PEST Analysis

Prepared forMBA Egypt

Dr Afifi

Prepared ByAhmed M. Ezzat

Agenda

• Key FACTS about Egypt

Introduction

• Political structure• Main political parties• Environmental laws• Foreign trade• Tax Rate• Labor force and laws

Political Environment

• Facts and figures on the Egyptian economy• Risk Assessment• Performance statistics

Economical Environment

Sociocultural Environment

Technological Environment

IntroductionKey FACTS about Egypt

• Full name: Arab Republic of Egypt• Capital: Cairo• Population: 82,079,636 million (July 2011 est.)• Age structure:

– 0:14 years: 32.7% (male 13,725,282/female 13,112,157)– 15:64 years: 62.8% (male 26,187,921/female 25,353,947)– 65 years and over: 4.5% (male 1,669,313/female 2,031,016) (2011 est.)

• Median age: – total: 24.3 years– male: 24 years– female: 24.6 years (2011 est.)

• Population growth rate: 1.96% (2011 est.)• Birth rate: 24.63 births/1,000 population (2011 est.)• Death rate: 4.82 deaths/1,000 population (July 2011 est.)• Area: 1 million sq km contains land: 995,450 sq km & water: 6,000 sq km

• Major language: Arabic• Major religions: Muslim 90% , Coptic 9% & other Christian 1%• Currency: Egyptian Pound• Natural resources : petroleum, natural gas, iron ore, phosphates, manganese, limestone, gypsum, talc,

asbestos, lead, rare earth elements, zinc• Main exports: Petroleum, petroleum products, cotton, Textile, Metal product and Chemicals.• Geographical Location: Northern Africa, bordering the Mediterranean Sea, between Libya and the Gaza

Strip, and the Red Sea north of Sudan, and includes the Asian Sinai Peninsula

To make an external scanning on Egypt, we have to know what characterizes the political, economic, sociocultural and technological environments in Egypt.

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• Political Factors

• Economic Factors

• Sociocultural Factors

• Technological Factors

Political Environment:Political structure

• Following a revolution and during a challenging period of political transition,chief of state: President (vacant); Vice President (vacant); note - following the resignation of President Mohamed Hosni MUBARAK in February 2011, the Supreme Council of the Armed Forces, headed by Defense Minister Muhammad Hussein TANTAWI, assumed control of the government

• head of government: Prime Minister Essam Abdel Aziz SHARAF (since 4 March 2011); Deputy Prime Minister Ali elslme

• cabinet: a new cabinet was sworn in on 7 March 2011

• Constitution :11 September 1971; amended 22 May 1980, 25 May 2005, and 26 March 2007; note - constitution dissolved by the military caretaker government 13 February 2011

Political Environment:Political structure

• Legal system: mixed legal system based on Napoleonic civil law and Islamic religious law; judicial review by Supreme Court and Council of State (oversees validity of administrative decisions)

• The president's term runs for 4 years. Egypt's legislative body, the People's Assembly, has 454 members--444 popularly elected and 10 appointed by the president. The constitution reserves 50% of the assembly seats for "workers and peasants." The assembly sits for a 5-year term

• Legislative branch: bicameral system consists of the Advisory Council or Majlis al-Shura (Shura Council) that traditionally functions mostly in a consultative role (264 seats; 176 members elected by popular vote, 88 appointed by the president; members serve six-year terms; mid-term elections for half of the elected members) and the People's Assembly or Majlis al-Sha'b (518 seats; 508 members elected by popular vote, 64 seats reserved for women, 10 appointed by the president; members serve five-year terms)

• Judicial branch : Supreme Constitutional Court.

Political Environment:Main political parties :

• The multi-party system was restored in 1976 by the then president Sadate. However, in practice it is the ruling National Democratic Party (NDP) which completely dominates the political arena. The Muslim brothers, a brotherhood created in 1928 by Hassan El Banna is the main opposition party of the country. They were banned but in spite of it, they were able to win 88 seats in the People's Assembly in the 2005 elections. The other opposition parties like Wafd, El-Ghad or the Nasserian Party are minority parties and were nearly wiped out in the 2005 elections.

