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Egypt growth may halve, budget gap, inflation to rise

Egypt growth may halve, budget gap, inflation to rise

Loose fiscal policy, weak currency to fuel inflation; Central bank to intervene, aggressive rate hike an option; Investment outflows of up to $1 bln a day; Key tourism revenues take "big hit".

February 10, 2011 1:04 by

Political turmoil in Egypt may more than halve the Arab country’s economic growth this year, push its budget deficit into double digits and weaken its currency, boosting already high inflation.

A month before massive anti-Hosni Mubarak protests erupted on Jan. 25, analysts polled by Reuters had expected Egypt’s economy to grow 5.4 percent in the fiscal year ending in June, second only to Qatar. The government had forecast 6 percent expansion.

Banks are reopening but with shops still closed and tourists shunning the popular holiday hub, those growth predictions now look optimistic.

Some analysts have already trimmed their growth projections as the disruption strips at least $310 million per day from the crude-importing economy, said Banque Saudi Fransi.

“Tourist arrivals were 20 to 30 percent lower year-on-year after the (1997) Luxor attacks or when the global economy fell into recession,” Bank of America Merrill Lynch analysts said.

“Should political uncertainty not abate meaningfully and remain in place for an extended period, similar contraction would shave off some 2 to 3 percentage points from headline growth, which, along with contracting investments, would bring annual GDP growth to the 1 to 2 percent year-on-year range.”

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.

Egypt’s economy was worth an estimated $217 billion last year, half of oil giant Saudi Arabia, and relies on foreign investments, tourism and Suez Canal fees, but faces challenges such as poverty, high unemployment of at least 10 percent — but many suggest the real figure is much higher — and stubborn inflation.

Some analysts warn that the central bank could raise borrowing costs, with the overnight lending rate now at 9.75 percent, to stem capital outflows. Citi estimates outflows of $500 million to $1 billion per day.

“Tourism revenues are taking a big hit and are unlikely to recover quickly,” Reinhard Cluse, economist at UBS in London, said. “Retail and foreign trade seem to be disrupted and cash reserves might still be running low.”

Income from tourism — estimated at 5 to 11 percent of economic output — is an important lifeline for the Arab world’s most populous country, where about 40 percent of people live on less than $2 per day.

As protests intensified in the past two weeks, ratings agencies downgraded Egypt’s sovereign ratings by one notch citing possible damage to already weak state finances.

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