Egypt’s non-oil private sector sank further into contraction in October, with business conditions deteriorating at the strongest rate since July 2013, according to a survey sponsored by Emirates NBD and produced by IHS Markit.

Egypt’s non-oil private sector sank further into contraction territory in October, with business conditions deteriorating at the strongest rate since July 2013, according to a survey sponsored by Emirates NBD and produced by IHS Markit, a top business intelligence provider.

 According to anecdotal evidence, many of the issues facing companies stemmed from the weakness of the Egyptian pound relative to the US dollar. That drove costs up considerably, often making raw materials unaffordable and thus in short-supply. As a result, both output and purchasing activity fell sharply, the survey said.

Furthermore, higher costs linked to adverse exchange rates led a number of firms to raise their charges, which contributed in turn to faster declines in both total new work and new orders from abroad.  

The survey contains original data collected from a monthly survey of business conditions in the Egyptian private sector.

Commenting on the Emirates NBD Egypt PMI, Jean-Paul Pigat, senior economist at Emirates NBD, said: “October’s survey highlights the increasingly difficult operating environment confronting Egyptian private sector firms. 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.”

Key findings

•    PMI tumbles to 39-month low
•    Currency weakness leads to higher costs and material shortages
•    Output and new work fall markedly; input buying drops at survey-record pace

The headline seasonally adjusted Emirates NBD Egypt Purchasing Managers’ Index (PMI) – a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy – dropped to a 39-month low of 42.0 in October, from 46.3 in September. That signalled a marked and accelerated contraction of Egypt’s non-oil private sector. Moreover, the latest reading stretched the current downturn to 13 months – matching the longest sequence in the survey’s history.

The weakness of the Egyptian pound, particularly against the US dollar, was a key factor behind the overall downturn in October. It was cited as the main driver of higher purchasing costs, which rose to the greatest extent since data collection started in April 2011. In line with substantial cost pressures, firms also raised their charges at a survey-record pace.

Steep inflation had an impact on both output and new orders in October. Activity dropped at the steepest rate since mid-2013 amid reports of raw material shortages resulting from higher costs. Meanwhile, with charge inflation picking up, client demand deteriorated and new business fell at a marked pace similar to that seen for output. Uncertainty surrounding the exchange rate also led to a steep reduction in new business from abroad.

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. Companies chose instead to draw on pre-production inventories in order to meet subdued inflows of new work, with the rate of depletion accelerating to the fastest in the series history.

Material shortages linked to high inflation contributed to another rise in backlogs of work, the thirteenth in as many months. The rate of accumulation was only slight, however. The lack of raw materials had a more pronounced effect on suppliers’ lead times, which lengthened to the greatest extent since the survey started in April 2011.

Finally, employment declined for the seventeenth consecutive month, albeit modestly in comparison to output and new work.  – TradeArabia News Service