Political Environment:Environmental laws

• According to the Law 4/1994 for the Protection of the Environment, the Egyptian Environmental Affairs Agency (EEAA) was restructured with the new mandate to substitute the institution initially established in 1982. At the central level, EEAA represents the executive arm of the Ministry.

• The Principal Functions of the Agency Include: – Formulating environmental policies. – Preparing the necessary plans for Environmental protection and Environmental

development projects, following up their implementation, and undertaking Pilot Projects.

– The Agency is the National Authority in charge of promoting environmental relations between Egypt and other States, as well as Regional and International Organizations.

Political Environment:Foreign trade

• The Egyptian market is gradually opening up, especially after signing an agreement with the European Free Trade Association (EFTA) in 2006, and a free trade treaty with the United States. Its three primary export partners are the European Union, which represents more than a third of the trade, United States and Syria. Its three primary import partners are the European Union, the United States and China. Egypt mainly exports mineral fuels and oil, cotton, iron and steel. It imports mainly consumer electronic goods and capital goods, nuclear reactors and nuclear-powered boilers, cereals, food products and chemical products. Import volume has doubled and is twice the export volume, a fact which contributed to the deterioration of the country's trade balance.

Political Environment:Tax Rate

The standard rate of corporate income tax is 66%. The rate is 32% on profits arising from export operations and on profits of an industrial company as long as they arise from its industrial activities.

Withholding TaxAny business operating in Egypt must withhold against any payments-- made to any contractor or supplier of goods or services-- the following basic percentages:

Contracting and supplying: 1%Services: 3%Commissions: 10%Professional fees (under LE 500): 10%Professional fees (over LE 500): 15%Leasing of property or selling of goods for trading or manufacturing: 1% - 5% (to be added on the payee's tax liability account.

Political Environment:Tax Rate

• Corporate Tax Exemptions and Deductions– Almost all business expenses are deductible including depreciation, interest, royalties,

rent, profit sharing payments to employees, legal expenses, pension and Egyptian state social insurance contributions.

– Profits of companies located in the free zones.– capital gains are applicable in some cases of asset replacement.– All tax holidays granted under Investment Law No.8/1997.– Joint stock companies employing more than 50 employees and maintaining proper

books of accounts are granted a tax holiday for a five-year period. Also, hotels and tourist projects are granted a tax holiday for a five-year period which can be extended to ten years if the project is located in a remote area.

– For joint stock companies listed in the stock market, a deductible allowance is made that is equal to interest income, which can be earned on a bank deposit (currently 10.5 percent).

– Ninety percent of income generated by companies from their movable capitals which have been subject to the new tax imposed by Law 187 of 1993.

Political Environment:Tax Rate

• Personal Income Tax Taxable IncomeTax Law No. 187 of 1993 distinguishes among the following categories of income of individuals (as well as partners in partnerships):– Salaries and wages.– Commercial and industrial profits– Income from immovable property– Income from movable capital– Noncommercial profits.

• Taxation of Foreigners Foreigners that have been working in the country for more than 183 days with their annual salaries varying from LE 1.00 to LE 50,000 are subject to paying a 20 percent income tax. However, if the employee's annual income exceeds LE 50,000 then they will be liable to pay 32 percent income tax.

Political Environment:Tax Rate

• Social Insurance Contribution Rates

Employer(%) Employee(%)

On basic monthly salary up to L.E. 500 / month 26 14

On variable pay (such as production incentive bonuses)-up to L.E. 500/month 24 11

Political Environment:Labor force

• 26.1 million (2010 est.)

• Labor force - by occupation: – agriculture: 32%– industry: 17%– services: 51% (2001 est.)

