Egypt stocks will struggle regardless of outcome

February 1, 2011

Investors in Egypt should not expect a rapid investment bounce back — even if the current political troubles are resolved with speed. A week of unrest has closed financial markets and burnt investors who had underestimated the risks involved in the country’s governance weaknesses. To undo the damage, Egypt needs a roadmap that assures investors that things will be better than they were before the protests began.

Investors had a good run of late in Egypt. The economy was forecast to grow at around 6 percent this year and the country’s benchmark stock market index had risen nearly 80 percent in the last two years, making it one of the best performing in the region. It traded at around 12.5 times earnings before the unrest, according to EFG Hermes. That was in line with exchanges in Qatar and Abu Dhabi which are more politically stable. But Egypt’s main equity market has shed over a fifth of its value amid the unrest.

A return to strained peace under the repressive rule of President Hosni Mubarak now looks improbable. It would in any case be hard for the discredited ruler to maintain the economic and stock market growth seen recently. A prolonged power vacuum would be worse. The public finances might be able to withstand a sudden withdrawal of foreign capital. But an exodus of Egyptian funds and slowdown in remittances would be a disaster. It could badly dent the country’s foreign exchange reserves estimated before the crisis by Barclays Capital to be around $35 billion.

The best short-term fix is probably a move towards a national unity government with the promise to hold open elections in September. But even this doesn’t promise stability. Though the fragmented opposition has lined up behind Mohamed ElBaradei, it is unclear what agenda the long-repressed Muslim Brotherhood might eventually push.

In any event, Egypt faces a fraught path ahead. The best investors can hope for, perhaps, is if the country followed a similar path to Turkey. Like its neighbour to the north, Turkey is a predominantly Muslim nation with a similar-sized population. Turkey has reined in the power of its military and managed to sustain broad based economic growth to become, on a per a capita basis, almost four times richer than Egypt.

It took two decades for Turkey to quadruple its per capita income. It may not take that long for Egypt to regain the confidence of international investors. But confidence will not come back overnight.

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