Uncertainty over Egypt's political future holds back economic growth (page 1 of 2)

Last month saw an unwelcome resurgence of violence on the streets of Egyptian capital Cairo, casting fresh doubts on the country's military-led government, its apparent efforts to place candidates in the upcoming elections, and its ability to effectively manage economic recovery.

However, despite the economic paralysis which has gripped the country in the wake of the overthrow of former president Hosni Mubarak, analysts argue that Egypt remains a safe bet - or will do once the uncertainty over the country's political future is resolved.

"In the medium to long term Egypt is all about growth, and a country that we absolutely love," says Mark McFarland, Emerging Markets Economist at Emirates NBD. "You're got 100 million people who have great trading links, a long history of entrepreneurialism, and are very young and reasonably well-educated."

And yet even before the recent violence flared, the Egyptian economy was hardly enjoying a growth spurt, or even what might be termed a tangible recovery. The EGX 30, which tracks the performance of the top 30 stocks on the Egyptian Stock Exchange, had seen 42.7% wiped off its value year-to-date as of end-September. On September 28th alone the exchange witnessed its fifth-largest daily loss in history, seeing around $1.68bn wiped off its value on the news that political parties were planning to boycott the election if the ruling military council did not amend the electoral law.

Compare this with the performance of other bourses rocked directly by the Arab Spring: as of end-September the Tunis Stock Exchange had lost just 10.7% of its value year-to-date, despite the ousting in January of former president Zine El-Abidine Ben Ali. And in Syria, even as President Bashar Assad continues his campaign to repress protests against his regime, the Damascus Securities Exchange was down 44.4% year-to-date as of end-September - a performance just 1.7% worse than that of its Cairo counterpart. And yet Egypt's revolution was supposed to have ended relatively peacefully when Mubarak stepped aside on February 11th.

Sentiment stopping investors returning to market

"The short to medium term is going to be difficult for Egypt because essentially it's an unfinished revolution," says Dr Florence Eid, CEO of London-based research and advisory firm Arabia Monitor.

"It isn't clear to me how that revolution could have been conducted any better, given the size of the country and how important it is for regional balance and regional security," she continues. "However, the Egyptian economy is a fairly diverse economy and one that people are keen to invest in because there are a number of sectors which are solid: gas, tourism, and Suez Canal traffic, as well as smaller sectors which are fairly robust, such as financial services."

Dr Eid suggests that investors are staying away from the Cairo bourse for two simple reasons: uncertainty over the political situation in the country, and wariness inspired by the massive losses booked across the region in the wake of the global financial crisis. Many investors had assumed - incorrectly - that the Middle East would prove a safe haven that would escape the economic crisis because of the solid macroeconomic backbone of its oil exporters.

"Middle East markets were hammered even before the Arab Spring; it started in 2009 in a way that was totally unexpected," she says. "So there was already heightened risk aversion in the region, augmented now by the effect of the Arab Spring.

"People might believe that the Egyptian market has bottomed out, but they don't necessarily believe it's going to rise again anytime soon, so people believe they have time," she continues.