Egypt’s success stories are currently impressive. The ongoing offshore Mediterranean gas adventures are presenting one success after the other. Italian oil major ENI, operator on the Zohr offshore gas field, and British oil major BP, flood the media with discoveries, on-time delivery of projects and new possible giant discoveries around the country. Egypt’s neighbors are also becoming heavily involved, as Cairo and Cyprus signed up to build an offshore gas pipeline connecting Cypriot gas fields with Egypt’s gas infrastructure and LNG export projects.

The decades old struggle to bring Egypt and Israel into a major natural gas cooperation now also again is fully revived, after that companies operating in both Israel and Egypt will buy a 39 percent stake in the EMG pipeline to enable a landmark $15 billion natural gas export deal to begin next year. Israel’s Delek Drilling, US based Noble Energy and Egyptian East Gas Company, have agreed to the $518 million purchase. The latter will be playing a pivotal role in the overall Egyptian dream of re-entering the LNG markets very soon. The Delek-Noble-EEGC deal will enable the supply of 64 billion cubic meters of gas over 10 years from Israel’s offshore Tamar and Leviathan fields to Egypt as part of the export deal signed in February. First pipe-gas is expected to reach Egypt beginning 2019. These factors combined will push Egypt back into the LNG exporters league, a place it had needed to relinquish several years ago.  The Cypriot-Israeli gas supplies are expected to enter the liberalized Egyptian gas market, while Egypt’s offshore gas could become LNG at the same time.

At the same time, Egypt is still going through an important economic reform program which started with floatation of local currency in late 2016 to deal with a dollar shortage, while reducing the budget deficit and put in place several major investment schemes to boost the economy, the figures have shown a slightly green aura. After years of recession, due to internal and regional political instability, the economy is starting to grow again. Part of this has come from a continuing support by the International Monetary Fund (IMF), which is given an $12 billion loan, of which already 2/3 has been delivered.  On September 24, IMF’s Director Christine Lagarde announced that Egypt’s economy has become one of the highest growing economies in the Middle East. During a meeting with Egyptian president Abdel Fattah Al Sisi, on the sidelines of the 73rd United Nations General Assembly (UNGA), the IMF director stated that “Egypt’s economy is showing strong signs of recovery, and its economic growth is among the highest in the Middle East.” Lagarde reiterated to increase the strength of the Egyptian economy, continuing support is needed to deepen the powers and capability of the private sector.   “These reforms will help achieve more sustainable, inclusive and private-sector led growth which will help create jobs for Egypt’s young population, while also ensuring adequate resources are available for social protection. I reiterated the Fund’s commitment to support Egypt and its people,” she said.

The IMF has been keeping a wary eye on Egypt’s economic performance, after that it had agreed to a $12 billion loan program in 2016, which stipulated that Cairo needed to make deep cuts to energy subsidies, new taxes, and a floated currency in a bid to draw back investors. The last years, the Egyptian government has been increasing fuel and electricity prices several times, while other adjustments have been made too.  A report released by Centre for International Development in Harvard University classified Egypt as one of the world’s fastest growing economy in the coming decade, coming in third place after Uganda and India. The IMF reiterated also this week that the government will keep to a tight monetary policy, mainly to avoid inflation. Prior to the flotation measure, which was a key demand from the IMF, there had been a wide gap between the value of US dollars in banks and in the parallel market. Following the flotation, the lender agreed to loan Egypt $12 billion in an attempt to restore its economy.  In a promising move, Cairo has also indicated last month (August) that it will start repaying the International Monetary Fund (IMF) loan in May 2021, starting with a US $2.75 billion tranche. This would be followed by equal installments that would end by 2026.

Even that several leading economic sectors are showing a healthy growth, one major worry is still in the market. Reports are popping up that Cairo could be facing a real estate bubble soon. With a very strong demand, the real estate market is showing an appetite for more than 900,000 new houses the coming years.  The latter demand, which is seen by Egyptian analysts as healthy, however already is showing an overall slowdown. The first signs of the end of the so-called housing bubble are on the horizon, but can still be prevented. A housing bubble is an escalation of real-estate prices driven by increased demand, limited supply and possible speculation that eventually bursts causing prices to fall. In stark contrast to European, China, Japan, and European markets, a real mortgage financing bubble is not available in the country, as only 3 percent of transactions are based on mortgages. With a still healthy demand, as shown above, there is still a gap between supply and demand, as only around 50-60,000 new units are being build per year by private-sector companies. When looking at the immense population growth ongoing, as population still growth by 2.5 million per year, no slip in demand is to be expected. The amount of new units build is even less than real estate new builds in the Netherlands (17 million people, Egypt more than 100 million). A normal real estate bubble is not a threat (supply needs to be higher than demand), but a sword of Damocles is hanging over the market. As most purchases are being paid by cash, high inflation and continuing low salary levels, are however providing the basis for a possible crisis.

Since mid-2017, a few months after the floatation of the Egyptian pound in November 2016, people’s purchasing power had decreased with the depreciation of the pound. The current financial situation of most people is not allowing them to enter the market at present.  If this situation will continue, a possible bubble could become reality. If real estate prices in the market are higher than the intrinsic value, a slow down could quickly start to move into a bubble situation. The first sectors to be under threat will be the more larger or higher value units, as the appetite for smaller units will exist longer.

For the private sector, another threat exists too. The Egyptian government, and its state-owned or military linked organizations, have also entered the market, targeting largely to build and sell fully-finished units to higher-income groups. Egyptian research shows that at present 25 percent of the units built by the state in the new cities had not been sold. The main reason for this is that the price of land has increased exponentialy since the 2004 Urban Communities Authority auctions. Land put up for auction in New Cairo and 6 October city went up by 130 percent.

For Egypt’s future, the government will need to keep a wary eye on the real estate sector developments, as around 16.2 percent of the country’s GDP comes from the real-estate sector. The latter is becoming too high, in regards to other major sectors. The construction-sector and real-estate activities rose by 225 per cent and 952 per cent, respectively, between 2010-11 and 2016-17. A potential crisis within housing and real-estate related sectors will have a detrimental fall out on all other sectors.
On September 27 the Egyptian Central Bank (ECB) has showed to be confident in the ongoing economic reforms. The ECB left its main interest rates unchanged, keeping the overnight deposit rate at 16.75 percent and the overnight lending rate at 17.75 percent. The latter move is made due to ongoing international volatility on the emerging markets (Turkey), while Egypt’s inflation rates are slowing down a bit.

The ECB decision comes at a time that the Ministry of Finance is implementing a public debt reduction strategy. Cairo currently is aiming to reduce the public debt to 70 percent of the GDP in four years. The latter will not be based on a system of increased taxes or even proposing new ones, Egypt’s Finance Minister Mohamed Maait stated the last days. During a meeting in August, Maait already had indicated that the government aims to reduce its public debt to 92 percent of GDP in the budget of the current fiscal year 2018-2019, in contrast to the 108 percent of the GDP in the fiscal year 2016-2017. All figures are still far from the lowest ratio of Egypt’s public debt to GDP of 73.3 percent in 2009.Earlier in September, Egyptian Prime Minister Mostafa Madbouly said the country’s foreign debt rose 17.2 percent to 92.64 billion U.S. dollars by the end of June, compared with 79.02 billion dollars last year.

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