While the first six months of 2011 have been characterised by tremendous political upheaval in Egypt, the country’s future may ultimately depend on its recovery from the economic paralysis which has gripped the Middle East and North Africa (MENA) region’s second-largest economy since the unrest began.
As of June 14 the CASE Index, which includes the 30 most active stocks in the Egyptian stock market, was still down almost 22% since the start of the year – not far above its March lows when the market was down 31% year-to-date. And according to the Economist Intelligence Unit, real GDP growth in Egypt will drop to around 1.2% in fiscal year 2010/11 (July 1 to June 30) owing to the continuing impact of the political crisis.
“The Egyptian economy has slowed significantly [in the fiscal year ending on 30 June],” says Philippe Dauba-Pantanacce, senior economist for the MENA region at Standard Chartered.
“The tourism sector lost $646m in March alone – tourist arrivals were down 60% year-on-year,” he continues, noting that tourism is a key source of foreign currency.
As a consequence, FX reserves have slumped dramatically: net international reserves have fallen by $13bn since January, to $27bn as of the end of May. “The decline in reserves has stabilised, but it’s particularly important for Egypt, whose currency operates as a managed float,” he adds, referring to the mechanism wherein the currency’s value is allowed to fluctuate according to the foreign exchange market.
Some believe that this stabilisation is the first step in a long, painful process of recovery for Egypt’s shattered economy, and its standing on the world stage. Others, however, contend that the market has not been as badly damaged by the unrest, as had initially been feared. Could recovery be swifter than anyone might have imagined at the barricades of Tahrir Square?
“Egypt has been one of the best-performing markets in the region since the financial crisis, and that’s a function of the fact that the companies there are much more diverse than in other markets in the Middle East,” says Mark McFarland, emerging markets economist at Emirates NBD.
“I’m very optimistic about Egypt, as outside the tourism and real estate sectors, and businesses which feed into that, there hasn’t been a sustained negative impact on the economy, and the markets are still pretty buoyant,” he continues. “If you talk to car companies, for example, saloon cars are still selling well. And when you go and speak to food and beverage companies, they’ll tell you that they took a hit in Q1, but that things are returning to normal pretty quickly.
“We haven’t had a mood swing towards optimism yet, because of changes to parliamentary elections and foreign aid flows. But when that happens, the outlook will be extremely positive,” he adds.
Standard Chartered estimates that Egypt will record a real GDP growth of 1.4% for FY 2010/2011. According to the bank, month-on-month inflation started to moderate in May at 11.8%, after hitting 12.1% in April, while the stock market posted its best month in May with growth of 10.4%. Nevertheless, there are significant challenges ahead, not least with regards economic policy.
“The situation is still very fluid and we see very contrasting and hesitating signs on the economic policy front by the caretaker government, typically like the attempt to impose a 10% capital gain tax, a project that was ultimately scrapped,” cautions Dauba-Pantanacce.
“We recognise that you don’t get a 7% decline in Q1 and then everything’s back to normal,” accepts McFarland at Emirates NBD. “But if you can identify where that plunge took place – and most of it was in tourism and real estate and construction – then you can see that the rest is in reasonably ship-shape condition. Companies are cash-rich, the equity market has discounted most of the bad news, if not all of it, and we’re pretty optimistic.”
Of course, much will depend on the politicians and military men jostling for a seat at the top table so abruptly abandoned by Mubarak. The country’s interim government has said that it will postpone plans for economic reform and liberalisation, and instead concentrate on stabilising the economy. However, international as well as regional investors will be watching hawk-like as Egypt’s future political landscape is mapped out: any sign of uncertainty, or risk of a relapse into unrest, and potential investors will scatter.
“They’re due to have parliamentary elections in September, are rewriting the constitution for January, and then it’s the presidential elections in October next year,” says McFarland at Emirates NBD. “As long as that goes reasonably smoothly, I think there’s the potential for a really long-term boom in Egypt.”
He notes that while the economy has taken a significant hit in H1, the country has received assurances of financial assistance from various quarters: $4bn in economic aid from Saudi Arabia, the US’s cancellation of $1bn in debt, and $4.5bn in loans from the World Bank, with more expected from the International Monetary Fund.
“The international community sees Egypt as a strategic partner and of great strategic importance, and the commitments of foreign aid have pretty much wiped out and funding gaps that Egypt will have over the next couple of years,” McFarland says. “There’s a lot of commitment towards stability and the longer-term liberalisation of the Egyptian economy, which can only be positive.”
“Foreign aid by IMF or the World Bank but also the EU, or the Gulf countries should help the government navigate through the difficult upcoming months,” agrees Dauba-Pantanacce at Standard Chartered, before returning to a familiar, wary refrain: “Until the election results bring more clarity on the future direction of the country, foreign investors will remain cautious about committing to any long term involvement in the country.”
Monday, June 27- 2011 @ 10:40 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.