22 - 28 March 2001
Issue No.526
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Al-Ahram Weekly On-line 22 - 28 March 2001 Issue No.526 |
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Is Egypt next?
Will the sharp downturn in the United States and the resulting weakening of the global economy leave Egypt unscathed? Sherine Abdel-Razek tries to find out
The United States -- the world's largest economy -- is poised on the brink of a recession. In Japan, the prime minister nearly resigned last week because of his cabinet's failure to deal with the country's decade-long economic slump. European markets are now sharing the pain in a domino-like effect spate of losses. Even blue chip companies could not escape symptoms of the slowdown which brought stock market indices worldwide down. The pan-European FTSE Eurotop 300 lost 20 per cent, plunging from its September 2000 peak after a hair-raising slide on the tech-laden NASDAQ that fell to its lowest level since November 1998. Capital market indices worldwide are falling to new lows. Dow Jones, Nikkei, Dax and others all fell victim to the contagion.
Egypt has always taken comfort in the belief that it was relatively immune to any negative fallout in one particular economy or the other. But now that the global economy is certain to be affected, how will the Egyptian economy and its Capital Market Authority (CMA) index fare?
While market analysts differ as to what these developments will signify in the long term, they are unanimous that the Egyptian economy will be affected and that the slowdown will be reflected in market transactions.
Although it is too early to tell how the global downturn will impact Egypt's macroeconomy, the stock market has already reacted with an 11-point plunge in the CMA index. Analysts expectations were corroborated with all of the market's big caps taking a turn for the worse last week.
Hisham Tawfiq, head of the Egyptian Capital Market Association, expected foreigners' transactions in the capital market to witness a decline. Certain categories of foreign investors are expected to pull out.Western institutional investors -- mainly the investment funds that will have to liquidate their holdings to meet the increasing redemption orders in their home countries -- are expected to withdraw first. Next will be Arab investors, who, in addition to the Egyptian bourse, are also heavily involved in the international market. "These high net worth individuals usually panic when markets go down and pull out quickly," Tawfiq said. Last week's stock market figures show that foreigners were net sellers, with less buying orders than selling transactions.
"What makes us vulnerable to global developments now is the fact that we have shares traded internationally as Global Depository Receipts (GDRs)," said Mohamed Fahmi, senior research analyst at Prime Securities.
Indeed, the convergence of the modern global economy has thrust many countries, who were previously relatively safe, into boom and bust cycles. Fahmi said the impact of the GDRs' decline in global markets has been felt in Egypt, particularly since the nine companies with GDRs traded on European markets are the highly liquid big caps. The Egyptian companies with issued GDRs on international markets are the GSM operator, Orascom Telecom, Commercial International Bank (CIB), Misr International Bank(MIB), Pachin, EFG-Hermes, the Lakah Group, Suez Cement, Al-Ahram Beverages Company and El-Ezz Steel Rebars.
While he agreed that the decline in IT companies worldwide might have a spillover effect on the local market, Fahmi believes that this effect is marginal. "What caused the decline of NASDAQ was Internet and genetic companies, or what are known as high-tech companies," Fahmi said. "We do not have such companies here. What we have are companies like Orascom Telecom, telecommunication companies that are different from these dot.coms and that are not facing the same pressures."
The impact of the changing fortunes of global companies on foreign direct investments (FDI) coming into Egypt, as well as the country's current account is also an issue to be considered.
FDIs, especially those coming in from the US, will not be affected, according to professor of economics at Cairo University, Samiha Fawzi, who says that the bulk of American investments in Egypt are in the oil sector. "Such investment deals have a special nature and are usually executed through international agreements and thus are immune to any changes in the investment atmosphere."
Nevertheless, Fawzi believes that the economic slowdown in the US might have indirect effects on the Egyptian economy. "The limited growth there will definitely lower demand on oil, which might affect oil exports." In that event, expatriate remittances coming to Egypt from the oil producing Gulf states might be reduced, she said.
The same applies to other sectors which feed into the current account, such as tourism, which are also likely to be hit by a slowing world economy.
Meanwhile, the Egyptian economy is facing its own internal problems, due to a deteriorating exchange rate and the draining of hard currency resources. Exacerbating the situation is an appreciating dollar, which has currently reached its highest level ever in 15 years.
But the silver lining here, says Fahmi, is that while all of this will inflate Egypt's already snowballing imports bill, it might encourage the monetary authorities to accelerate their previously announced plan to peg the pound to a basket of currencies, instead of to the dollar only.
On the downside, says Fawzi, the global situation could undermine the government's efforts to accelerate economic growth by offering 49 public enterprise companies to anchor investors. "This might be hard, since now, no one will take the risk of investing in such a risky atmosphere," Fawzi said.
However, the negative investment climate and the current imbalances are not what worry Tawfiq the most. "Falling into recession is a natural thing in any economic cycle any place on earth," he said. The problem with Egypt, is that it lacks benchmarks and measures to assess the depth of harm done, he said. More ominous is the lack of courage on the government's part to implement needed techniques to react to slowdowns, such as lowering interest rates and cutting high tax rates. "No concrete measures are being taken," Tawfiq said.
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