Recent developments are making Egypt's economic outlook more blurred than it already is, writes Niveen Wahish
For the past year and a half, economists have been saying that the Egyptian economy is on firm ground and that once stability is restored after the elections, it will take off in no time. The way events have developed in the past 10 days, in terms of dissatisfaction with election results and the return of mass protests to Tahrir Square, gives the impression that that stability is still far in the distance.
Freedom and Justice Party (FJP) candidate Mohamed Mursi enters the presidential run-off against former Prime Minister Ahmed Shafik on 16-17 June. The "run-off in Egypt's presidential elections between the two most polarising candidates has escalated investor concerns of renewed unrest," said Arabia Monitor, the market research company that covers economics and financial markets in the Middle East and North Africa region, in its monthly report.
Magda Kandil, executive director of the Egyptian Centre for Economic Studies (ECES), worries that that polarisation could delay stability. "Achieving stability remains crucial, otherwise there could be adverse implications," she stressed.
Already the economy is feeling the brunt. The first to take the hit was the stock market. According to Mona Mansour, co-head of research at CI Capital, the brokerage firm: "What is happening in Tahrir is reflecting negatively on investor sentiment. The EGX30 dropped and selling pressure increased." Egypt's benchmark EGX30 index declined 2.3 per cent to 4,502.9 at the close on Tuesday, the lowest level in over four months.
But Florence Eid, CEO of Arabia Monitor, nonetheless remains optimistic. "The Egyptian economy has actually sustained a fairly serious hit and still it is posting positive growth." The economy saw a growth rate of 0.3 per cent for the first half of 2011/12 according to Ministry of Finance figures. That is remarkably lower than 5.6 per cent during the corresponding period in 2010/11.
Eid is "not worried" about the mass protests: "Investors learn to adjust and to understand volatility and they work around it," Eid said.
Mansour expects that after the president is elected -- if elections take place as scheduled -- "we will see some instability; yet as the situation clears and the macro scene gets settled we can start seeing some pick up in the macro scene, especially that the two candidates are capitalists and encourage investments. Both candidates have pro-investment policies, it is the efficiency and how the policies are applied that is the key issue."
Eid adds: "There is no magic wand, even with the best of economic plans, the economic situation will take time before it starts improving."
She also said: "Neither of the candidates will come uncontested, but to win over the people they have to be responsive to the street. Whoever wins will need to strike the right balance between social and economic needs while keeping an eye on macro-economic policies."
Nonetheless she believes that will not be an easy task, yet "not impossible, though it will be a non-linear path. And if the person elected does not succeed, then that is what elections are for."
Magda Kandil agrees. The winner of the elections will have a tough time reaching out to a large segment of the population, namely those who voted for the other candidate or chose not to vote at all because they were unhappy with both candidates. "It will be very crucial for the winner to have leadership skills to mobilise the people behind him," she said.
Kandil explained that while both candidates are for a private sector led economy and free market forces, they differ in their priorities and who they are catering to.
Kandil explained that Shafik sees security as the biggest hurdle to the return of investment and those who support him are attracted by that. He believes that tackling the security issue will attract back the big investors who suffered in the past year and a half, and that if investment at the top is attracted its fruits will trickle down. It is not clear to Kandil how Shafik will deal with the problems of distribution and lack of inclusive growth that was one of the major setbacks of reform of the past few years. That is a top-bottom approach and it is where Shafik differs with the Muslim Brotherhood.
Meanwhile, Mursi supports a bottom-up policy where they want to start by catering for those at the bottom of society. They consider that once those at the bottom are reached, the economy at the top will improve: "They are the wider majority, serving their interests will mean political stability, therefore economic stability that will attract back the big investors."
Kandil believes that big investors will not be back to the Egyptian economy for a while. "Big investors are opportunity entrepreneurs and Egypt may not meet their criteria for the moment." She said that what needs to be done now is to make small and medium enterprises the engine of growth. Kandil explained that there are many necessity entrepreneurs, those who have lost their jobs and will be more responsive to stimulus packages. Reaching them, she said, means reaching those responsible for 80 per cent of the economy. That will in turn create better consumption and create the dynamic to attract the big investors who are attracted to Egypt's economy for its resilience and large consumption base. The big investors will not come until they feel the economy is back on track, stated Kandil.
To speed up the process towards stability, Kandil recommends that after the elections there should be better cooperation between the president elect and parliament. "The difference between the government and parliament has cost us a lot in recent months." Mursi is likely to have a smoother relationship with parliament given the parliament's Islamist majority; notwithstanding he is problematic because of concerns of FJP dominance. Should Shafik win, it is crucial that he reaches out to other groups and proceeds in a business-like relationship and provides parliament with the information to enable it to take decisions.
The future will depend on what happens in the run-offs, according to Kandil. "If the winner has a clear message that can unite the people behind him, it will take three to four months for the economy to start getting back on its feet. If we continue to bicker, then we should expect another year with a lot of uncertainty and I am not sure if the economy can endure it, especially with the current size of reserves."
Egypt's foreign reserves stood at around $15 billion at the end of April 2012, down from $36 billion in January 2011.