Egypt is in the early stages of an export boom, suggesting its economy could begin to recover in the next few months if a minimum level of political stability is restored.

Helped by a falling Egyptian pound, non-oil exports have grown at double-digit annual rates since early this year despite violence on the streets and deep uncertainty over the country's political future.

Egypt's export sector accounts for only slightly more than 10 percent of the overall economy, and this relatively modest contribution cannot by itself end high unemployment or generate enough tax revenue to fix the government's shattered finances.

But the surge in exports, which has received little publicity amid this year's flood of bad economic news from Egypt, shows many manufacturers are finding ways to ride out the political turbulence - and could enjoy strong growth if the country eventually gets a stable government.

"It's a good sign if they're managing to achieve that kind of export growth, especially in the current environment," said John Sfakianakis, chief investment strategist at MASIC, a Riyadh-based investment firm.

Overall Egypt still runs a huge merchandise trade deficit, which was $23.8 billion in the financial year to March, although this was already 2.7 percent narrower than in 2011-12 as exports grew and imports remained steady.

In the separate energy sector, which accounts for about a fifth of overall exports, Egypt has sharply cut back natural gas shipments, diverting supplies to the domestic market to avoid power shortages.

RECOVERY

Egypt's non-oil exports grew strongly for much of the past decade, rising 18.5 percent to 130.1 billion Egyptian pounds (now $18.6 billion) in 2011, the year when Hosni Mubarak was overthrown, according to the State Information Service.

Their growth plunged last year as the election of Islamist president Mohamed Mursi worsened political tensions and deterred investment; industrial unrest, poor security, fuel shortages and difficulties obtaining finance hit many companies.

Non-oil exports inched up just 2 percent in 2012, less than half the rate of consumer price inflation. But shipments began to recover around the start of this year, rising 7 percent from a year earlier in the first two months of 2013, and 15 percent to 65.50 billion pounds in the first five months.

Trade minister Mounir Fakhry Abdel Nour told reporters that non-oil exports jumped 21 percent year-on-year in June, a month when big Egyptian cities were rocked by mass protests against Mursi that led to his overthrow by the army on July 3.

In many ways, the operating environment for Egyptian companies has remained as tough as it was last year. But exports of low-technology, cost-sensitive products such as textiles, food and leather have jumped, businessmen say.

Textile exports rose 16.5 percent from a year ago to 2.44 billion pounds in the first five months of 2013, according to the Textile Export Council. Processed food exports climbed 26 percent year-on-year to 2.01 billion pounds in the month of May alone, and were nearly twice their level in May 2010.

A major reason for the export recovery is the depreciation of the Egyptian pound, which makes shipments more competitive. Depreciation accelerated in the first half of this year; the pound, now at 7.00 to the U.S. dollar, is down 9.3 percent since end-2012 and 16 percent since Mubarak's fall.

There are also signs that some Egyptian exporters are starting to tap fast-growing demand in markets beyond Europe and the Arab world, their traditional focuses.

Non-oil exports to non-Arab African countries surged 28 percent from a year earlier to 4.85 billion pounds in the first five months of this year. Exports to the Arab world climbed 20 percent to 27 billion pounds, helped by an economic recovery in neighbouring Libya after its civil war.

CURRENCY

It is not clear how much longer Egyptian exporters will benefit from a weak currency. Many analysts believe the pound is still overvalued and should be trading around 7.5 to the dollar, given the pressures on the economy; fresh depreciation to that level would almost certainly boost exports further.

But Egyptian authorities may resist further depreciation, and with foreign reserves boosted by $12 billion of aid pledged by friendly Gulf Arab governments this month, they are better placed to do so than the cash-strapped Mursi administration was.

Egypt depends heavily on imports of wheat and some raw materials for its industry, including low-quality cotton; although it is a big producer of raw cotton, it is unable to process that output competitively. So a weaker pound drives up costs for much of its industry, limiting the boost to corporate profits from higher exports.

Also, one of the post-Mursi government's priorities is reviving business investment and luring back money which fled the country. That may mean keeping the currency stable is more important than it would be in normal economic times.

"The currency is a double-edged sword," said Sfakianakis. "There are costs to the economy from depreciation as well as benefits, and the balance of them is not as simple as it would be in some other economies."

The pound has risen marginally in foreign exchange auctions conducted by the central bank since Mursi's departure, which may be a sign of authorities' intentions toward the currency.

Even without further depreciation, however, the operating environment for exporters may improve. Egypt's new team of technocratic economic ministers is promising to end bureaucratic delays, review regulations and ease fuel shortages.

Norhan Mohsen, who handles merchandising for small Cairo garment exporter Authentic Egypt, said expressions of interest from U.S. customers had increased in recent weeks.

"Foreign customers are still interested in our prices" despite Egypt's political instability, she said. "This year's situation looks like it will be better than last year.” – Reuters