• Unemployment rate: – 9.7% (2010 est.)– 9.4% (2009 est.)

• Population below poverty line: – 20% (2005 est.)

Economical EnvironmentOccupying the northeast corner of the African continent, Egypt is bisected by the highly fertile Nile valley, where most economic activity takes place. Egypt's economy was highly centralized during the rule of former President Gamal Abdel NASSER but opened up considerably under former Presidents Anwar EL-SADAT and Mohamed Hosni MUBARAK. Cairo from 2004 to 2008 aggressively pursued economic reforms to attract foreign investment and facilitate GDP growth. The global financial crisis slowed the reform efforts.

The budget deficit climbed to over 8% of GDP and Egypt's GDP growth slowed to 4.6% in 2009, predominately due to reduced growth in export-oriented sectors, including manufacturing and tourism, and Suez Canal revenues. In 2010, the government spent more on infrastructure and public projects, and exports drove GDP growth to more than 5%, but GDP growth in 2011 is unlikely to bounce back to pre-global financial recession levels, when it stood at 7%. Despite the relatively high levels of economic growth over the past few years, living conditions for the average Egyptian remain poor.

In the past year, the cabinet economic team has simplified and reduced tariffs and taxes, improved the transparency of the national budget, revived stalled privatizations of public enterprises and implemented economic legislation designed to foster private sector-driven economic growth and improve Egypt's competitiveness. Despite these achievements, the economy is still hampered by government intervention, substantial subsidies for food, housing, and energy, and bloated public sector payrolls. Moreover, the public sector still controls most heavy industry.

Economical EnvironmentFacts and figures on the Egyptian economy

GDP (purchasing power parity):$497.8 billion (2010 est.)$473.4 billion (2009 est.)$452.3 billion (2008 est.)note: data are in 2010 US dollars

GDP (official exchange rate):$218.5 billion (2010 est.)

GDP - real growth rate:5.1% (2010 est.)4.7% (2009 est.)7.2% (2008 est.)7.1% (2007 est.)

GDP - per capita (PPP):$6,200 (2010 est.)$6,000 (2009 est.)$5,900 (2008 est.)$5,500 (2007 est.)

GDP - composition by sector:agriculture: 13.5%industry: 37.9%services: 48.6% (2010 est.)

Labor force:26.1 million (2010 est.)

Labor force - by occupation:agriculture: 32%industry: 17%services: 51% (2001 est.)

Unemployment rate:9.7% (2010 est.)9.4% (2009 est.)

Population below poverty line:20% (2005 est.)

Household income or consumption by percentage share:lowest 10%: 3.9%highest 10%: 27.6% (2005)

Distribution of family income - Gini index:34.4 (2001)

Investment (gross fixed):18.4% of GDP (2010 est.)

Budget:revenues: $46.82 billionexpenditures: $64.19 billion (2010 est.)

Public debt:80.5% of GDP (2010 est.)80.9% of GDP (2009 est.)

Inflation rate (consumer prices):12.8% (2010 est.)11.9% (2009 est.)

Central bank discount rate:8.5% (31 December 2009)11.5% (31 December 2008)

Commercial bank prime lending rate:11.98% (31 December 2009 est.)12.33% (31 December 2008 est.)

Stock of narrow money:$37.8 billion (31 December 2010 est.)$33.42 billion (31 December 2009 est.)

Stock of broad money:$166.2 billion (31 December 2010 est.)$146.7 billion (31 December 2009 est.)

Stock of domestic credit:$145.6 billion (31 December 2010 est.)$131.5 billion (31 December 2009 est.)

Market value of publicly traded shares:$89.95 billion (31 December 2009)$85.89 billion (31 December 2008)$139.3 billion (31 December 2007)$93.48 billion (31 December 2006)

Agriculture - products:cotton, rice, corn, wheat, beans, fruits, vegetables; cattle, water buffalo, sheep, goats

Industries:textiles, food processing, tourism, chemicals, pharmaceuticals, hydrocarbons, construction, cement, metals, light manufactures

Industrial production growth rate:5.5% (2010 est.)

