El-Erian of Pimco on the Egyptian Economy

Updated on

The situation in Egypt is truly an earthquake which not only affects the middle east but the entire world.  Hossni Mubarak who ruled the country since 1982, announced moments ago. There is no telling what the effects will be in the Mid-East or in other oppressive nations, China, Iran Belarus and many others too numerous to name. What is frightening is what a democracy in Egypt might look like. I do not normally post political commentary on this site, but this issue is too large not to discuss. Anyone who has not read it yet, I urge to read my previous  post on Egypt. New data from Pew is even more frightening. According to a poll conducted  last year, more than 90% of Egyptians express unfavorable views toward Jews. Without getting into why this happened, the fact stands that this is reality. What is truly frightening is a possible war between the most well armed nations in the Middle East. Even if this is does not happen, Egypt exerts tremendous control over Gaza which is now fighting a war of attrition with Israel. I hope I am wrong, but I now expect the situation to get far even worse.

Bloomberg PR emailed me this video yesterday. Although, I do not agree with El-Erian in regards to everything he offers some interesting insight. In addition, El-Erian, being  the son of an Egyptian diplomat is more familiar than most with , said that Egypt will need help restarting its economy once the nation’s political situation begins to stabilize.  He also said that the “one thing I worry about is a certain amount of capital outflow, especially when the stock market is reopened.”

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Please see video and highlights below.


El-Erian on what he would like to see happen in Egypt in the next 30 days:
“Everybody right now is rightly focusing on the political issues.  Things are moving very quickly and it is correct to do so, but we should not forget that there are also economic and the financial aspects.  Over the next 30 days, especially if change occurs, the Egyptian economy has to restart, has to recover and get back on the path of rapid growth.  We should not simply be obsessed with the politics.  We should also be thinking about what it takes to restart an economy that has been dramatically stopped in its tracks by the events of the last few weeks.”

On what he’d like to see out of the leadership in Egypt:
“We want to see a transition process that has the buy in of the majority of Egyptians.  That transition process will have to deliver three things.  One, a time table for parliamentary elections that are fair and free, second, constitutional reform, third, presidential elections.  What is critical over the next few days is to deliver a transition process that is credible to most Egyptians.”

On if Vice President Suleiman can lead the process, given his military background:
“He could.  The one credible institution in Egypt is the army.  The army can define the parameters of this transition as long as it is viewed as a means to another end, which is greater democracy and greater freedom.  There is still concern out there that it might not be a means to an end, but an end in itself.  I do not think that is the case, but there is understandable concern out there.”

On what the administration in Egypt is heading from the nation’s elite:
“I can tell you there are many conversations going on right now and there’s a desire to avoid chaos. Everybody is afraid of chaos because there are no winners if the situation becomes chaotic.  Everybody is hoping for managed change and the critical thing is to converge on a common understanding of what this managed change looks like.”

On how the U.S. should project assistance from Washington:
“First and foremost to understand that this is a revolution by Egyptians and Egyptians will determine where it’s going.  Secondly, to be there to support the transition process towards more democracy and more freedom.  Thirdly, to recognize that the Egyptian economy is going to need help in restarting–everything from Central Bank swap lines to redirecting aid.  It is critical that once the political process is clearer, that we can restart this economy in order to deliver, especially to the poor segments of the population who are at risk right now.”

On how the Middle East should adapt to the new Egypt:
“It is not just a question of the Middle East.  I think there’s a temptation to oversimplify to stress a regional issue.  There are many countries today around the world that are dealing with food inflation, dealing with high youth unemployment and income inequality.  In this age of social media, it is not as easy to sustain a society with all of that.  For me, the message that goes out to the rest of the world is that governments have to get ahead of the process and have to worry about the unemployed, have to worry about those who half of their consumption is going to food and are facing higher prices.”

On what he thinks we will see from Mubarak’s upcoming statement:
“I think, clarity as to his plans, first and foremost.  Second, clarity as to the transition process, if he decides to step down.  And very quickly, a process of buy in for the rest of society.”

On if his research team at PIMCO has changed investment strategies in the Middle East in the last two weeks:
“Sure, I mean, as we spoke about last time I spoke with you, the immediate reaction to Egypt in the Middle East was pretty indiscriminate so there was value created from people making too many parallels, indiscriminate selling, etc.  Those opportunities arose.  You have to look at the market day-by-day because the events are fast-moving, still uncertain, and there will be both opportunities and risks in this process.”

On the Egyptian economy:
“Over time, it is a self-sustaining economy that has lots of strength.  In the immediate few weeks and months when they are restarting this economy, there will be a need to calm sentiment. The one thing I worry about is a certain amount of capital outflow, especially when the stock market is reopened, which is currently scheduled for next Sunday.”

El-Erian on how to buttress against capital outflow:
“The first line of defense is the country’s reserves.  They are substantial at $36 billion–plus another amount that is with the commercial banks.  That is the first line of defense.  I would like to see that line supported by swap lines with central banks.  I think other central banks can play a role here.  Thirdly, the redirection of aid that has already been committed.  With those three things, Egypt should be able to navigate the next few weeks and months

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