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Economic resilience
 
Date: 2/19/2015
Issue No.1234, 19 February, 2015      17-02-2015 08:42PM ET

Economic resilience

Will events in Libya affect prospects for the Sharm El-Sheikh Conference, asks Sherine Abdel-Razek

Economic resilience
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Less than one month before the economic conference that Egypt’s government hopes will present its case as an appealing investment destination and only a few days after the economy got a much-needed vote of confidence from directors of the International Monetary Fund (IMF), the news of air strikes by the Egyptian military against Islamic State (IS) militants in Libya has left many wondering how these could be reflected in investors’ decisions at the conference.

The economy has been struggling through a series of political changes and instability that has driven away investors and tourists and resulted in limiting growth to the neighbourhood of two per cent per annum.

The government of Prime Minister Ibrahim Mehleb, which came to power in March 2014, embarked on structural reforms recommended by the IMF such as reducing subsidies and devaluing the Egyptian pound.

At the government’s request, IMF directors recently assessed the economic situation in the country with a view to rubber stamping the reform package ahead of the economic conference.

“The measures implemented so far, along with some recovery in confidence, are starting to produce a turnaround” in Egypt, noted an IMF press release issued last week.

However, the IMF mission chief for Egypt, Christopher Jarvis, also said that Egypt was facing risks. The region is in turmoil, domestic security remains an issue, and the global economic environment is not supportive. And this was even before IS had announced its murder of 21 Egyptian workers.

But the situation might not be as bad as it seems. “The military strikes will add to the success of the conference rather than otherwise,” said Hani Geneina, a senior economist at Pharos brokerage, commenting on the Egyptian air strikes in Libya last weekend.

Geneina said that the bulk of marketing for the conference had taken place in the Gulf, implying that Egypt will continue to rely on its partners in the Gulf Cooperation Council (GCC) as investors rather than creditors or donors.

“Given that most GCC states (except Qatar) are already concerned at the growing power of IS, commitment to support Egypt will increase materially over the coming few months, including via strong participation in the conference,” he said.

Generous Gulf aid has helped keep the economy afloat since the toppling of ousted former president Mohamed Morsi. However, while they still support Egypt the governments of these countries, especially that of the UAE, have been pushing towards providing investments rather than aid.

According to Ahmed Galal, managing director of the Economic Research Forum, a non-government MENA region think tank, Egypt’s investment appeal is not necessarily undermined by recent developments.  

Several internal and external factors enter into the equation when an investor is calculating whether a country is politically stable or not, he said. According to Galal, finance minister in 2013, investors make a judgment collectively and do not look at one piece of a situation at a time.

“Is Egypt a stable country? I would say relatively speaking yes. We have an army that is solid and unified. Just think about the absence of an army in the countries around us. There are serious reasons to believe that this country is stable. We are not having problems of the kind they are having in Iraq, for example,” Galal said.

Foreign direct investments fell from double digits before the 25 January Revolution to $3 billion in 2012/2013, but doubled to $6 billion in 2013/2014.

As Egypt is not planning to seal a deal with the IMF any time soon, as was revealed last week by Finance Minister Hani Kadri, it is hoping to get enough investment at the conference to cover its financing gap, currently 10 per cent of GDP.

 The stock market reacted to developments at the weekend by going down by two per cent, its highest one-day loss since the beginning of 2015. Individual investors had abandoned their holdings in a short-term panic-driven selling spree, according to Geneina.

But he noted that one should bear in mind that the Egyptian market had been amongst the best-performing markets globally to date in 2015, “so investors took the opportunity to sell at high prices to realise very decent profits,” he said.

Geneina expected the market to rebound in the short term, particularly as the flow of news has shown that IS was now being dealt with.  

The scenario is reminiscent of a similar one in 2003, when the market soared after Egypt participated in the war against Iraq, because the then Iraqi president, Saddam Hussein, was portrayed as a risk to Middle Eastern stability.

“I recall that the market rallied three or four per cent on the day of the first strike. So, given that the dangers posed by IS are real, the market is expected to be extremely positive as soon as operations achieve their targets.”

“Moreover, the impact on the local economy will likely be limited in the short term and probably will take the form of delayed consumption or investment expenditure due to concerns over escalation.”

“However, consumers and investors will return to normal within a very short period of time as the impact of the strikes is reflected in medium-term political stability,” Geneina said.

 The IMF expects the economy to grow by 3.8 per cent in 2014/15 and to rise to five per cent in the medium term.

 
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