Egypt’s Business Activity Crashes as Gulf Downturns Persist

CAIRO (Capital Markets in Africa) — Business conditions in the Arab world’s three largest economies deteriorated further last month amid shutdowns from the coronavirus and a plunge in commodity prices.

Non-oil private sector activity collapsed at an unprecedented pace in Egypt and suffered another record setback in the United Arab Emirates, according to Purchasing Managers’ Index surveys compiled by IHS Markit. Business conditions in Saudi Arabia also remained below the threshold of 50 that separates growth from contraction.

Egyptian “businesses lucky enough to remain open scaled back activity on a massive scale, as many highlighted sharp falls in domestic sales and foreign demand,” said David Owen, an economist at IHS Markit. “Firms forced to close unsurprisingly recorded an even steeper decline in output.”

The Egypt PMI slumped to 29.7, down from 44.2 in March and the lowest since the series began in April 2011, according to IHS Markit; activity, new business and exports all dropped at record rates

Saudi Arabia’s PMI was at 44.4, compared with 42.4 in March; new orders and employment levels continued to decline

IHS Markit’s gauge for the U.A.E. dropped for the sixth month running to a record low 44.1 in April; export demand collapsed amid global lockdown

Factories are reeling from Asia to the U.S., a sign the global economic recovery from the biggest crisis since the Great Depression will likely be long and uneven. With the Middle East already coping with the damage inflicted by the pandemic, the region is also coming under strain from the rout in oil prices and production cuts by OPEC and its allies.

The sudden stop of Egypt’s economy, heavily reliant on tourism and remittances for hard currency, follows a period of contraction for the non-oil private sector as the government completed a three-year agreement with the International Monetary Fund that involved a $12 billion loan. The effort helped transform Egypt into a favorite of emerging-market debt investors, though foreign direct investment has been slow to materialize.

Forced into restrictions to contain the virus, the government has now lowered its projections for economic growth in the next fiscal year beginning in July. It’s starting to ease some of the curbs by announcing plans for a partial reopening of hotels and resorts. Egypt also moved last month to shore up confidence by asking the IMF for fresh funding under a stand-by agreement in addition to the lender’s rapid financial instrument after outflows and a decline in reserves in March.

Still, undoing last month’s damage will take time. Firms in Egypt responded to the crisis by cutting costs, curbing inventories, and decreasing purchasing activity. The austerity also spilled into jobs, with employment falling at the fastest in over three years.

‘Fairly Sedate’
“Of concern for the eventual recovery, once the lockdown is lifted, new orders and new export orders were also especially low, suggesting that the bounce-back will be a fairly sedate one,” Emirates NBD economists Khatija Haque and Daniel Marc Richards said in a report.

Meanwhile, supply chain disruptions may have partly distorted PMI readings, according to Emirates NBD, Dubai’s biggest bank. Lengthening suppliers’ delivery times, one of the index’s components, usually indicates higher demand for inputs and therefore pushes the headline figure higher.

But it’s the shutdowns of factories and border closures — and not increased demand — that have recently caused longer delivery times, Emirates NBD economists said in a report. Other PMI components such as new work are now probably a better reflection of business conditions, they said.