Economy will test future Egyptian government

January 28, 2011

By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Egypt’s brave drive for democracy comes with a cost. Four days of unprecedented protests calling for an end to President Hosni Mubarak’s 30-year rule have frightened international investors. While political change is unlikely to lead to a serious financial crisis in the Arab world’s most populous nation, whoever is left in charge will be challenged to sort out the country’s public finances, and restore its investor-friendly climate.

The Egyptian exchange benchmark index lost 21 percent in just two weeks as frustration over high unemployment and a lack of democracy spread from Tunisia to poorer parts of the Maghreb and the Gulf. Egypt can hardly afford to ignore investors’ concerns. Foreigners hold about 7 percent of the country’s public debt, and tourism accounts for 5 percent of its GDP.

High levels of bank liquidity and a relatively low external debt, at around 16 percent of GDP, mean Egypt should be able to withstand a crisis of confidence — as long as it’s temporary. Its official reserves — forecast before the crisis at $35 billion in 2011, according to Barclays Capital — will help it face its current currency woes. Furthermore, the country’s current account deficit is covered by a regular flow of foreign direct investment, mostly in the oil and gas industries.

Yet the current turmoil will further erode the country’s financial cushion, already hit by the downturn in world trade. The Mubarak regime has a track record of economic reform but even before the unrest, hopes to lower public debt from around its current 60 percent-plus of GDP were fading. Presidential elections were due in September, and the frail leader was expected to use an increase in costly subsidies for food and fuel in a push to help keep him — or his son — in power.

The potential opposition leaders — independent political reform campaigner Mohamed ElBaradei, or personalities from banned political parties or from the long-repressed Muslim Brotherhood — have no track record of economic policy-making. Yet unpopular reforms such as restructuring fuel subsidies, and introducing more taxes like a comprehensive VAT, are crucial to raise the country’s economic growth rate to levels that would create long-term employment. But in the current turmoil, it will be hard for a hopefully democratic government to convince ordinary Egyptians that fiscal prudence now could mean better days later.

Comments

Thanks for such an insight and in addition to this markets across Asia are already affected. And their opposition leader Mr. ELBaradei is asking Mr. obama to intervene. Which is highly unlikely possiblity as of now. Because the current rule is supported by them only.

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