Egypt’s economic woes deepen as Mursi marks one year in office

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One year after President Mohammed Mursi came to office, foreign investors are still waiting for reassurances it is safe to return to Egypt as many grow increasingly concerned about the economy.

Cairo’s stock market was today braced for the worst, amid fears of renewed violence following days of anti-Mursi protests in which several people were killed and hundreds wounded.

The economic woes of the Arab world’s most populous nation have deepened since Mursi took power 12 months ago, according to official data. Growth has stalled, unemployment has risen, poverty has increased, the deficit has widened and Egypt’s debts have soared.

Egypt’s foreign-exchange reserves inched up slightly, from $15.5 billion in June 2012 to just over $16bn by the end of May this year – but this figure includes $12bn in various forms of aid from allies including Qatar, Saudi Arabia, Turkey and Libya. The current level of reserves is still considered dangerously low and only covers the cost of a few months of essential imports like food and fuel.

The country’s currency has lost more than 16 percent of its value against the U.S. dollar as the central bank loosened its grip on the pound and foreign capital flowed out of the country. The pound is currently trading at just over LE7 to the dollar according to official central bank data, versus LE6.06 at the time of president Mursi’s election.

Egypt’s sovereign credit rating has been downgraded twice by Moody’s during Mursi’s first year in office, standing firmly in junk territory at CAA1. Since the January 2011 revolution Egypt has suffered six downgrades by Moody’s. The country is seen as an increasingly risky investment with the cost of insuring the country’s debt rising to a record high in the past weeks.

Experts say the key concerns for investors are the continued political uncertainty and the lack of clarity in policymaking.

“Foremost among investors’ minds is the lack of predictability in the policymaking environment,” William Jackson, an analyst at Capital Economics told Al Arabiya in interview.

Jackson pointed to the lack of progress on urgent economic reforms and concern over the value of the Egyptian pound which some investors feel still has further to fall.

“If investors are thinking about putting money into Egypt they won’t do so until they feel the pound has fallen to the level at which it will stabilize,” Jackson said. “At the moment Egypt’s precarious external position means that the pound looks set to fall but the central bank is trying to prevent it.”

Alia Moubayed of Barclays Capital said that the lack of clarity over the political outlook “is creating a lot of uncertainty in the legal and regulatory frameworks, and delaying reforms aimed at reducing the deficit and bringing inflation under control.”

“The Egyptian economy has weakened considerably since the beginning of the revolution, and eroded most of its buffers,” Moubayed said, adding that progress on economic, social or fiscal reforms has been “extremely limited”.

Foreign direct investment hit a record below between July and December of last year, coming in at just over $300 million. But it has improved slightly since the beginning of this year, inching up to $1.4bn according to the central bank. In a statement, the bank said the improvement was the result of a decrease in the capital outflows from and oil and gas sector.

Egypt’s economy is still growing, with gross domestic product, a measure of overall economic activity reaching 2.3 percent in the first quarter of the year, unchanged from the previous quarter but slower than a year earlier.

Experts say that despite the current economic gloom, Egypt has potential over the long term due to its large workforce, low labor costs and strategic location.

“Egypt has the potential,” Gabriel Sterne, economist at Exotix investment bank said. “It has a lot of educated people and a large workforce but without stability a lot of foreign investors will be put off.”

Sterne said it is important for banks to increase their lending to businesses, but pointed out that with interest rates on government bonds as high at 16 percent, banks have little incentive to lend to companies, preferring to hold government bonds instead.

Banks have been hit by new legislation aimed at increasing government revenue, namely new taxes on bank loans and provisions, which experts say could make them even more reluctant to lend.

Investor confidence has also been hit by the introduction of taxes on share trading and an increase in corporate taxes.

“The financial markets don’t appear to have passed a good judgment on President Mursi’s first year,” Jackson of Capital Economics wrote in a note. “The equity market has fallen over the past year and bond yields have reached a post-Arab Spring high.”

In early June, MSCI issued a stinging warning about Egypt’s stock market, saying it might be forced to consider excluding Egypt from its emerging market index if international investors continued to face difficulties repatriating their funds.

In a statement MSCI said it was closely monitoring Egypt’s foreign exchange market due to the recent shortage of foreign currency which was “of great concern to international institutional investors.”

MSCI said this situation could have a negative impact on the liquidity of the Egyptian equity market and “could trigger a review of the MSCI Egypt Index for potential reclassification to Frontier Markets due to the lack of liquid investable stocks.”

Investors also cite the apparent deadlock with the IMF over a $4.8bn financing package as a major concern. The two key areas of contention are unpopular reforms to energy subsidies and a proposed sales-tax increase.

“The IMF seems unconvinced by the savings expected from the government’s proposed plans to introduce a smart-card system for the distribution of fuel (diesel) and a voucher system for the distribution of gas cylinders,” Alia Moubayed of Barclays Capital said in a report.

Experts say consensus is urgently needed if Egypt is to win back foreign investors.

“The best way to progress is to form consensus in society,” Jackson of Capital Economics said.

“Egyptian society seems extremely polarized and because of this polarization the government is reluctant or unwilling to make unpopular reforms needed to improve business environment and seal a deal with IMF and bring private foreign capital back.”

Jackson added that given all the headwinds, president Mursi’s second year looks set to be just as challenging as the first.