Al-Ahram Weekly Online   24 - 30 November 2011
Issue No. 1073
Published in Cairo by AL-AHRAM established in 1875

Tear-gassing the economy

Violence in Tahrir Square is pushing Egyptian stocks to new all-time lows, Sherine Abdel-Razek sheds light on the losses of the economy at large

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A gloomy atmosphere prevails as losses in Egypt's economy accumulate

Following new clashes in Tahrir Square in Cairo, stock market indices went into free fall. The CASE30 index, the main tracker of Egyptian stocks, declined to its lowest level in 32 months on Monday and Tuesday. This was amid heavy selling from foreigners trying to limit their exposure to risk in a country suffering high instability. While starting in the red on Wednesday the market trebound at the second half of the session as both local and foreigners snapped the now very attractively priced blue chips.

The market was already losing ground before the latest clashes broke out, but the fall gained momentum with news of 33 Egyptians losing their lives and thousands reportedly suffocating from poisonous teargas. As such recent events only added a new jolt to pre-existing market woes.

The CASE30 index has shouldered huge losses since the 25 January Revolution. The overall decline, since the start of the year, has mounted to 47 per cent. While the index made some improvement last month, Sunday, Monday and Tuesday saw it slumping by 10.9 per cent.

Meanwhile a gloomy atmosphere prevails. "Political uncertainty is the index's main driver, to the extent that no good news on the micro-level has succeeded in pulling the market upwards," a trader told Al-Ahram Weekly.

Speaking on condition of anonymity, the trader was referring to the increase in Orascom Construction Industries (OCI), Egypt's largest listed stock in terms of market capitalisation and net profits in the second quarter by 30 per cent. He was also referring to the verdict of the legality of Talaat Mustafa Group's Madinaty contract.

"Each of these news items could have lifted the bourse," he said. "But the effect was not only limited but short-lived as the negative effect of news of people losing their lives outweighed it."

Trading in the local bourse was suspended for five weeks when Egyptians took the streets to topple former president Hosni Mubarak's regime earlier this year. This time round, stock exchange Chairman Mohamed Omran has stressed that trading will not be suspended "unless the banks shut down".

The market's hiccup reflects the unstable political and economic environment. The clashes raise the question of the possibility of holding next week's parliamentary election on time. In addition, they show just how worryingly wide the gap between the people and the ruling Supreme Council of the Armed Forces (SCAF) is. On the macroeconomic level, international reserves are being depleted, the pound is depreciating, internal debt increasing and international aid is slow.

Yesterday, the Egyptian pound dropped in value to LE6.01 to the dollar, compared to LE5.8 in January. Analysts expect it to lose even more ground.

But even before the recent events, Egypt was heading towards monetary turmoil as the Central Bank of Egypt (CBE) battled to keep the pound stable by running down its foreign exchange reserves. The reserves declined from $36 billion in January to $22 billion in October. October's depletion rate, at eight per cent, was the highest in the 10 month period.

Nonetheless, the CBE has managed so far to maintain the pound's value through the last months by purchasing it from the market and selling dollars. Analysts believe the CBE will not be able to afford such interference for long.

In an interview with Reuters, senior Middle East and North Africa economist at RBS Raza Agha said reserves are large enough to pay for about four and a half months' worth of Egyptian imports. But liquid reserves -- currencies, deposits and securities that can be mobilised quickly to defend the pound -- are about $16.1 billion or 3.2 months of imports, he calculates.

"Egyptian reserves are still not at the panic-inducing levels, but they are extremely vulnerable to capital flight," Agha added.

The problem with the depreciation of the currency is its negative effect on prices. Rising prices, according to chief economist at CI Capital Mona Mansour, will depress private spending, that contributes with more than 70 per cent of the country's GDP. This will negatively impact Egypt's economic performance.

Egypt's economy posted a quarterly contraction of 4.2 per cent in the third quarter of 2010/2011, ending the fiscal year with a low GDP growth of 1.8 per cent .

The depressed investment mood is another repercussion that a recent CI Capital note written by Mansour highlighted. Local press reports on Tuesday quoted Oil Minister Abdallah Ghorab as saying that a number of global companies have suspended some $15 billion worth of investments, given the current political upheaval. Those companies include British Petroleum (BP), Misr Oil Processing Company (MOPCO) and Mostorod Refinery.

Depleted reserves and the outflow of investments can only be compensated by international aid. Egypt turned down the offer of a $3.2 billion financing facility from the International Monetary Fund (IMF) this summer, in a move that the then Minister of Finance Samir Radwan attributed to Egypt's ruling military's reservations about increasing foreign debt.

Hazem El-Beblawi, minister of finance in the now resigned cabinet, said last week that the country is reconsidering taking the loan. But CI Capital's Mansour ruled out this possibility: "The IMF loan to Egypt may be muted on the back of such unrest and the reshuffling of the government -- which will further undermine investors' confidence."

Cairo has so far received in-principle offers of aid totalling well over $10 billion from Qatar, Saudi Arabia and the United Arab Emirates. However, it did not get even half this sum so far in what analysts attribute to reservations many Gulf countries hold against the fact that former ally Mubarak is facing trial.

What could worsen Egypt's stance as a global borrower even further is any downgrade in its credit rating. Since the uprising late in January, Egypt has been witnessing continuous downgrading by international investment houses.

"Rating could be downgraded further in the event that foreign exchange reserves continue to decline to a level that threatens the authorities' debt repayment capacity or its ability to support the Egyptian pound," according to CI Capital.

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