Mon, Feb 14, 2011 - Page 10 News List

ANALYSIS: Egypt economy faces rocky road in wake of protests

domino effect?:Gulf countries such as Yemen, Bahrain and Kuwait, with their own young populations and widespread discontent, have offered Egypt cash or concessions

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 US$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 US$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.

However, while banks and some shops are reopening, tourists — who account for between 5 percent 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.

Officials on Saturday pushed back the opening of the stock market for a second time, from yesterday to 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 former Egyptian president 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, CEEMA (Central Eastern Europe, Middle East and Africa) strategist at BNP Paribas.

Lower private consumption, which accounts for about 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 probably be scrapped, the transitional government is likely to keep up spending.

Lower taxes, higher subsidies and pressures to give more money to the unemployed may also undermine the crude oil-importer’s fiscal health, with the budget gap likely to balloon toward 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.”

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