Current account balance:$270 million (2010 est.)$-3.195 billion (2009 est.)$-1.331 billion (2008 est.)

Exports:$25.34 billion (2010 est.)$23.09 billion (2009 est.)

Imports:$46.52 billion (2010 est.)$45.56 billion (2009 est.)

Reserves of foreign exchange and gold:$35.72 billion (31 December 2010 est.)$33.93 billion (31 December 2009 est.)

Debt - external:$30.61 billion (31 December 2010 est.)$29.66 billion (31 December 2009 est.)

Stock of direct foreign investment - at home:$72.41 billion (31 December 2010 est.)$66.71 billion (31 December 2009 est.)$59.13 billion (31 December 2008 est.)

Stock of direct foreign investment - abroad:$4.9 billion (31 December 2010 est.)$4.272 billion (31 December 2009 est$12.08 billion (31 December 2008 est.)

Exchange rates:Egyptian pounds (EGP) per US dollar -5.6124 (2010),5.545 (2009),5.4 (2008),5.67 (2007),5.725 (2006)

Economical EnvironmentRisk Assessment

The economy grew strongly in 2007 driven by domestic demand. The government's liberal approach since 2004 has fostered a climate of confidence conducive to consumption and investment. The economy has also benefited from oil country boom via their investments and emigrant worker remittances. In this context, the business environment is improving with the Coface payment incident index remaining below the world average. While the gas sector has continued to develop, manufacturing, construction, tourism, and communications have achieved excellent performance. The outlook for 2008 is bright with growth likely to reach between 7.0 and 7.5 per cent. .The external financial situation remains healthy amid the good trend on foreign currency earnings and the increase in foreign direct investment fuelled by the privatizations. Debt service is low and Egypt is building up foreign exchange reserves. However, the fiscal deficit and public sector debt remain a source of concern. Controlling public spending and reducing the debt necessitates a spending overhaul that will take time. Regional conflicts and poverty have strengthened Islamist opposition movements. In this context social climate is tense and officials have exercised caution in pursuing reforms.

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Economical EnvironmentRisk Assessment

• STRENGTHS – The business climate has benefited from an active reform program and a

regional economic boom.– Egypt boasts diversified sources of foreign exchange (the Suez Canal,

tourism, private transfers, and oil and gas exports).– Foreign exchange reserves are high.– The country enjoys the political and financial support of Western

countries.

• WEAKNESSES– The interest on public debt and the cost of subsidies weighs on public

finances limiting the capacity for infrastructure development.– The banking system is not yet capable of meeting the economy's needs.– The tourism sector, whose revenues are of fundamental importance to

the current account balance and economic growth, remains vulnerable to the terrorist menace

Economical EnvironmentPerformance statistics

Subject Descriptor Units Scale 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Gross domestic product, constant prices National currency

Billions 354.70 367.20 378.90 391.00 407.00 425.20 454.30 486.50 521.39 545.89 570.44

Gross domestic product, constant prices Annual percent change

5.38 3.52 3.19 3.19 4.09 4.47 6.84 7.09 7.17 4.70 4.50

Gross domestic product, current prices National currency

Billions 340.10 358.70 378.90 417.50 485.30 538.50 617.70 744.80 896.50 1,038.60 1,182.62

Gross domestic product, current prices U.S. dollars Billions 99.16 95.40 87.51 81.38 78.80 89.79 107.38 130.35 162.62 187.96 208.46

Gross domestic product, deflator Index 95.88 97.68 100.00 106.78 119.24 126.65 135.97 153.09 171.95 190.26 207.32

Gross domestic product per capita, constant prices

National currency

Units 5,603.52 5,675.47 5,740.91 5,809.81 5,932.95 6,074.29 6,371.67 6,610.05 6,933.32 7,116.81 7,291.09

