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Analysis: Egypt economy faces rocky road after protests - Daily News Egypt

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Analysis: Egypt economy faces rocky road after protests

By Reed Stevenson/Reuters DUBAI: Egypt’s military council faces a daunting challenge to stabilize the economy after 18 days of protests which may cut growth this year in half and have left regulators nervous about the reopening of its capital markets. In the short-run, analysts hope that there will be an orderly transition to democracy and that …


By Reed Stevenson/Reuters

DUBAI: Egypt’s military council faces a daunting challenge to stabilize the economy after 18 days of protests which may cut growth this year in half and have left regulators nervous about the reopening of its capital markets.

In the short-run, analysts hope that there will be an orderly transition to democracy and that may halt outflows of capital which have reached as much as $1 billion per day at the height of the revolt.

Many investors are also optimistic about the broader changes to business and policy that may follow under a freely-elected government but there is little prospect of a step change in the near term.

“In terms of the economy, Egypt has been run by the same technocrats for the last 30 years,” said Tim Ash, head of emerging markets research at RBS. “I don’t think you’re going to see too much of a change.”

“The establishment are still around. Their real agenda is no change until September,” he said.

Egypt’s economy was worth an estimated $217 billion last year, half of oil giant Saudi Arabia, and relies on foreign investments, tourism and fees from the Suez Canal

A month before the protests erupted on Jan. 25, analysts polled by Reuters had expected growth of 5.4 percent in the fiscal year ending in June, second in the Gulf Arab region only to Qatar. The government had forecast 6 percent expansion.

But while banks and some shops are reopening, tourists — who account for between 5 and 11 percent of economic output — are still shunning the popular holiday hub, making the growth predictions look optimistic.

Said Hirsch, Middle East economist at Capital Economics, said the main priority would be bringing society back to normal and get people working again.

“The military’s role will be to stabilize the economic situation,” he said.

Market nerves

Officials on Saturday pushed back the opening of the stock market for a second time, from Sunday to next Wednesday, and the Egyptian pound had to be propped up by intervention by the central bank last week.

At the peak of the unrest, some analysts speculated the bank would have to make an emergency rise in interest rates to aid the pound.

Optimism over Hosni Mubarek’s departure — which has helped emerging markets globally — make that move less likely, but the currency’s weakness also adds to the likelihood of higher inflation and an eventual rise in rates.

Ratings agencies also downgraded Egypt’s sovereign ratings by one notch as protests intensified, citing possible damage to already weak state finances.

“We believe the central bank will hike rates by 100 basis points in an emergency meeting this month as inflation is likely to surge on the back of a weaker pound,” said Dina Ahmad, CEEMEA strategist at BNP Paribas.

Lower private consumption, which accounts for around 70 percent of GDP, a drop in foreign investments and higher unemployment are also expected to hurt economic performance.

Although Mubarak’s promise of a double-digit salary raise for public sector workers will now likely be scrapped, the transitional government is likely to keep up spending.

Lower taxes, higher subsidies and pressures to give more money to unemployed may also undermine the crude oil-importer’s fiscal health, with the budget gap likely to balloon towards 10 percent of GDP this year, according to BNP Paribas.

“First we need to see a return to normality,” said Lars Christensen, senior emerging markets analyst at Danske Bank. “Then I think the recovery could be relatively short.”

Spending vs Inflation

Long-term, the outlook is cloudier.

If the economy worsens, any resulting social instability could become a graver geopolitical concern and to prevent that, Egypt may also be well-positions to receive a boost in foreign aid.

“I think it’s the case that the United States and the Gulf (countries) could bring more aid to Egypt,” said Hirsch. “A lot of money could come from the Gulf.

Gulf Arab rulers, as well as the United States, see Egypt as a key ally to counter Iran’s growing influence in the region, and will want to keep the country economically healthy and stable.

Among Gulf countries, Yemen, Bahrain and Kuwait have already offered cash or concessions, eyeing similar young populations and simmering discontent.

Beyond that, the prospect of a freer and more transparent economy under new regime could draw substantial inflows of investment looking to grab market share in the country of 80 million.

“When you have less than, say, 10 percent of the population with checking accounts, there is potential for growth,” said Karim Baghdady, managing director of Egyptian-based investment bank Beltone in New York.

“When you have a gray economy that is almost as large as the official GDP, if you are able to institutionalize that economy, then people will start securitizing their debts, able to borrow more, buy more. So there is a big domino effect.” —Additional reporting by Martin Dokoupil and Manuela Badawy

 

Topics: egypt economy

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