroun,
a partner at Booz & Company.
The global recession - how did we get here?
The US mortgage market collapse spawned the global financial crisis and economic downturn.
Globally, financial-services were hit hard and early; with more than 30 major financial institutions
taken over by competitors or governments. The construction and real estate sectors are also
suffering: expected to shrink 11 percent this year in the US alone. US automakers have received
in excess of $20 billion in government aid and are asking for more; while Germany, France, and
the UK have developed special stimulus packages for domestic auto companies.
The downturn is global
Faced with a financial crisis, governments around the world have intervened—providing liquidity
to markets, bailing out and rescuing banks, coordinating policies at the regional and global levels,
and putting together economic stimulus packages.. “The initiatives should help countries weather
the financial crisis, but an upturn will not be immediate” commented George Atalla, a principal at
Booz & Company. The International Monetary Fund (IMF) predicts that advanced economies’
growth will decline from 1 percent to minus 3.8 percent and emerging economies’ growth will slow
from 6.1 percent to 1.6 percent.
The MENA region and the global downturn
The MENA region is feeling the effects. The IMF recently reduced its 2009 Middle East growth
forecast from 6.5 percent to 2.6 percent, compared with 6.1 percent in 2008. Current account
balances are likely to worsen; although oil exporters may be able to keep a positive balance,
Egypt and the Levant countries (Syria, Jordan, and Lebanon) may not. Local stock markets have
also suffered, with some indices losing more than half their value in 2008.
Stock market declines signal economic trouble. “To deal with the global challenge, GCC
governments have injected liquidity through stimulus packages and support to the financial
sector, but recent robust growth is likely to slow and current account balances will decline,”
explained Maroun.
In this period of slowing growth, GCC countries have a number of advantages. Oil’s steady price
increase between 2005 and 2008 allowed oil-rich countries to accumulate revenue surpluses. Oil
exporters have used these to establish sovereign wealth funds, which have diversified their
economies and funded major capital projects.
GCC countries are therefore comparatively well positioned to limit the negative effects of the
crisis. Additionally, the Organization of the Petroleum Exporting Countries (OPEC) has
announced measures to stabilize oil prices between $50 and $60 per barrel, allowing GCC
countries to balance their budgets. “However, if oil prices weaken further or remain depressed,

2. surpluses could vanish and governments eroding the ability to cushion the impact of the crisis,”
explained Maroun.
Egypt and the global economic crisis
“Egypt’s limited exposure to global financial markets and a strong, liquid banking system have
helped insulate it from the crisis’s first wave. But as weakness spreads, Egypt’s economy is
vulnerable to a slowdown,” explained Amira El-Adawi, a Principal at Booz & Company. The
country’s growth rate is expected to drop to less than 5 percent in 2009 from over 6 percent in
2008.
The Private Sector
Egypt is unlikely to experience the significant decline in private-sector GDP that other countries
might. Manufacturing, for example, accounts for 19 percent of Egypt’s GDP and is driven largely
by domestic consumption; international markets account for only 10 percent of sales.
Tourism, comprising less than 5 percent of Egypt’s 2007 GDP, is vulnerable to the global
downturn, as consumers curb spending on travel. The rise of the Egyptian pound against the
Euro has hurt tourism growth as well. Although the sector has grown at an impressive 20 percent
annual rate for the last five years, the first quarter of 2009 has seen 30 percent decline in tourist
bookings, which is expected to result in a real decline in sector growth rates for the duration of the
crisis..
Agriculture is less vulnerable to the crisis, because the sector produces mainly for domestic
consumption. The downturn will provide relief to Egyptian consumers: steep rises in food prices
have brought hardship and unrest. “the ease in inflationary pressures on commodity prices should
lead to a stabilization of food prices, and by the same token will provide a competitive edge to
lower-cost Egyptian food exports,” stated Atalla.
The communications and transportation industries are primarily domestic, but have different
outlooks. The communications sector increased at a 9 percent annual rate between 2003 and
2007 and will continue to grow boosted by the introduction of a second landline provider. The
transportation sector is under pressure, with requests for commodity transport by national rail
declining significantly in the past few months.
Finance and real estate are Egypt’s most vulnerable economic sectors. Nearly 50 percent of
investment in Egypt’s banking and financial sector originates from abroad - making it vulnerable
to international fluctuations. Egypt’s real estate sector has boomed in recent years, from an influx
of Gulf developers and the introduction of suburbs around Cairo. Real estate prices have risen
with the investment surge and could be vulnerable to a correction. “The sector is likely to slow
significantly as investors face difficulty getting financing, and residents slow purchases of new
homes,” Atalla commented.
Foreign Direct Investment, Foreign Exchange Reserves, and Trade
Foreign direct investment (FDI) in Egypt is expected to drop significantly, following annual growth
of 77 percent over the past four years. More than 65 percent of FDI came from the US, the UK,
Kuwait, and the UAE, which are now likely to concentrate on their own economies. Most new
Egyptian companies established through FDI were in the real estate and tourism sectors and are
now likely to reduce their investments.
Foreign exchange reserves are expected to decline after strong five year growth. Before the 2004
government reforms, Egypt’s foreign exchange reserves were stable at around $13 billion. The
current crisis is expected to hurt export revenues and reserves are forecast to shrink by 8 percent
between 2008 and 2010.

