When a country is doing as well as Egypt, even the slightest hint of unwelcome news can have an exaggerated effect on investor sentiment .
So when Investment Minister Mahmoud Mohieldin announced in late February a downward revision in its gross domestic product (GDP) growth forecast for the financial year 2007-08, from 8 per cent to 7 per cent, citing “international economic turmoil”, it was hard to escape the conclusion that the Egyptian government was trying to dampen overheated expectations about the durability of the country's economic boom.
Most other countries would celebrate such growth rates. The 7.1 per cent real GDP growth in 2006-07, according to central bank figures, was substantially higher than the 4.3 per cent average of the previous five years.
However, this must be viewed in context. The country is hardly teetering on the verge of a recession. With the government of Prime Minister Ahmed Nazif pushing economic reform, and domestic consumption levels holding up, the Egyptian economy is likely to build on the strong performance this year.
What Cairo is signalling is that for all the positive fundamentals, like any growing economy, it is also vulnerable to destructive global economic influences.
Analysts are more sanguine, pointing out that economic growth has taken on a different character. Non-hydrocarbons growth has broadened and the government expects non-petroleum exports to rise by $3bn to $17bn in 2008.
While hydrocarbons growth provides insulation from the worsening global conditions, it is the sector least likely to be affected by the global financial tumult.
“Much FDI [foreign direct investment] goes into the oil and gas sector, which is likely to be unaffected,” says Ben Faulks, analyst at ratings agency Standard & Poor's. “Substantial investment is coming from the Gulf, which will be less affected by the credit crunch. If anything, it may rise because of [the region's] strong hydrocarbons receipts and the need to place them.”
Rising oil prices and bold structural economic reforms remain the drivers of Egypt's growth. Foreign direct investment (FDI) swelled by 80 per cent to $11.1bn in 2006-07.
“Egypt is relatively sheltered from the worst of the global capital market situation,” says Faulks. “For example, there is not a lot of external borrowing by the banks and the government, so more stringent global borrowing conditions will have a limited impact.”
Egypt will not completely escape global pressures though. Like most successful emerging market economies, it has integrated more deeply into the global economy in recent years and its soaring FDI performance could be hit by a recession in Western markets.
“If economic conditions start to bite a bit harder in Europe, that could have an impact on tourism,” says Faulks. “Exports to the US and Europe could also slow, though the impact will not be so dramatic as non-oil exports account for less than one-quarter of current account receipts. But it is too early to draw conclusions.”
The IMF rates the probability of a sudden disruption to capital inflows as low, with only a small part comprising portfolio investment. The vulnerability to a sudden disruption is also low because capital inflows have not been intermediated through the financial system.
For the Egyptian economy to become more resilient, the private sector needs to be further developed and the investment compulsion strengthened. The IMF estimates that to reach a sustainable growth rate of 6-8 per cent over the medium term, investment will need to rise to more than 25 per cent of GDP, from less than 19 per cent in 2006.
The overriding message is that the Nazif administration needs to accelerate the reformist momentum generated since 2004. Efforts to deepen private sector involvement in the formal economy - for example, through privatisation - could help to revive private investment levels, which have been constrained by high domestic interest rates.
Interest rates will be kept high -averaging 8.8 per cent on 91-day treasury bills in 2006-07 - to deal with an inflationary spike that has accompanied Egypt's impressive GDP growth. Inflation rose to an average of 9.4 per cent in 2007. Given commodity price trends and supply bottlenecks, such pressure is unlikely to abate this year.
Equally critical is the need to keep the wider population on-side as reforms gain traction. The Cairo authorities are increasingly concerned by the prospect of the population losing patience with the reform programme. The lack of GDP wealth being redistributed to the general public needs to be addressed. While stronger growth created 2.5 million jobs between the end of 2004 and March 2007, the World Bank noted increases in absolute rates of poverty over the same timeframe.
The government has to change a public perception that the benefits of economic growth have been absorbed wholesale by the well-connected middle class elite.However, delivering equitable growth is a challenge facing most Middle East countries.
If any have the solution, they would well do to inform Cairo.