With the rapid unfolding of political developments, sporadic clashes on the streets that are expected to continue, and an interim president tasking a new prime minister with putting together a competent non-divisive cabinet, concern over the fragile economy grows.
Despite some optimism inside the country that a new transitional roadmap will put things on the right track, several multi-layered and deep-rooted challenges lie ahead for the new government, coupled with a troubled image of Egypt internationally.
The transitional government, headed by economist and former Finance Minister Hazem al-Beblawi, will have to tackle a number of pressing issues to avoid a deepening of the current crisis: The level of economic activity, the stalled International Monetary Fund loan, subsidy cuts and tax reform, the stability of the pound, and the availability of basic commodities and energy.
Businesses have decreased their activity since millions began protesting on June 30 demanding the ouster of President Mohamed Morsi, deposed on July 3 by military fiat. Morsi’s supporters continue to protest for his return and what they deem the legitimacy of the ballot box, and clashes have already cost scores of lives.
Economists predicted inflation would rise, and indeed, figures released on Wednesday show that increased food prices pushed inflation to a two-year high of 9.8 percent.
Pressure on the pound has eased since late June due to less demand for dollars on the market, but that trend is unlikely to continue. Meanwhile, the state budget is still grappling with a gaping deficit.
As seen over the past two years, tourism is the first casualty of political turmoil, always the first sector to directly feel the consequences and likely to be hardest hit. Even if tensions ease in the coming weeks and a relative calm ensues, tourism will take months to recover.
As officials in the sector often say, tourism needs 60-90 consecutive days of calm to return to normal levels.
The Red Sea city of Hurghada, for one, attracts most tourist inflow. Last week, there were reports of clashes between pro-Morsi protesters and security forces that left many injured. The British and French governments advised against all non-essential travel to Egypt, while the United States Embassy evacuated many of its non-essential personnel.
Islam al-Gamal, who owns a small company that organizes fishing trips, says a majority of tourists have abandoned the resort town. “The only ones remaining are those who own a house here or have escaped from the more violent clashes happening elsewhere in the country,” he says.
He owns four boats, of which only one was operating last week, so he had to tell 12 of 16 employees that he would not need them until the situation improves. “I cried when I told them to go,” he says. “What will they do now to provide for their families?”
If the current instability continues for months, he will have to shut down and sell his boats. “It has been two and a half years … I have been surviving, [but] I cannot afford to lose anymore money.”
Trade en route
As expected, Suez Canal traffic was not impacted by the events, and the vital global trade route operated normally.
Allen Sandeep, head of research at Naeem Brokerage, does not believe vital imports to Egypt will be impacted in the short term. The country relies heavily on importing food and fuel products to meet domestic demand, though this has been vulnerable over the past few months due to decreased liquidity in the state coffers as well as diminished foreign reserves.
Wheat is the most strategic import, and with the harvest now over, former Prime Minister Hesham Qandil’s Cabinet announced in June that there were enough reserves to last at least until mid-November.
Meanwhile, though the queues outside of gas stations have eased since the weeks leading up to June 30, experts do not predict any improvement in sporadic fuel shortages.
According to Sandeep, supply is impacted both by the mediocre state of Egypt’s refineries as well as the level of debt owed by the Egyptian General Petroleum Company (EGPC) to foreign contractors. He therefore foresees at least another year of fluctuations in supply.
More broadly, the perceived political instability is likely to lead to additional constraints on payments to Egyptian importers. “There are tough times ahead,” says Sandeep, who predicts another inflationary wave.
On the market
The stock market has reacted mostly positively to the latest developments, with the exception of Monday, in the aftermath of clashes between security forces and Morsi supporters in front of the Republican Guards headquarters in Cairo that left more than 50 protesters dead.
The market lost more than LE10 billion of market capitalization, but in the days before and after, has been making generous gains.
Trade volumes peaked by more than 200 percent while the main EGX 30 has increased by 12 percent since the uprising. It gained more than 7 percent after Morsi was deposed.
“It seems the stock market recovered what it was lacking these past years: confidence,” Sandeep said.
But if the lack of political consensus continues and polarization intensifies, expected clashes will put a damper on this upward trend.
Moreover, any continued unpredictability in economic policymaking, as in previous attempts to impose taxes on stock exchange transactions, will again antagonize already wary investors.
Money going into the economy will still be limited, as investments have increasingly dried up over the past two years.
“Whenever there is uncertainty, most investors do not invest, and this uncertainty has been around for many months. This current period is no different, since most companies are not investing to a notable level,” says Angus Blair, founder and head of the Signet Institute.
Prolonged instability or frail leadership may further impinge on the state’s ailing finances. The question remains whether the transitional government will be willing and able to tackle the most pressing economic and financial issues.
Sandeep says Morsi’s ouster may have consequences in the form of alienating countries like Qatar, which has offered Egypt financial support to the tune of US$8 billion in aid, some of which has been in the form of direct deposits with the Central Bank to prop up foreign reserves.
“If Qatar asks for its money back, it will have a very important impact, firstly on the pound,” he says.
In the case of a major drop in balance of payments, the Central Bank would not be able to keep the Egyptian pound at a steady level and would have to let it devalue further, raising, in turn, the price of vital imports.
However, this scenario remains unlikely.
“Even if Qatar withdraws, the government should have time to find other funds, from the Gulf or the IMF,” Sandeep explains.
Already Saudi Arabia and the United Arab Emirates have pledged billions of dollars in financial support to Egypt under interim President Adly Mansour.
The IMF has declared it is following the current unrest closely, but any steps regarding the US$4.8 billion loan in negotiation for months will probably be delayed for the foreseeable future, even if the incoming finance minister resumes negotiations.
According to Sandeep, a deal with the IMF seems unlikely with a transitional government, “but a competent technocratic government could pave the way for a quicker deal.”
Blair expects another drop in the Egyptian currency and urges deep economic reforms.
“A pro-growth economic program needs to be put in place very quickly,” he says, “to turn the economy around and provide the jobs required by a young population.”