Khatija Haque - Head of MENA Research
Athanasios Tsetsonis - Sector Economist
Published Date: 05 March 2017
Although the latest Purchasing Managers’ Index (PMI) for Egypt continued to show a sharp contraction in private sector activity, the pace of the contraction eased in last month. In February, the headline PMI came in at 46.7, marking the 17th consecutive month below the neutral 50 level, but up from 43.3 in January and the highest reading in six months. The contraction of the main Output Index softened in February at 44.3, with 25% of respondents recording a decrease in output. This was the first time in four months that this component of the PMI was above 40, which is also the case for the New Orders Index (44.0 in February) as well as the Quantities and the Stocks of Purchases Index (44.0 and 43.6, respectively in February).
The New Export Orders Index remained below the neutral 50 level for the 20th consecutive month in February at 49.2. However, the rate at which new export orders contracted was marginal overall and the reading was the highest since August 2015. This suggests that the recent devaluation of the EGP is already having a positive impact on external demand, and this should continue to improve in the coming months. Indeed, the EGP’s real effective exchange rate is now at its lowest level since December 2004 (chart #1), which was one year before the economy embarked on one of its fastest periods of growth in recent memory (real GDP expanded by an average 7.2% between 2006-2008). Recent news reports have also suggested Russia could be set to end its ban on flights to Egypt, which could provide a much needed boost to the tourism and export sector in 2017.
The EGP’s devaluation also continues to result in significant upwards price pressures, although even here there is some evidence that the worst may be over. The Output Price Index declined to 63.5 in February from 71.2 In January indicating an easing of inflationary pressure last month. According to survey compiler Markit, 24% of respondents raised their selling prices in February, largely as a result of higher input costs.
The Purchase Price Index came in at a still elevated 77.9, down from a peak of 93.5 in October and November 2016 immediately post-devaluation. The majority of respondents (52%) noted a rise in input costs, which they commonly linked to the strength of the US dollar relative to the Egyptian pound. The sudden rise in prices of imported goods is likely to remain a key feature of Egypt’s economic backdrop in 2017, with the shortage of raw materials in particular likely to constrain business activity in the coming months. However, firms are more optimistic about the coming 12 months.
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