Investors may come to rue Egyptian army rule

Investors may come to rue Egyptian army rule

The financial dangers of prolonged army rule are clear: for one thing the military-driven rejection of aid from the IMF has forced the government to lean on domestic banks to finance the fiscal deficit, forecast at 10 percent of GDP in 2011.

November 21, 2011 5:08 by Reuters

Egypt’s deadly clashes could trigger investors’ worst-case scenario. The ruling army have become the focus of protester ire in a stand-off that threatens to delay elections, due to start in a week. If tensions aren’t resolved quickly, the economy is facing the risk of a dangerous downwards spiral.

The military have failed to hand over power as quickly as promised. They are also pushing for certain powers over any new elected parliament — including an exemption for its budget from civilian oversight. But the army’s attempt to protect its economic interests, estimated to be worth up to 40 percent of the economy, appears to have backfired.

Egyptians expect the army to continue to effectively rule even after the upcoming parliamentary elections in early January, and a new cabinet is appointed to oversee the drafting of a new constitution. A presidential election, if that is the path Egypt chooses, might not take place until 2013, leaving the army in charge of an ailing economy for almost two years.

The financial dangers of prolonged army rule are clear. The military-driven rejection of aid from the IMF has forced the government to lean on domestic banks to finance the fiscal deficit, forecast at 10 percent of GDP in 2011. Yields on 266-day T-bills have leapt to 14 percent, a three year high, on anticipation of a devaluation of the pound. The finance minister had his resignation rejected last month. Uncertainty is keeping tourism and foreign investment away.

Foreign reserves are declining at the fastest rate since April, and the stock market is nearing its lowest point this year. Gulf countries appear to be waiting to see what kind of parliament emerges before committing their full aid pledges. Fears are growing for a sudden rather than a managed plunge in the pound — which could, in turn, stoke mass unrest amongst the poor.

The push to ensure a full revolution – which many Egyptians don’t think the economy can afford, with risks of many more deaths — might not be the first step towards financial disaster if it forces the army to outline a clearer, quicker roadmap to civilian rule. A shorter transition would be an economic boost. But with the stakes high for both sides, Egypt’s hopes for smooth elections are waning.