Egypt moves towards democracy

09 June 2011

The revolution in Cairo has put a strain on public finances and slowed foreign investment. Electing a new government in favour of social and economic change will be key to stabilising the economy

As 2010 drew to a close, the main political talking point in Egypt was whether 82-year-old Hosni Mubarak or his son Gamal would stand in the presidential elections scheduled for September 2011.

But within weeks of the new year beginning, the country’s political landscape was unexpectedly redrawn. Mubarak, president for more than 30 years, was swept from office following 18 days of anti-government demonstrations and is now being investigated for corruption and abuse of power. The oppressive state regime has been dismantled and Egyptians have taken their first steps towards democracy with a referendum on constitutional reform.

Economic strain on Egypt

But for all the positive outcomes of the revolution, the impact on the economy in the short-term has been uniformly adverse. At the height of the protests, the disruption to the economy was estimated at $310m a day. Since then, the strain on public finances has resulted in the need for significant bail-outs from international institutions. The Washington-based World Bank and IMF, along with the Tunis-headquartered African Development Bank have all stepped in to help. The central bank was also forced to auction treasury bills.

One in eight workers depends on the [tourism] sector for employment

The Cairo bourse suspended trading for nearly two months and when it re-opened on 23 March, saw a dramatic fall in share prices. The tourism industry was also hit hard. Tourism is an important contributor to Egypt’s economy. One in eight workers depends on the sector for employment. International tourism revenues account for 6 per cent of gross domestic product (GDP), and when considering the sector as a whole, the figure reaches 11 per cent – more than double the amount Egypt earns from the Suez Canal. Historic sites and hotels were left empty during the two weeks of violence. In February, hotel occupancy fell to below 17 per cent in some Cairo hotels.

The IMF has revised down its GDP growth forecast for 2011, from 5.5 per cent to 1 per cent. The longer-term impact of the revolution on the economy is less clear. In a possible sign of Egyptians confidence in a post-Mubarak economy, there was no run on the banks on 6 February, when they reopened their doors after a week of enforced closure. Reduced opening hours and withdrawal limits helped, but the queues quickly disappeared and within a couple of days the situation returned to normal.

Egypt GDP by sector, 2009/10
Agriculture, forestry and fishing14
Oil and gas14
Services - Government, health, education17
Services - Trade, retail, Suez Canal32
Source: Ministry of Finance

The extent of the damage to investor confidence is harder to gauge. The country relies heavily on foreign direct investment (FDI). Many investors have said that they remain confident in the long-term fundamentals of the Egyptian economy and intend to start investing again once a new government is in place. That is not expected until the end of the year. FDI is expected to fall about 40 per cent in 2011, according to the US rating agency Moody’s.

Furthermore, it is unclear what political direction the country may take. Several individuals have said they intend to contest the presidential election, but there are limited parties to run in the parliamentary elections. The Muslim Brotherhood is likely to be a strong contender, but not a popular choice among investors.

The country’s public-private partnership (PPP) programme stands to lose out, in particular. Mubarak’s government drew up an ambitious PPP programme aimed at bringing private capital into its transport, utility and social infrastructure sectors, which are in dire need of investment. But projects have stalled following the collapse of the regime. It remains to be seen if the new leadership will want to continue with the PPP programme, and, if it does, whether investors will still be interested in backing them. Some analysts are predicting a return to more nationalistic governance.

Hydrocarbon reserves and production in Egypt
Oil production (thousand barrels a day)742
Oil reserves* (billion barrels)4.4
Oil proven reserves* (share of world total)0.3
Gas production (billion cubic metres a day)62.7
Gas proven reserves* (trillion cubic metres)2.19
Gas proven reserves* (share of world total)1.2
*At end of 2009. Source: BP Statistical Review of World Energy

Egypt’s deficit is expected to swell as a result of the slowdown in the economy. According to Finance Minister Samir Radwan, the country will need up to $12bn in budget support until the end of June 2012. Radwan has said that the deficit is likely to reach 9-10 per cent of GDP.

For Egypt to meet its financing needs, the UK’s Barclay’s Capital estimates that a support package of at least $6bn-7bn from its external creditors is needed to ease the country’s liquidity problem and avoid a sustained depletion of  foreign currency reserves.

Challenges ahead for Egypt

The political upheaval in early 2011 has affected all aspects of Egypt’s economy. But the country has sound fundamentals. Prior to the uprising, Egypt was experiencing a boom in consumer spending, driven by an emerging middle class. That will remain the case in the years ahead, and could even accelerate under a democratic political system. However, the new government will face the same economic and social challenges that put an end to Mubarak’s rule and they will need to be addressed.

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