The economy’s great fall

07-12-2012 01:40 PM

Mervat Ayoub - Fady Labib

Egypt’s economy takes a beating in the wake of President Mursi’s Constitutional Declaration

It took no more than a single day following President Mursi’s 22 November Constitutional Declaration for Egypt to lose more money in one day than it has lost since the January 2011 Revolution. 
On 25 November, the first working day following Mursi’s declaration, the Cairo stock market took its deepest plunge, some 10 per cent, since the January 2011 revolution losing EGP29.3 billion of total market capitalisation. Further fall was halted only by automatic curbs. The money lost amounts to more than what Egypt would get should the IMF loan, it is so studiously requesting, is approved.
Economic experts strongly criticised President Mursi’s power grab and the curtailment of the independence of the judiciary, and attributed the economic setback to that. They feared for the Egyptian economy; the mass flight of Egyptian and foreign investment and the halt in industrial production threatened to take their severest toll on Egypt’s poor.
Unprotected investment
A spokesperson for the IMF announced that in order to grant Egypt the USD4.8 billion, the fund’s board of directors will insist that no major changes to the agreed-upon economic programme should be made. The IMF statement insinuated there was a possibility of withholding the loan.
Apart from the losses in the money markets, tourism took a direct hit. Bookings in Luxor hotels, according to latest statistics, went down some 50 per cent with the occupancy rate down from 42 to 21 per cent. In Cairo, visits to the Egyptian Museum decreased some 70 per cent.
The Egyptian economic court decided to suspend its hearings in protest against Mursi’s assault against the judiciary. The court was founded in 2008 to rule in disputes relating to critical economic issues and requiring immediate settlement; this includes cases on investment, financial markets, real estate financing, consumer protection and communications. The court’s suspension of activities should reflect negatively on the investment climate in Egypt, since it sends the message that investment in Egypt is no longer protected.
The question that now begs an answer is how far-reaching the economic repercussions of Mursi’s declaration can be. Watani took the issue to the experts.
Flight of Egyptian capital
For starters, economic expert Mukhtar al-Sharif finds the IMF statement perfectly predictable. Internal unrest usually hinders the implementation of planned economic reforms. The IMF’s wish to link the loan to the stability of the economic and political situation aims at ensuring the implementation of the planned reforms. 
Dr Sharif warns that the rift, and ensuing violence, between the supporters and opponents of Mursi’s Constitutional Declaration can deepen the country’s economic woes. The event of preventing the judges of the Supreme Constitutional Court from accessing the court building has an even greater impact on the Egyptian economy, he says. Foreign investment and tourism may severely retreat in the wake of the fall in the stock market. Under such conditions, Egypt will never be able to achieve any economic revival. 
It was conspicuous that Egyptian investors were net sellers in the recent fall in the money market. Dr Sharif said that their haste to sell reflects their horror at Mursi’s declaration. It was an impulsive action, he said, and did not mean that Egyptian investors are fleeing the Egyptian market right away. Fleeing a market is a pre-determined, studied action that cannot be taken in haste, since it involves the search for new markets, alternative investment, and guarantees for such investment.
The sudden flight of capitals occurred in Egypt twice in modern times: following World War II, and in 1956 when the Jews were pressured to leave Egypt, leaving their investments behind. Dr Sharif said Egyptians have not reached this stage at the moment.
Straining the State budget
Technical analyst, Ahmed Galal, stresses that the current unrest on the Egyptian street will in all probability affect the money markets for quite some time. Egyptian companies trading on the London stock exchange, Dr Galal says, lost 3 per cent of their value the day following Mursi’s Constitutional Declaration.
Economic forecasts had expected the stock exchange to recover the EGP195 billion losses it had incurred during 2011—the Revolution year, Dr Galal says. “But now, after the President’s declaration the situation will alter,” he predicts, pointing at the possibility that the stock market ends the year on a negative note, wiping out all the gains that it had already achieved during the past year.
Dr Galal calls upon the President to reconsider his recent decisions, since they promise to undermine the Egyptian economy. If Egypt does not get the IMF loan, he reminds, the government will have to resort to internal borrowing from local banks, increasing thus its short-term debt. This should directly strain the State budget and push interest rates up, eventually swelling the public debt which already stands at a staggering EGP250 trillion. 
The economic expert Hamdi Abdel-Azim fully agrees with Dr Galal. “President Mursi gave himself the right to grab the legislative, executive, and judicial authorities, and this will have a negative impact on the investment climate in Egypt. 
Revolution of the hungry
For his part, the head of the Egyptian Strategic Economic Forum Rashad Abdu describes Mursi’s recent decisions as ‘unwise’. “It is unreasonable that the President should declare his decisions immune of judicial oversight or any form of opposition, and expect the people to remain silent. The immunity the President granted himself sends a message that Egypt is not an institutional State,” he says. 
These decisions, Dr Abdu told Watani, have had a negative impact on all sectors of the national economy, but most especially on tourism which has drastically tumbled. Many factories have already laid off workers, he reminds, and are now threatened with closure.
Dr Abdu warns against a revolution of the hungry which, he says, is ‘unquestionably coming’. “When this happens, he insists, we can kiss the Egyptian economy goodbye.”
WATANI International
7 December 2012 
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