Gross domestic product per capita, current prices

National currency

Units 5,372.83 5,544.05 5,740.91 6,203.57 7,074.34 7,692.86 8,663.39 10,119.57 11,921.54 13,540.36 15,115.71

Gross domestic product per capita, current prices

U.S. dollars Units 1,566.42 1,474.48 1,325.85 1,209.27 1,148.71 1,282.77 1,505.96 1,771.00 2,162.45 2,450.41 2,664.41

Gross domestic product based on purchasing-power-parity (PPP)

valuation of country GDP

Current international

dollar

Billions 247.52 262.03 274.76 289.63 309.65 333.35 367.76 405.11 443.43 471.51 500.25

Gross domestic product based on purchasing-power-parity (PPP) per

capita GDP

Current international

dollar

Units 3,910.25 4,049.93 4,162.96 4,303.62 4,513.88 4,762.12 5,157.97 5,504.17 5,896.67 6,147.12 6,393.94

Gross domestic product based on purchasing-power-parity (PPP) share of

world total

Percent 0.59 0.60 0.60 0.60 0.59 0.59 0.60 0.62 0.64 0.66 0.67

Implied PPP conversion rate National currency per

current international

dollar

1.37 1.37 1.38 1.44 1.57 1.62 1.68 1.84 2.02 2.20 2.36

Inflation, average consumer prices Index, 2000=100

100.00 102.43 104.92 108.28 117.06 127.36 132.71 147.25 164.48 191.20 207.36

Inflation, average consumer prices Annual percent change

2.85 2.43 2.43 3.21 8.11 8.80 4.20 10.95 11.70 16.24 8.45

Inflation, end of period consumer prices

Index, 2000=100

100.00 102.23 105.04 109.26 122.05 127.76 137.01 148.73 178.75 196.55 212.27

Inflation, end of period consumer prices

Annual percent change

2.54 2.23 2.75 4.01 11.71 4.68 7.24 8.55 20.18 9.96 8.00

Population Persons Millions 63.30 64.70 66.00 67.30 68.60 70.00 71.30 73.60 75.20 76.70 78.24

Economical EnvironmentPerformance statistics

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20160

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Real GDP Growth Rate

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Economical EnvironmentPerformance statistics

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

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Consumer Prices

Consumer Prices

Economical EnvironmentPerformance statistics

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2016

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Balanced on current account

Series 1

Sociocultural Environment• Egypt’s total population stood at 82,079,636 million. Out of this approximately 90% are Muslims while the

remaining are Christians. Most of the population inhabits the area near the Nile River and almost half of Egypt’s population is urban, living in the densely populated cities such as Cairo and Alexandria.

• One of Egypt’s biggest socio-economic problems is the high unemployment rate which has been growing over the years. The unemployment rate, which has averaged more than 10% over a decade, increased to over 12% in 2005–06. With the population growing at 1.8% per annum, the economic growth of 4.4% is not enough to curb the unemployment rate. While the average growth in employed population during the last five-year period stood at 2.3%, the rise in unemployed population has been much higher during the same period averaging around 8%. The high rates of unemployment and population growth coupled with meager wages in most of the public sector companies contribute to the poverty levels, with close to 20% of Egypt’s population below the poverty line. A big challenge for Egypt in the near future will be to create jobs, as the population within the 20–45 age-group constitutes around 65% of the total population.

• The education indicators of Egypt project a poor image of the education system. Only about 58% of the population is literate and there is a big difference in the literacy rates for males and females. Male literacy rate is around 68%, while female literacy rate is just about 47%, indicative of gender disparity. The National Council for Women, a nodal government agency that works for the welfare of women in Egypt, aims to completely eradicate illiteracy among females.