3. Egypt’s trade deficit had been widening in recent years as imports outpaced exports. “The
slowdown should narrow the deficit as consumer demand slows and lower oil and commodities
prices reduce the cost of imports”, stated Maroun. However, export revenues are likely to face
pressure from shrinking external demand: industrial exports declined 28 percent year-over-year in
January 2009; especially as the majority of Egyptian exports are destined for Europe and the US,
where demand is dropping significantly,”
Public Finance
More than a third of Egypt’s government revenues are linked to the oil sector and global trade.
The government’s draft budget was issued in May 2008, when the estimated average for
Egyptian petroleum was around $88 per barrel. With oil prices expected to stabilize around $50 to
$60 per barrel, the government may face as much as a 37 percent decline in petroleum revenues.
A downturn in world trade is already eroding Suez Canal revenue, which tumbled 20 percent in
January 2009 compared with January 2008. Declines in Suez Canal revenue will add to the
pressure on public finance in the months ahead. The downturn should however bring relief from
rising commodity prices. “With the decline in energy and commodities’ prices, the drop in the
Egyptian government’s subsidies bill should offset the drop in oil-related revenues,” explained
Maroun.
Wages are the second-largest budget item for the government. With wages and other
expenditures such as debt service amounting to 50 percent of government spending, public
financing will continue to suffer as long as government revenues are down.
Social Conditions
With most Egyptians living on an income of less than $2 per day, a decrease in growth can have
social repercussions. Almost 90 percent of lower- and middle-class income comes from wages;
other sources include remittances from family members working abroad and government
subsidies of energy and basic commodities.
Just 20 to 30 percent of Egyptians work in industries likely to experience layoffs, such as tourism,
real estate, and construction. More than a quarter work in agriculture, a sector that should be only
mildly affected. Pressure from a workforce growing faster than the market’s demand will add to
domestic unemployment rates. Egypt has a relatively high dependency ratio of 3.63, and a rise in
unemployment will lead to an increase in the dependency ratio and to lower household income.
The return of migrant workers will affect Egypt’s domestic unemployment rate, and result in a
decline in remittances. The World Bank positioned Egypt as the seventh-largest recipient of
remittances in the world, growing 30 percent per year since 2004, outpacing local wage growth.
In 2008, they totaled $9.5 billion, or 6 percent of GDP. The World Bank estimates that
remittances to MENA countries will decline as much as 13.2 percent this year.
These pressures could be offset by relief from inflation and the average Egyptian household is
likely to be only slightly worse off than in 2008. Consumer prices in Egypt rose more than 20
percent in 2008 as food and oil prices spiked, but since summer 2008, commodity prices have
dropped by more than 60 percent, and are expected to remain at current levels this year.
The government will also continue to provide social support. “Subsidies have grown faster than
both GDP and inflation and maintaining those subsidies should help prop up lower- and middle-
class incomes,” said Atalla.
Surviving the global storm
“The global economy’s rapid decline presents Egypt’s policymakers with a challenge and
opportunity to revisit economic policies, forecasts, and strategies - to reduce the impact of the

4. crisis and protect previous economic achievements,” stated El-Adawi. There are seven policies
that Egypt’s government could employ:
1. Stimulate the economy back to health. Policymakers might consider fiscal and
monetary stimulus including accelerating capital spending and implementing
countercyclical monetary policy. Easing monetary conditions will likely be necessary in
the near term.
2. Support at-risk sectors. The government can implement well-targeted initiatives and
reforms to boost the economy’s competitiveness. One key area is export related
activities, but tariffs may have negative long-term consequences.
3. Strengthen the domestic financial system. To prevent harm to the country’s financial
system, the government can help bolster the banking and financial sector by
strengthening the supervision framework for the banking and insurance industries.
4. Promote private investment. Policies designed to continue attracting foreign direct
investment, accelerate and broaden Egypt’s privatization program, improve the country’s
investment climate, and reactivate capital markets can reap dividends beyond the current
crisis.
5. Support job creation. With unemployment expected to rise, the development of
incentive programs and policies to reward companies for job creation and increased local
employment could prove beneficial.
6. Restore consumer confidence and encourage demand. The government can support
local producers through well-targeted initiatives and reforms to ensure those producers
meet local demand at affordable prices.
7. Expand social safety nets. The economic downturn will likely increase reliance on
social safety nets, and measures to broaden social services could include expanding in-
kind or cash transfers to low-income households, moving from blanket subsidies to more
targeted subsidies, and reforming public-aid delivery and distribution programs to ensure
aid reaches those who need it most.
Beyond the crisis
The global economic crisis will present challenges and opportunities for Egypt’s policymakers.
“Steps to alleviate the financial crisis should unwind stimulus measures either at a specific date or
on a contingency basis,” Maroun said. Measures should be reversible and designed so they do
not create economic distortions.
The Egyptian government’s response to the current crisis should not lead to policies that reverse
the many reforms the country has undertaken. Looking beyond the current crisis, Egypt can
benefit from maintaining its current momentum toward economic liberalization, privatization, and
a more efficient government. Egypt must also promote the competitiveness of export industries
and capture opportunities as a supplier of intermediated goods. These policies will improve
Egypt’s economic position and help foster sustained growth once the inevitable global economic
upturn materializes.