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DAMPENED EXPECTATIONS
Abstracts from “Business Barometer, July 2008”
Published by the Egyptian Center for Economic Studies (ECES)
Analysis by SHAIMAA FAYED
Since 1998, the Egyptian Center for Economic Studies has been publishing its biannual “Business Barometer,” an independent study that assesses the views of a stratified sample of public and private Egyptian firms with regard to the performance of the economy over the previous six-month period, as well as their projections for the upcoming six months. The July 2008 edition of the “Business Barometer” reports the views of 474 large firms across six sectors: manufacturing, construction, tourism, transportation, communications and financial services. The study covers their assessment of overall economic growth and the results of their operations in terms of production, sales, inventories and capacity utilization, prices and wages, investment and employment, and the major business constraints they faced. This is also the first edition to summarize its results in one Business Barometer Index (BBI), reflecting firms’ evaluations and expectations of the overall performance of the economy.
For the first half of 2008, there was a notable drop in the number of firms with positive perceptions of the economy, with fewer firms anticipating an increase in economic growth compared to the previous survey, in addition to relatively more firms holding unfavorable expectations about production, domestic sales and exports for the second half of 2008.
“Regarding [their] own activities, relatively fewer firms [29 percent compared to 48 percent in the previous survey] reported higher production, domestic sales and exports; while relatively more firms [44 percent compared to 29 percent] reported unchanged production, domestic sales and exports. In general, the most favorable views were reported by the financial, tourism and construction firms. Less positive perceptions were expressed by transportation, communications and manufacturing firms. For the next six months, respondents’ expectations were similar.”
Firms’ increased pessimism with regard to economic growth is mainly a reflection of recent economic measures undertaken by the government, which led to an spike in domestic inflation; in June 2008, Egypt’s year-to-year inflation reached 20.2 percent. The study points to the need for more rigorous measures to restore investors’ confidence in the economy.
“To secure the LE 12 billion required to finance the 30-percent salary increase promised by the president to civil servants and public sector employees in May 2008, [the government’s measures] included a raise in the price of gasoline, diesel and kerosene; an increase in sales tax on local and imported cigarettes by 10 percent and 33 percent, respectively; and a raise in the price of natural gas for energy-intensive industries. In addition, a development tax of LE 27 per ton of clay was imposed on quarries, and an increase in annual vehicle registration fees was put into effect. Tax exemption for private schools and universities and on treasury bills was removed. The free zone status was discontinued for energy-intensive companies operating in free zones.”
With regard to the level of activity, the majority of firms reported steady or higher economic growth during the first half of 2008. Fifty-six percent of the surveyed firms reported higher production quantities, 28 percent reported stable production and the remaining 16 percent reported lower production compared to the previous survey. The most favorable responses were from the financial, tourism and construction sectors.
The incongruity between firms’ perceptions about their production and their perceptions regarding economic growth was highly affected by the skyrocketing inflation resulting from the economic measures taken by the government, which coincided with the time of the survey (end of May 2008). This factor impelled firms to become less optimistic about their expected performance than they were in the previous survey. In the January 2008 issue of “Business Barometer,” 75 percent of firms expected higher performance in comparison to 68 percent of firms in July 2008. Sixteen percent expected production capacity to remain the same compared to 19 percent in July 2008. However, more firms (13 percent) expect to reduce their production capacity during the second half of 2008 than did during the first six months of the same year (9 percent).
The transportation, financial, construction and manufacturing firms voiced the most optimistic views with regard to production, with tourism and communications firms expressing less optimistic projections. The one sub-sector for which all firms expected an increase in production is the paint industry, due in turn to the boost in the construction industry owing to high foreign investments in Egypt’s real estate market. Domestic and international sales resulted in similar responses.
“Regarding the coming six months, the majority of firms anticipate higher (66 percent) and stable (22 percent) domestic sales, although their expectations were less optimistic compared to the first half of 2008 (with 73 percent of firms anticipating higher domestic sales)... The percentage of firms expecting an increase in domestic sales was higher in the transportation, financial, construction and manufacturing sectors. Communications and tourism were less optimistic about domestic sales during the second half of 2008... For the coming six months of 2008, the majority of firms anticipated higher (71 percent) and stable (19 percent) international sales, although they were slightly less optimistic compared to the first half of the same year... Compared to the manufacturing and transportation sectors, firms in the financial, construction, tourism and communications sectors expect higher exports during the next six months.”
The dampened sales expectations can be explained mainly by the continued rise in inflation. As worldwide food, fuel and real estate prices soared and expectations of bans on certain commodity exports emerged, especially food products, output and input prices also increased.
“The majority of firms reported higher (56 percent) or stable (41 percent) output prices. For the coming six months of 2008, the majority of firms anticipate higher (68 percent) or stable (30 percent) output prices, with relatively more firms in the construction, transportation, manufacturing and tourism [sectors] expecting an increase.”
While many companies reported higher or stable output prices, and hence higher wages, which increased concurrently with rising production figures, their employment outlook seems to reflect uncertainty about market performance in the short term.
“During the first six months of 2008, firms reported stable (55 percent) or higher (33 percent) employment. The majority of firms hired more blue-collar (17 percent) than white-collar (14 percent) workers; and more temporary (33 percent) than permanent workers (29 percent). For the coming six months of 2008, firms expect to maintain (70 percent) or increase (22 percent) employment.”
The generally conservative outlook of most of the sectors covered in this report was induced mainly by skyrocketing inflation. However, the firms surveyed also cited some major business constraints faced by their relative sectors, namely dealing with government bureaucracy, lack of skilled workers and insufficient demand.
This report is available on the website of the ECES at www.eces.org.eg
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