Egypt protests could benefit the economy once stability returns

01 February 2011

The initial reaction on the regional bourses has been negative

The current protests in Egypt could have a positive economic impact on the country once stability and security are restored.

“What is happening right now in Egypt will have a positive impact both politically and economically in the long term. Economic overturn will not happen overnight, but it will bounce back once there is security and political stability and Egypt will become an excellent buy,” says Shrouk Diab, vice-president of UAE investment bank Rasmala.

The impact so far, however, has not been good. “Stock markets across the region have fallen sharply in reaction to the ongoing protests, but there will a very strong rebound once confidence returns to the market,” adds Diab.

Egypt’s stock exchange has remained closed since 27 January after dropping 16 per cent. The Gulf markets and in particular indices in Kuwait, the UAE and Bahrain have also seen negative impact. The Gulf bourses lost almost $10bn in a single session on 30 January. Saudi Arabia was the only market to close positively at 2.58 per cent.

“The impact on the financial markets of the broader region is looking more meaningful at this stage,” says Ann Wyman, head of emerging markets research at Japanese investment bank Nomura.

Egypt, with a population of 84 million people, has a much larger economy than that of Tunisia and has been a popular destination for Gulf investments. The deteriorating security and political situation in Egypt has left investors uncertain and eager to pull out. Dubai’s Emaar Properties, one of the largest foreign investors in Egypt, lost 8.3 per cent. “We cannot gauge how much money has been pulled out on a day-to-day basis, but you can see the impact on the local equity indices,” says Wyman.

The assumption that these countries are safe has gone and it remains unclear how long this uncertainty will last. “The longer you have insecurity, the more investors will feel uncomfortable with their exposure to the region. They fear events similar to those in Egypt and Tunisia could spread elsewhere in the Middle East,” says Wyman.

Meanwhile, in Tunisia there is now a feeling of optimism regarding the economy as it seems more stable. The non-competitive influences have been removed - the president and his family had infiltrated the business community, leaving little opportunity for others, but this has now changed.

If Egypt can follow Tunisia’s example and transition quickly, the long-term implications of this uprising will be markedly less. Diab, who is currently in Cairo, says that more people are abiding by the curfews, which begin at 3pm local time on 31 January. “The situation is not as stable as it should be with the absence of the police, but it is improving daily. The appointment of a vice-president is significant, it gives some sense of stability and a transition if Mubarak leaves. There may not be a complete regime overhaul, but its most corrupt influences can be filtered out in the next election.”

The sector most affected by the uprising is tourism. While it only contributes five per cent to gross domestic product (GDP) in Egypt, its contribution to employment is much greater. The retail sector will also be hard hit if unrest continues and curfews are implemented and observed. With Hosni Mubarak’s decision to limit communication in the country, the economic ramifications will be much deeper. “Everything has come to a standstill, they will have to reinstate the communications,” says Diab.

While a growing number of cities in the region have seen citizens take to the streets in protest, including in Amman and Sanaa, the same kind of events are not being anticipated for the Gulf countries. “Part of the frustration in Tunisia and Egypt was the political set up where so-called democracy did not actually allow the people to be heard. The demand for democratic representation is not the same in the Gulf where governments are able to improve living standards,” says Wyman

Organisers in Syria are calling for a “day of rage” on the streets of Damascus on 5 February.


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