‘Bleak’ outlook for Egyptian economy amid ongoing unrest

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Political uncertainty spells a “bleak” outlook for Egypt’s already strained economy, experts said, as thousands gathered in Tahrir Square to protest against the rule of President Mohammed Mursi.

The Arab world’s most populous nation has suffered economically under Mursi’s 12-month rule, with levels of debt, unemployment and poverty all having risen.

With the country divided by those for and against the president, and an army ultimatum for a resolution, economists said the political unrest does not bode well for the country’s finances.

“Until there’s a political solution, the economy is just going to continue on a downward spiral,” Trevor McFarlane, a senior editor at the Economics Intelligence Unit, told Al Arabiya.

“People are painting a dark picture of what’s happening in Egypt; it is all looking pretty bleak,” he added.

McFarlane said the next 48 hours would be “critical” for Egypt in building a political base for a stronger economy.

“If you don’t have these foundations, how can you build the economic roads in the future?” he asked.

Economist John Sfakianakis, the chief investment strategist of Masic, a Saudi Arabian family investment company, agreed that the next two days would be crucial to Egypt’s economic recovery.

“If the politics is not fixed and middle ground is found then the economy will certainly suffer over the medium term,” he said.

Prolonged unrest and political uncertainty in Egypt is likely to hit both tourism and investment, Sfakianakis added.

“Whenever violence erupts, tourism is the first industry that gets impacted and Egypt is no exception. The longer violence and uncertainty manifest themselves the longer [it will be that] not only tourists stay away but also investors. In the case of Egypt, those investors who could exit did... and those that are interested are shying away and will continue to do so until there is clarity.”

Sfakianakis agreed that the Egyptian economy had suffered since Mursi took office a year ago.

“The economy has regressed over the last year due to mismanagement and lack of priorities. Growth has been anemic, poverty and unemployment shot up, and inflation is dangerously on the increase. These are deadly combinations which remain far from being addressed,” he said.

Part of the reason for this is that the ruling Muslim Brotherhood government “lacks experience”, said Nasser Saidi, a former Lebanese economic minister and former chief economist at the Dubai International Financial Center.

The International Monetary Fund has been in talks with Egypt over a proposed $4.8bn loan, for which Mursi’s government was asked to undertake a number of economic reforms to be eligible.

“I don’t think there was a great deal of experience for policy decision makers, and that reflected itself in a variety of things including failing to reach an agreement with the IMF,” Saidi told Al Arabiya.

Some financial aid came from Qatar and other countries – but other outside investment could be hit by the ongoing unrest, said McFarlane.

“Investors and businessmen hate any kind of risk or unrest, particularly political unrest because this the most difficult type of risk to manage,” he said.

Saidi said however that there was hope for long-term investment in Egypt. “Look at the demographics, geographical location, improvement on the educational level of labor force, the size of the economy... all of those are positive," he said. "Hence all those investors will not be deterred.”

According to a report by Capital Economics, Egypt’s economy was highly dependent on public spending and tourism during the first quarter of this year.

“Were it not for these two sectors [government services and tourism] the economy would have contracted by 0.4 percent year-on-year,” the report said. It adding that the Egyptian budget deficit reached 14 percent during the quarter, up from 11 percent last year.

Despite a possible impact of the recent unrest on sectors such as tourism, the outcome of the events could eventually act to boost the economy, said Saidi.

“The Egyptian political scene needs to find an alternative. From that point of view, recent events are actually a positive thing,” he said.

Sfakianakis said that there was some sign of hope in Egypt, given that local shares have jumped on the stock exchange in recent days.

“Counter intuitively, Egypt’s domestic stock market rebounded almost 5 percent after the military’s new ultimatum and about 10 percent since June 24. The optimistic tone of domestic stocks, dominated by domestic investors, probably reflects popular expectations of an orderly exit from the crisis,” he said.

But this is by no means certain, Sfakianakis warned. “There is concern about the role of the army and the level of political discord,” he said. “It seems that Egypt could be entering a phase of messy politics without much clarity and direction. Too much involvement of the army could radicalize the Islamists and too little involvement could upset those that want to see a more balanced political order.”