Al-Ahram Weekly Online   2 - 8 June 2005
Issue No. 745
Economy
 
Published in Cairo by AL-AHRAM established in 1875

Turning heads

Keeping a close eye on developments on the political scene, business circles remain upbeat on the economy's prospects, finds out Niveen Wahish

Click to view caption
Street demonstrations are not worrying the business community

The thought of reform on the domestic political scene seemed hardly on anyone's mind last year. When Ahmed Nazif's cabinet was appointed in July, they introduced an ambitious economic reform programme aimed at, among other things, improving the business environment, enhancing private sector growth and creating jobs. Political reform seemed nowhere on the agenda, a factor which many observers lamented believing that real economic reform could never take place without political reform.

Now things have changed, political reform is in the making and observers are watching what bearing it might have on economic activity. Although the political environment may not directly affect economic activity, it is one of the factors taken into account when making an investment decision. As Peter Goepfrich, executive director of the German Arab Chamber of Industry and Commerce (GACIC), put it, "political stability and transparency are a major factor for investment."

In fact, the political environment is one of the elements that may affect rating agencies' outlook on an economy. Earlier this year, the fact that 2005 was an elections year in Egypt was viewed as the core risk by rating agencies in that it could cause a slowdown of economic reform.

Fortunately, this does not seem to be the case. As Goepfrich said, while the German business community is closely watching the political scene, they do not see an immediate negative impact on the economy. Despite the fact that demonstrations are taking place almost every other day, "nobody is really worried and investors are not expecting any turmoil," he said.

"The demonstrations are a healthy sign," added Doha Abdel-Hamid, advisor to the minister of planning. She believes that the recent demonstrations are "a positive sign of the budding democratisation process and are to be taken by the investment community as a sign of freedom of expression and that all stakeholders in the socio- economic process are engaged in decision- making relating to their future," she said, adding that it is a signal that investors, "should they have any apprehensions or demands, they would have the appropriate channels to voice their demands and have a right to be responded to."

Investors seem to be aware of that. As Hani Geneina, senior economist at EFG-Hermes, Egypt's largest investment bank, pointed out, investor reaction to political changes has been far from negative. Following the announcement in February of the amendment of the constitution allowing for multi-candidate presidential elections, the Hermes Financial Index rose by 5.6 per cent, the third highest daily percentage recorded since 1997. "Any drop in market performance that the recent debate over the referendum may have made was short lived," he explained adding that now that the referendum is over, "the political uncertainty is gone. Many believe that President Hosni Mubarak is staying on."

The political environment, then, is generally perceived as remaining predictable and stable. Even the possibility that the wave of economic reform may be hampered by the political changes is unlikely. Although a Fitch Ratings sovereigns report issued in January had seen that the risk of policy reversal was low based on the number of initiatives implemented, it had said that there is a higher risk that momentum behind reform will wane "if public support for economic reform leads to more strident calls for intensified political reforms."

But experts believe that has not been the case so far. According to Geneina, the government is moving according to schedule. "They did not promise anything and did not deliver," he said referring to the customs and tax reforms. The only area where they have not taken action is the subsidies area, out of concern that this would be a very unpopular move in an election year.

Abdel-Hamid reiterated a similar view. She does not believe that what is happening politically will affect government reform plans. "The recent constitutional amendment that came into fruition through the referendum is anticipated to be an ongoing process of political dynamism. This is expected to have an upside effect on economic performance within the five-year plans framework."

But while things may remain unchanged for the time being, the process is underway. And, as Goepfrich of GACIC put it, "it's a step in the right direction."

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