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Investors see economic growth beyond political turbulence

Investors see economic growth beyond political turbulence

As investors await elections the short-term outlook seen bumpy, though economists say the worst of capital outflows maybe over.

May 12, 2011 10:07 by



When mass protests drove Egypt’s Hosni Mubarak out of office in February and political turmoil sent the economy into a tailspin, Sweden’s Electrolux put its deal to buy an Egyptian appliance maker on hold.

The company was not alone in suffering a bout of nerves. The stock market plunged and the Egyptian pound slid to six-year lows against the dollar as tourists fled and capital inflows slowed sharply.

Now the deal to buy Egypt’s Olympic Group is back on, and Electrolux Chief Executive Keith McLoughlin sees strong long-term prospects for the Arab world’s most populous nation despite the possibility of near-term turbulence.

“In five or 10 years that is going to be a very important part of the world to be in. The real issue is what is the next 12, 18, 24 months looking like, given the turmoil in the transition?” McLoughlin told Reuters.

“We are quite confident, given the move towards democracy, the move towards a large population increasing their disposable income — a move toward a better quality of life.”

As investors take stock three months after Mubarak was ousted on Feb. 11, some of the initial worries have given way to more optimism, even though an economy that had been expanding at about 6 percent annually may barely register growth this year.

Investors will be watching September’s parliamentary elections closely. But concerns among some Western investors that established political voices would smother those of January’s youthful protestors have already subsided.

“Although the political waters are murky, there is more optimism now about the unleashing of various political parties (rather) than simply the Islamist card feared at the start of the uprising,” Credit Agricole said in a May 4 report.

Brahim Razgallah, chief economist for the Middle East and North Africa at JP Morgan said Egypt had remained resilient despite the shock of Mubarak’s ouster.

“The country is expected to be hit in the short-term … but this represents also an opportunity to make structural reforms in order to really increase potential growth,” he said.

Such assessments will hearten Egypt’s new military rulers, who have shown no interest in clinging to power but have outlined a swift timetable for a transfer to civilian rule that could be completed by the end of the year.

What may be less welcome is an assessment that Egypt does not have time to wait for a civilian administration before tackling reforms needed to get the economy back on track.

“The interim government … should and ought to do more to focus on improving the investment climate, and that means taking some brave decisions,” said Angus Blair of Beltone Financial.

ELECTION LOOKOUT

Demands commonly cited include the swift completion of corruption probes from Mubarak down, to avoid poisoning the investment climate, reining in the state’s role in the economy, cutting inflation and overhauling education and training.

In the short-term, the outlook appears bleak.

Egypt’s economy shrank about 7 percent in January-March and could grow just 2 percent or less this year. That is worrying for a country that economists say must expand by about 6 percent a year — the figure it had been expected to achieve before the uprising — to create jobs for its young population.

Foreign investment fell to $1.2 billion in the first quarter, down $400 millon on the same period in 2010, and the finance minister has forecast foreign direct investment will fall to $4.1 billion in 2010/11 from $6.8 billion last year.

But Razgallah said Egypt may have seen the worst of the capital outflows, citing a more stable exchange rate after the pound fell 2.1 percent against the dollar following the start of anti-Mubarak protests on Jan. 25.

“Uncertainty related to the foreign exchange outlook was a major factor hindering the return of international investors into the market,” he said. “As long as investors see that foreign exchange is remaining stable and the T-bill market attractive, they will come back.”

Property firms, once rising stars on Egypt’s bourse, have been left reeling by a string of legal challenges to their land acquisitions that began before Mubarak was ousted but which have since gathered pace.

The cases revolve around the way land was bought from the state, via direct sales rather than auctions, which enabled them to get hold of plots below market value. The longer these and other corruption probes continue, the more investors will worry.

“The last thing you need is for all of this vendetta and the charging against various politicians and people in business to go on for many, many months. It’s got to be done quickly … so that people can move on,” said Beltone’s Blair.



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