Al-Ahram Weekly Online   13 - 19 October 2011
Issue No. 1068
Published in Cairo by AL-AHRAM established in 1875

Another blow

Egypt's economy pays the price of continued political instability

Click to view caption
source: Central Bank of Egypt

The start of the week saw Egypt's benchmark stock index EGX30 suffer steep losses, as an immediate reaction to the clashes that took place Sunday night in central Cairo between security forces and Coptic Christians.

Although late Monday afternoon and the days to follow saw some recovery, the market had suffered a loss of more than 5.1 per cent soon after it had opened. The decline pushed the index's year to date losses to almost 45 per cent.

"A day before the clashes, things were looking up," said Hassan Samir, managing director at brokerage firm Global Capital Securities. The benchmark EGX30 index had gained two per cent, which Samir considered a good sign, especially after the 6 October celebrations when the popular mood in Egypt was of greater security and stability.

"We were actually expecting even more gains on Monday," Samir said, adding that the clashes that erupted over the weekend wiped away every hope. "I wish we could give the index a chance to perform," he said, lamenting the recurrence of instability.

Before this week's incidents, Samir had been expecting the stock market to rebound within six months after the November parliamentary elections. Now, he believes it will take the market a full year to rebound. While he believes the Egyptian economy's fundamentals remain strong, political incidents like Sunday's clashes are hindering its development. "Our main problem is political instability," Samir said. "Every time we take one step forward, we take 50 steps back."

Yale World Fellow and former director of Egypt's International Economic Forum Ashraf Swelam agrees. He says the incidents are yet another sign of where the country is going, posing concerns about the transition to democracy and the price it will take to get there. "The political situation is far too insecure to enable investing time and money in the Egyptian economy," Swelam said. "Stock market performance is just a sign of things to come."

The past eight months have seen foreign direct investments (FDIs) drop to around $2.2 billion for fiscal year 2010/11, compared to around $6.5 billion the year before. What worries Swelam is that the weekend's clashes set a very bad precedent. "Until now, it was unthinkable that such clashes would take place. Now, the unthinkable has happened. And although many believed that we had already hit rock-bottom, the clashes show that the worst may be yet to come," he said.

Swelam believes the politicians' response will determine the severity of the clashes' impact on the economy. If the country's leaders come up with real solutions the negative effects can be contained. But if their answer is weak, that will be a bad signal.

He also said that the violence that the Egyptian capital witnessed this week is not just a matter of sectarian strife. In his view, it shows that violence can erupt when any group decides to voice its demands. "It is the culmination of problems that society faces today, problems that have never been addressed properly," he said.

The clashes are proof, in Swelam's view, that Egypt needs a short transition to democracy, complete with a clear timeline. He believes that should have a good effect on the economy. "The country needs somebody to tend to its problems," Swelam added.

Investors need clarity, Swelam suggests, adding that while everybody understands the country has undergone a revolution and a major shaking up of the system, what is needed now is a vision and some stability. Investors need to see that the country is moving in the right direction, quickly and with clarity. Right now, "there is a lot of vagueness," says Swelam, adding that it remains to be seen when a new constitution will be ready, and when the next presidential elections will be held.

Businessman Mohamed Attia expressed a similar viewpoint. The nature of current government policies is among the reasons why he is frustrated. Attia believes the government should restore Egypt's economic confidence by signalling to domestic and foreign investors that the country is heading towards a stable, transparent and competitive business environment. However, in Attia's view, the government is implementing policies which are driving investors away. "The recent court verdict annulling three companies' privatisation contract gives investors a bad sign," the businessman told Al-Ahram Weekly.

Worst of all, Egypt's average citizens are paying the price. Many people had hoped the revolution would improve their living standards, but they have been let down. A recent Information and Decision Support Centre (IDSC) report shows Egyptian consumer confidence in economic performance declined by 2.5 per cent from August to September 2011.

The IDSC report attributes this drop in confidence to the decline in the number of individuals who believe their financial situation is improving. The report also showed that the income level per family fell by 7.3 per cent from August to September 2011.

"I barely have enough to feed my family," said taxi driver Mohamed El-Guindi, who dubbed Egypt's economic climate as "very bad" and in free-fall since January. El-Guindi added that the same economic problems which Egypt suffered before the revolution still persist. "Young people cannot find jobs, and prices are straining family incomes," he said.

In fact, as Attia stressed, people are becoming increasingly worried about the country's economic future. The IDSC report finds that people's expectations regarding an improvement in their families' and society's overall living and economic conditions have declined by two per cent this month, as compared to last month.

Corroborating the IDSC report's findings, global market research firm AC Nielson came to a similar conclusion. According to the Nielson Consumer Confidence Indicator, Egypt scored 92 points in the second quarter of 2011, down 10 points compared to the previous quarter.

Indeed, Egypt has seen economic growth contract sharply since the start of the uprising, dropping to 1.8 per cent at the end of June according to government figures, compared to 5.5 per cent the year before. Hard currency earners such as tourism were hit particularly hard. Certainly, this will continue to be the sector most affected by any violence.

"The clashes that took place between protesters and the military on Sunday will definitely take their toll on the flow of tourists, but the extent to which this will happen is still unknown," says Ezzat Abdel-Ghaffar, regional internal audit manager at Travco Group. So far, he says, no cancellations to reservations have been reported, but foreign tourism companies are calling to inquire about the security situation.

"We cannot measure the exact effects before the end of this month," Abdel-Ghaffar said. He added that "just like when angry protesters attacked the Israeli embassy last month, I believe everything will be alright if the situation is contained and the government prevents future clashes."

The drop in FDIs and tourism has in turn taken its toll on the country's foreign reserves. The latter have dropped by over 33 per cent since December 2010, coming to around $24 billion at the end of September 2011.

An economist at the National Bank of Egypt, Salama El-Khouly, says foreign currency reserves are depleting because the government uses them to support the pound and to fund imports of basic commodities like wheat in large quantities. El-Khouly attributed the weakening of the pound to the flight of investors following the outbreak of the revolution. Like other experts, he also stressed the importance of stability, adding that remittances from Egyptians abroad fell dramatically during the revolution and the few months that followed, but the situation began to improve as time went by.

Overall, El-Khouly is hopeful that the fallout from this week's clashes will be short-lived. "After all, these are nothing like the days in February, when the revolution was taking place and clashes happened every day."

Reported by Nesma Nowar, Ahmed Kotb and Niveen Wahish

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