Egypt’s Economy Continues to Declines While Stocks Boom

Egypt’s Economy Continues to Declines While Stocks Boom
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Egypt's Economy Continues to Declines While Stocks Boom

One of the aspirations of the so called ‘Arab Spring movement’ in Egypt was to create jobs in the country and increase the quality of life for the citizenry. We doubted this from the beginning, and our earlier predictions turned out to be correct.

Since the ousting of Hosni Mubarak last year and the claimed success of the uprising little has been done to improve the economic situation. The lack of concrete policies in the economy has caused decline and may leave many Egyptians worse off than they were last year. Meanwhile the new year has seen an unprecedented rise in the prices of stocks in the North African country. Egypt has seen a greater rise in the value of its stocks so far this year than anywhere else in the world. The break in the economic indicators shows an economy still in turmoil in the midst of great political upheaval.

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Egypt’s GDP growth in 2011 was around 0.5% a pitiful number compared to the 5-10% rate it had enjoyed in previous years. Much of this can be put down to the economic turmoil the country is facing but the problem is whether or not new stability will be a return to Mubarak’s economy or toward something different. A series of reforms undertaken by the former regime allowed the economy to grow well and attract its fair share of foreign direct investment, a key factor in any emerging market. The problem is that now the structure of the country’s economy may be changed to suit the politics of the country’s new rulers. Many of the new democratic power houses are suggesting a roll back on Mubarak’s reforms, a situation which could slow the economy for years to come.

Of the two main forces shaping Egypt’s future, the military and popular Islamist parties, neither one seems too preoccupied with matters of the economy. The military’s rhetoric has centered on keeping the structure of the military and keeping it independently powerful. This is at odds with the Islamist parties, the biggest of which is the Muslim Brotherhood, who wish to create a traditional Islamic stateenforcing social values above all else. That group is holding more and more power as negotiations over the country’s constitution continue to drive liberals away.

The future will be challenging particularly when today’s problems are taken stock of. The country is buckling under a massive weight of unemployment. The loss of infrastructure and institutions in the uprising could be blamed for a certain amount of this. There is also a deficit which has been increasing in a volatile fashion since last year. The country also faces large problems in relation to its currency. The central bank allowed the bleeding of most of the foreign reserves last year and now there is no protection left against a sustained instability in the Egyptian Pound. These problems are big and together they represent a challenge, though not an insurmountable one.

Egypt’s problem is creating the political will to solve these problems so that they do not erupt into something worse, politically and economically. With Egypt just beginning to recover from last year’s chaos now is not the time for an economic crisis. The weakness of the currency and the size of their deficits alone could drag this to the fore. The government also faces a revenue problem as tourism, once a cash cow for the country, has fallen considerably on security worries.

In the midst of these problems Egypt’s stocks (NYSE:EGPT) continue their rise. This seems a non sequitur but analysts are predicting the rise continue. One of the forces behind the rise is the undervaluation of stocks last year as political instability enveloped them. There is also some confidence from within and from abroad that Egypt will pull through this period of stagnation and make it to the other side where the rewards will be massive. Several fund managers are investing in the country on that logic alone. They sense volatility now and value later. We are skeptical that there is really value in an emerging market, teetering on the brink of civil war.

Egypt is an emerging market to watch. The political paralysis it is currently suffering is likely to end in a military dictatorship or some form of compromise between the fundamentalists and the army. Interesting times ahead for the most populous of the Arab Countries.

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