Optimism builds for Egypt's economy in second half (page 1 of 2)

While the first six months of 2011 have been characterised by tremendous political upheaval in Egypt, the country's future may ultimately depend on its recovery from the economic paralysis which has gripped the Middle East and North Africa (MENA) region's second-largest economy since the unrest began.

As of June 14 the CASE Index, which includes the 30 most active stocks in the Egyptian stock market, was still down almost 22% since the start of the year - not far above its March lows when the market was down 31% year-to-date. And according to the Economist Intelligence Unit, real GDP growth in Egypt will drop to around 1.2% in fiscal year 2010/11 (July 1 to June 30) owing to the continuing impact of the political crisis.

"The Egyptian economy has slowed significantly [in the fiscal year ending on 30 June]," says Philippe Dauba-Pantanacce, senior economist for the MENA region at Standard Chartered.
"The tourism sector lost $646m in March alone - tourist arrivals were down 60% year-on-year," he continues, noting that tourism is a key source of foreign currency.

As a consequence, FX reserves have slumped dramatically: net international reserves have fallen by $13bn since January, to $27bn as of the end of May. "The decline in reserves has stabilised, but it's particularly important for Egypt, whose currency operates as a managed float," he adds, referring to the mechanism wherein the currency's value is allowed to fluctuate according to the foreign exchange market.

Some sectors unaffected by unrest

Some believe that this stabilisation is the first step in a long, painful process of recovery for Egypt's shattered economy, and its standing on the world stage. Others, however, contend that the market has not been as badly damaged by the unrest, as had initially been feared. Could recovery be swifter than anyone might have imagined at the barricades of Tahrir Square?

"Egypt has been one of the best-performing markets in the region since the financial crisis, and that's a function of the fact that the companies there are much more diverse than in other markets in the Middle East," says Mark McFarland, emerging markets economist at Emirates NBD.

"I'm very optimistic about Egypt, as outside the tourism and real estate sectors, and businesses which feed into that, there hasn't been a sustained negative impact on the economy, and the markets are still pretty buoyant," he continues. "If you talk to car companies, for example, saloon cars are still selling well. And when you go and speak to food and beverage companies, they'll tell you that they took a hit in Q1, but that things are returning to normal pretty quickly.

"We haven't had a mood swing towards optimism yet, because of changes to parliamentary elections and foreign aid flows. But when that happens, the outlook will be extremely positive," he adds.

Standard Chartered estimates that Egypt will record a real GDP growth of 1.4% for FY 2010/2011. According to the bank, month-on-month inflation started to moderate in May at 11.8%, after hitting 12.1% in April, while the stock market posted its best month in May with growth of 10.4%. Nevertheless, there are significant challenges ahead, not least with regards economic policy.

"The situation is still very fluid and we see very contrasting and hesitating signs on the economic policy front by the caretaker government, typically like the attempt to impose a 10% capital gain tax, a project that was ultimately scrapped," cautions Dauba-Pantanacce.

"We recognise that you don't get a 7% decline in Q1 and then everything's back to normal," accepts McFarland at Emirates NBD.