Political disarray hits economy
With election results delayed until possibly Sunday and both candidates claiming victory, it’s all wreaking havoc on the nerves of the Egyptian people and reverberating to the economy.
Meanwhile, the rumor mill is operating at jet speed, churning out doomsday scenarios ranging from all out chaos by the losing candidate’s supporters to purported news of banks closing and neighbors advising each other to stock up on food supplies.
Uncertainty being the thorn in the side of investors and economists, it’s all adding up to more losses for Egypt.
Closing off the week at an abysmal 4,035 points, Egypt’s main index fell 5.5 percent this week, hit hard by the increasing political uncertainty of the past four days. As was the Egyptian pound, which reached a fresh seven-year low of 6.0507 to the dollar on Wednesday, before bouncing back slightly Thursday.
Overall, Egypt’s stock market lost LE 18.396 billion of total market capitalization during the four-session week (it was closed Sunday for day two of the runoff), starting with LE 321.309 billion and ending the week at LE 303.013 billion.
The economy is on the brink. It’s a phrase that’s been repeated over the past year and a half, each time attributed to a slew of reasons painting only half the truth. It’s the protests. It’s the Islamists dominating politics. It’s the chaos.
Truth is, it’s none of the above.
It’s the transition, delayed time and time again in the year and half since the January uprising, and now extended seemingly indefinitely. It’s also lost faith that a transition to so-called civilian rule with a newly elected president will actually mean civilian rule, namely after the Supreme Council of the Armed forces issued an addendum to the constitutional declaration which broadened its powers and raised questions over the incoming president’s authorities.
“In a sense, we’re back to where we were a year ago. A year has been wasted, so investors from all areas — domestically, regionally and globally — see uncertainty and most key investments will be put on hold,” said Angus Blair, founder of the Signet Institute, a Cairo-based think tank.
Egypt is still “waiting for a president, a parliament, a constitution, and then elections again after that. …As the transition period extends, the economy will continue to suffer,” said Blair.
Citing similar concerns, Fitch Ratings moved to further downgrade Egypt’s sovereign credit rating on June 15, due to what they saw as a rising political crisis after the supreme court’s ruling.
The rating was cut to B-plus from BB-minus, with a negative outlook, which means it may be further downgraded in the next 12 months.
“Such political uncertainty could weaken confidence and heighten near-term economic and financial pressures facing Egypt,” Fitch said. “Nor is it conducive to the taking of critical macroeconomic and structural policy decisions required to catalyze Egypt’s economic recovery, alleviate budget and external financing strains and return the public finances to a sustainable path,” it added.
Fitch Ratings also downgraded the National Bank of Egypt (NBE), its wholly-owned subsidiary National Bank of Egypt (UK) Ltd, and the Commercial International Bank’s (CIB) long-term foreign currency Issuer Default Ratings to B+ from BB-, with a negative outlook.
“The need to re-run parliamentary elections will, at the very least, delay the emergence of a workable and inclusive governance structure,” Fitch said in a statement.
Similarly, Capital Economics said deteriorating political conditions darken the outlook on Egypt.
“The Egyptian military is tightening its grip over political life in the country, casting doubts over the authority of the new president,” according to a statement.
“Investors should therefore be concerned that recent developments will probably increase the risk of further social unrest and crush any hope of a change in economic policy. But in the extreme, this could lead to a second revolution, and thus a longer period of political uncertainty,” it added.
And right now it’s not a question of whether the Egyptian pound will be devalued, but when, how, and by how much. The best case scenario is an orderly devaluation of about 10-15 percent, although economists think it could reach 30 percent.
“I don’t think it’s in anyone’s interest to have a disorderly devaluation,” said Blair. Given the dire economic context, the “answer to Egypt’s problems would be that you’d devalue to an extent. I would rather it be done in a period of greater certainty, with a political system running properly.”
An orderly devaluation would be a longer-term plan, and the question is whether Egypt can continue to prop the pound by drawing on foreign reserves, which reached $15.5 billion in May, dwindling to this point mainly due to the same strategy of supporting the currency in the past 18 months.
A ballooning budget deficit has seen the government resort to short-term borrowing from local banks usually flush with cash, but this has affected the credit market and interest rates.
The alternative to a long-term orderly devaluation will have immediate, deplorable affects on citizens already struggling with a lagging economy as well as unbearable poverty levels and rising unemployment.
“It would damage the economy to have a significant and disorderly devaluation. Inflation would rise quite sharply, imported goods and subsidy costs would see a sharp rise,” said Blair.
With financing stretched to a breaking point and no government in place, even the contentious option of looking for help from foreign donors is now off the table.
The International Monetary Fund, which has had a $3.2 billion loan earmarked for Egypt since last year, “has made it clear it wants parliamentary approval for its loan,” said Blair.
In the end, Egypt is indeed back at square one when it comes to economic concerns, and any headway made since parliament was seated has been undone. A look at the stock market’s tumble from best performing in the region to where it is now is a case in point.
It can’t be said enough, the economy needs political stability and an effective government — all of which are now on hold. –The Egypt Monocle