Coup may give Egypt window to tackle economic problems

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The ouster of President Mohammed Mursi may give Egypt’s economy its best chance since the2011 revolution to escape a downward spiral of currency weakness, capital flight and crumbling state finances.

The departure of Mursi, who was widely blamed for the condition of the economy, will not provide any quick or easy fixes to problems such as dangerously low foreign reserves, a ballooning budget deficit and high unemployment.

But many businessmen and economists hope for the appointment of a more technocratic administration that would address these problems methodically, while luring back some of the investors and money which have fled the country.

“I think Egypt will start taking very strong steps to strengthen the economy...I think a lot of investment will come in,” said Medhat Khalil, chairman of Raya Holding, an Egyptian information technology conglomerate.

Khalil predicted Egypt would emerge from its economic crisis in six months at most - a prediction which most foreign economists consider far too optimistic. But such optimism added about $3.2 billion to the stock market’s value on Thursday as the main share index jumped 7.3 percent.

Particularly strong were shares in companies perceived to have suffered under Mursi’s administration for political reasons, such as Ezz Steel, whose former owner was a leading official in the party of former president Hosni Mubarak.

Egyptian bond prices rose sharply and the black market exchange rate of the Egyptian pound narrowed its discount to the official rate - a sign that traders thought more funds might flow into the country.

Akram Farag, founder of Oxygen Consulting, a Cairo firm which advises on digital content, said he had been thinking about leaving Egypt but now intended to stay. Other businessmen were making the same decision, he said.

“In the short term and the long term I see what happened in Egypt last night will have a positive effect on the economy and investment.”


Much of the economic turmoil under Mursi, whose Muslim Brotherhood was new to power, was the result of indecisive and inexpert administration. After the 2011 revolution, successive governments had trouble attracting experienced technocrats, who feared being tainted by an unpopular ruling military council or by the Islamist ideology of the Brotherhood.

The outpouring of public anger with the Brotherhood in the past few weeks has largely erased the stigma attached to working in a government backed by the military, businessmen say.

“None of this is on the table now, so I believe that anybody who is asked to join the cabinet won't hesitate,” said Karim Helal, chairman of ADI Capital, the Egyptian investment banking arm of Abu Dhabi Islamic Bank.

Mohamed ElBaradei, who headed the United Nations nuclear agency, is a favorite to be named as head of a transitional government that will prepare for elections.

The acclaim which the army won from much of the population for its smooth overthrow of Mursi may give the transitional government a window of opportunity to push painful economic reforms that previous administrations shied away from adopting.

Mursi’s government had been running out of cash, partly because of expensive subsidies for gasoline and other fuels which eat up over a fifth of state spending. The cash squeeze led to rolling electricity blackouts and queues of cars at filling stations, adding to the anger with the Brotherhood.

If it can improve the energy supply situation, the new administration may be able to justify to the public subsidy cuts that would partially repair the state budget.

“This might make it easier to push energy subsidy reform: if you explain to the public that they may have to pay more, but that fuel will be available at that price,” said Simon Kitchen, a strategist with local investment bank EFG Hermes.

Financial aid

Whatever the policies of the new administration, Egypt is likely to remain dangerously dependent on foreign aid to finance its external deficit for years.

Raza Agha, economist at financial firm VTB Capital in London, estimated Egypt would need a $19.5 billion of external financing in the year through June 2014, to cover maturing debts and a $5.4 billion deficit in trade of goods and services.

That estimate assumes no more capital flight, which could be triggered if, for example, elements of the Muslim Brotherhood turn to violence in response to their ouster.

“A currency crisis can make things much worse than they already are. Egypt imports much of its basic food needs. Food price inflation would go up, which could lead to more popular unrest in an already highly impoverished and polarized country,” investment bank ING wrote in a research note.

Many investors hope the new government will agree on a $4.8billion emergency loan with the International Monetary Fund, which Mursi’s government initialed last November but never ratified. ElBaradei has pressed for Egypt to sign the deal.

Hopes for an early IMF agreement may be misplaced, however. To avoid seeming to endorse a military coup, and to ensure that tough economic reforms in the loan deal have broad political support in Egypt, the IMF may wait to negotiate with an elected government - and it could be months before polls are held.

A further delay to the IMF loan would make Egypt more dependent on wealthy donors in the Gulf. The government of Qatar, which has provided $7.5 billion in grants and low-interest loans, has been close to the Muslim Brotherhood and may view Mursi’s ouster as a diplomatic setback.

There is no indication so far, however, that Qatar intends to pull its money out of Egypt. The official Qatar News Agency said on Thursday that the Gulf state would “continue to respect” the will of the Egyptian people and work to strengthen ties.

Meanwhile, Egypt may be able to count on more aid from two other rich Gulf states which have long distrusted the Muslim Brotherhood, and therefore have a strong political interest in ensuring that post-Brotherhood governments in Egypt succeed.

Both Saudi Arabia and the United Arab Emirates congratulated the new Egyptian leadership within hours of the coup. In 2011the UAE pledged $3 billion in aid to Egypt, but the money was never delivered; the UAE now has more reason to disburse it.

Egypt “is in a much better position now to receive aid from Saudi Arabia and the UAE when the Brotherhood is no longer there,” said Citigroup regional economist Farouk Soussa.

“Both Saudi Arabia and the UAE have promised significant financial aid to Egypt. It is more likely that Egypt will receive it now.”

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