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Egypt economy faces rocky road after protests

Egypt economy faces rocky road after protests

Sentiment on army's side for now, but big challenges loom; Growth may fall to as low as 1-2 percent – analysts; Loose fiscal policy, weak currency to fuel inflation

February 13, 2011 3:56 by

Egypt’s military council faces a daunting challenge to stabilise the economy after 18 days of protests which may cut growth this year in half and have left regulators nervous about the reopening of its capital markets.

In the short-run, analysts hope that there will be an orderly transition to democracy and that may halt outflows of capital which have reached as much as $1 billion per day at the height of the revolt.

Many investors are also optimistic about the broader changes to business and policy that may follow under a freely-elected government but there is little prospect of a step change in the near term.

“In terms of the economy, Egypt has been run by the same technocrats for the last 30 years,” said Tim Ash, head of emerging markets research at RBS. “I don’t think you’re going to see too much of a change.”

“The establishment are still around. Their real agenda is no change until September,” he said.

Egypt’s economy was worth an estimated $217 billion last year, half of oil giant Saudi Arabia, and relies on foreign investments, tourism and fees from the Suez Canal.

A month before the protests erupted on Jan. 25, analysts polled by Reuters had expected growth of 5.4 percent in the fiscal year ending in June, second in the Gulf Arab region only to Qatar. The government had forecast 6 percent expansion.

But while banks and some shops are reopening, tourists — who account for between 5 and 11 percent of economic output — are still shunning the popular holiday hub, making the growth predictions look optimistic.

Said Hirsch, Middle East economist at Capital Economics, said the main priority would be bringing society back to normal and get people working again.
“The military’s role will be to stabilise the economic situation,” he said.

Officials on Saturday pushed back the opening of the stock market for a second time, from Sunday to next Wednesday, and the Egyptian pound had to be propped up by intervention by the central bank last week.

At the peak of the unrest, some analysts speculated the bank would have to make an emergency rise in interest rates to aid the pound.

Optimism over Hosni Mubarek’s departure — which has helped emerging markets globally — make that move less likely, but the currency’s weakness also adds to the likelihood of higher inflation and an eventual rise in rates.

Ratings agencies also downgraded Egypt’s sovereign ratings by one notch as protests intensified, citing possible damage to already weak state finances.

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