• The healthcare system in Egypt is underdeveloped with only around 29% of the population covered by governmental health insurance. Egypt’s public healthcare system is under-funded, with the government committing only around $1 billion in 2005–06 for upgrading the healthcare sector, which represents a meager 2.7% of the total state budget. The ministry of health is the largest institutional financier providing free healthcare services in Egypt but its reach is limited. Almost 65% of the Egyptian people pay for their own insurance through private and other health insurance organizations. The total spending on healthcare in Egypt is only about 4% of its GDP.

Technological Environment• Egypt's IT spending is expected to increase from US$1.3bn in 2010 to US$2.1bn by 2014 and the Egyptian IT market

growth is forecasted to remain below pre-economic crisis levels in 2010, but economic recovery, tenders delayed from 2009 and higher incomes boosted by pay raises for civil servants and other groups should help to keep sales on an upwards trajectory. .

• A number of policies have been implemented to attract foreign investment in IT outsourcing, including local employment subsidies, lower corporate taxes and deductions for training costs. The Egyptian minister of state for administrative development has said that 200 government services will soon be available online through a new e-government portal. The portal will offer 70 services in both English and Arabic. According to the Ministry for Administrative Development, more than 20 government agencies currently offer services and licenses online.

• Egypt's computer hardware sales are projected at US$821mn in 2010 and are forecast to reach around US$1.3bn in 2014.Egypt's IT market will stay hardware dominated, with spending on PCs sustained by initiatives like the 'Computer for Every Student' and 'PC for Every Home' programs. Hardware accounted for an estimated 62% of Egypt's IT spending last year. Households account for 20-25% of unit sales, with almost 1-1.5mn households said to possess a computer at present. .

• Overall spending on software remains rather low, which reflects the relative immaturity of Egypt's IT market. One market driver has been a significant fall in software piracy, with the illegal software usage rate, as measured by the Business Software Association, falling a further 1% to 59% in 2008. While large corporations have long understood the business case for deploying technology, small and medium-sized enterprises is increasingly beginning to see such investments as important if they are to avoid being overtaken by more tech-competent competitors. .In 2008, Egypt continued liberalization of the telecoms market, with the award of a second national fixed license. This development, which followed the award of 3G licenses to three mobile telecoms service providers in 2007, is likely to drive new opportunities for IT vendors. As well as generating additional spending on IT products and services from the telecoms sector, the spread of internet should provide a boost to the PC market over the next few years. . . .

• The Egyptian IT services market is dominated by demand from government, finance and telecoms sectors, which account for more than 25% of Egypt's total spending.

Technological EnvironmentCommunications• Telephones - main lines in use:10.313 million (2009)• Telephones - mobile cellular:55.352 million (2009)•

• Telephone system:• general assessment: underwent extensive upgrading during 1990s; principal centers at Alexandria, Cairo,

Al Mansurah, Ismailia, Suez, and Tanta are connected by coaxial cable and microwave radio relay• domestic: largest fixed-line system in the region; as of 2010 there were three mobile-cellular networks

with a total of more than 55 million subscribers• international: country code - 20; landing point for Aletar, the SEA-ME-WE-3 and SEA-ME-WE-4 submarine

cable networks, Link Around the Globe (FLAG) Falcon and FLAG FEA; satellite earth stations - 4 (2 Intelsat - Atlantic Ocean and Indian Ocean, 1 Arabsat, and 1 Inmarsat); tropospheric scatter to Sudan; microwave radio relay to Israel; a participant in Medarabtel (2009)

• Broadcast media:• mix of state-run and private broadcast media; state-run TV operates 2 national and 6 regional terrestrial

networks as well as a few satellite channels; about 20 private satellite channels and a large number of Arabic satellite channels are available via subscription; state-run radio operates about 70 stations belonging to 8 networks; 2 privately-owned radio stations operational (2008)

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• Internet country code:.eg• Internet hosts:187,197 (2010)• Internet users:20.136 million (2009)

References

• CIA the world fact book – USA• The international Monetary Fund

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