Pound float may spur growth as Egypt private sector sinks

CAIRO — Egypt’s non-oil private sector growth slowed to its weakest rate in more than three years in October on the back of weakness of the Egyptian pound against the US dollar and sharp inflation, according to a recent survey. The weakness of the currency led to higher purchasing costs during the month making raw materials unaffordable and thus in short supply, the Emirates NBD monthly survey finds. Costs hit an all-time high since the survey began in April 2011, resulting in a sharp drop in output and purchasing activity. In addition, job creation in the private sector fell the seventeenth consecutive month. However, Egypt›s stock market surged in early trade on Sunday, led by financial companies› shares, on hopes that the economy will benefit from last week›s devaluation of the Egyptian pound. The blue chip index was up 2.4 percent after five minutes of trade while the broader EGX100 index climbed 2.0 percent. On Thursday, the blue chip index had risen 3.4 percent in an initial response to the devaluation. The central bank devalued the pound by almost a third to 13 pounds against the dollar from a previously fixed rate of 8.85 pound on Thursday. The bank said the starting exchange rate would «serve as soft guidance to jump-start the market». Commercial International Bank, the biggest bank, jumped 5.2 percent while investment bank EFG Hermes climbed 3.0 percent. The buying was mainly by local investors; many foreign fund managers said the devaluation was unlikely to cause them to rush back into Egypt, given continued uncertainty about the economy. The seasonally adjusted Emirates NBD Egypt Purchasing Managers’ Index (PMI) dropped to a 39-month low of 42.0 in October, from 46.3 in September. An index reading above 50 means growth and below the mark represents contraction. “October’s survey highlights the increasingly difficult operating environment confronting Egyptian private sector firms,” said Jean-Paul Pigat, Senior Economist at Emirates NBD. With raw materials largely unaffordable, and client demand on a downward trajectory, firms saw little need for input buying in October. In fact, purchasing activity decreased at a survey-record pace, it noted. The survey also showed that material shortages linked to high inflation contributed to another rise in backlogs of work. “It is difficult to see the situation improving before an IMF agreement is signed, as the ongoing FX shortage and EGP weakness on the parallel market are the main factors undermining economic output at the moment,” said Pigat. Things may change in Egypt as the country is aggressively pursuing economic reform measures to restore investment confidence after foreign investors shunned the country following the ouster of longest-serving president Hosni Mubarak in 2011. The North African country recently agreed to a $12 billion loan over three years with the International Monetary Fund (IMF) to reinstate market confidence. As part of the reforms plans agreed with the IMF in pursuit of the loan, Egypt floated its currency on Thursday. The bank, businesses and importers have welcomed the floating of the pound, which is expected to crush a mammoth dollar black market. — Agencies