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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

“We believe the central bank will hike rates by 100 basis points in an emergency meeting this month as inflation is likely to surge on the back of a weaker pound,” said Dina Ahmad, CEEMEA strategist at BNP Paribas.

Lower private consumption, which accounts for around 70 percent of GDP, a drop in foreign investments and higher unemployment are also expected to hurt economic performance.

Although Mubarak’s promise of a double-digit salary raise for public sector workers will now likely be scrapped, the transitional government is likely to keep up spending.

Lower taxes, higher subsidies and pressures to give more money to unemployed may also undermine the crude oil-importer’s fiscal health, with the budget gap likely to balloon towards 10 percent of GDP this year, according to BNP Paribas.

“First we need to see a return to normality,” said Lars Christensen, senior emerging markets analyst at Danske Bank. “Then I think the recovery could be relatively short.”

Long-term, the outlook is cloudier.

If the economy worsens, any resulting social instability could become a graver geopolitical concern and to prevent that, Egypt may also be well-positions to receive a boost in foreign aid.

“I think it’s the case that the United States and the Gulf (countries) could bring more aid to Egypt,” said Hirsch. “A lot of money could come from the Gulf.

Gulf Arab rulers, as well as the United States, see Egypt as a key ally to counter Iran’s growing influence in the region, and will want to keep the country economically healthy and stable.

Among Gulf countries, Yemen, Bahrain and Kuwait have already offered cash or concessions, eyeing similar young populations and simmering discontent.

Beyond that, the prospect of a freer and more transparent economy under new regime could draw substantial inflows of investment looking to grab market share in the country of 80 million.

“When you have less than, say, 10 percent of the population with checking accounts, there is potential for growth,” said Karim Baghdady, managing director of Egyptian-based investment bank Beltone in New York.

“When you have a gray economy that is almost as large as the official GDP, if you are able to institutionalize that economy, then people will start securitizing their debts, able to borrow more, buy more. So there is a big domino effect.”

(By Reed Stevenson. Additional reporting by Martin Dokoupil and Manuela Badawy; editing by Patrick Graham.)

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