Egypt analysts optimistic for post-Morsi economy

Egyptian celebrate in Tahir Square Can the euphoria last?

Analysts are optimistic that the ousting of President Morsi may presage a brighter future for Egypt's economy.

Stocks in Cairo rose by 7% on Thursday on the news, their largest one-day percentage gain in over a year.

Traders are hoping that Egypt's prospects will improve in the absence of Mr Morsi, even though the country's battered economy remains in crisis.

Some analysts said a long-stalled loan from the IMF may now be possible, although others remained sceptical.

"The technocrats will know how to deal with institutions - they will help the country financially because they have a clear agenda," said Sebastien Henin, portfolio manager at The National Investor, an Abu Dhabi-based investment firm.

"There will be a definitive change to the business environment for international and domestic investors," he added.

Window of opportunity

However, for Dina Ahmad, a strategist at BNP Paribas, the initial optimism should not be overplayed.

"While essentially this takes Egypt back to square one and delays any chance of economic progress and an IMF deal even further, we think that ultimately it creates a window of opportunity for a more stable government to be put in place," she said.

This window of opportunity brought about by the protests that saw Mr Morsi removed from office has, at least in part, been created by the Egypt's dire economic performance over the past two years.

Egyptian unemployment Egyptian unemployment remains stubbornly high

The Arab Spring revolution that removed Hosni Mubarak from power did not translate into the economic change many had hoped for.

Instead, over the past two years, political instability in Egypt has ensured that inflation and unemployment rose, while foreign investment and tourist revenues fell.

Government debt has grown from $30bn before Mr Mubarak was ousted to around $40bn today. Inflation, which two and a half years ago was 3%, now stands at between 13% and 18%. Unemployment has climbed to a record 13.2% under Mr Morsi.

Gradual change too slow

Caroline Freund from the Peterson Institute for International Economics said that after Mr Morsi came to power two years ago, he squandered the short "grace period" he had in which to implement changes that might have improved the economy, while he had the support of a newly liberated people.

"It's very typical for economies to decline in the year around transition, but what we've seen is that countries that are able to demonstrate a clear programme both politically and economically are able to rebound much more quickly than countries that do it gradually," she said.

"While gradual sounds good, gradual usually end up being gradual by default, rather than by design, which is a real problem for the economy because it leaves investors, tourists and consumers on the sidelines waiting to see where things are going."

The political instability has made it increasingly difficult for the government to raise taxes from Egypt's 80 million-strong population.

So, as Egypt's debt ballooned, Mr Morsi's government continually dipped into the country's cash reserves, which at $16bn today are less than half what they were before Mr Morsi took office.

Because he battled to raise money from his own people, tourists stopped coming and the IMF loan became stalled, Mr Morsi often relied on cash from other sources to balance the books.

Qatar and Saudi Arabia loaned at least $3bn each, Turkey put in another $1bn and Libya stumped up $2bn. And while the IMF loan of $4.8bn failed to materialise, the United States kept up its annual grant of more than $1.3bn.

But it wasn't nearly enough.

Egypt GDP graph Egypt's GDP growth has fallen in recent years

In May, the United Nations said that poverty and food insecurity had escalated severely over the past three years. It estimated 17% of the population battled to put food on the table, up from 14% in 2009. In addition, the UN calculated that the malnutrition rate had risen to 31% of children under five, up from 23% in 2005.

From bad to worse

Analysts say that under Mr Morsi, Egypt's economy went from bad to much worse and is now close to collapse. Electricity and water supplies are sporadic and in some places, even basic foods such as bread are hard to come by.

However, such a picture shouldn't detract from the fact that Egypt economy was in dire straits before the revolution that ousted Hosni Mubarak. Unemployment was running at 10% and a quarter of young people were out of work.

In the absence of the Muslim Brotherhood in control of the government, the willingness on the part of donors like Qatar may be in question.

Economist Farouk Soussa says ousted President Morsi could have done more to stabilise Egypt

Also, there's no guarantee that any replacement authority will be able to prise cash out of the International Monetary Fund. Mr Morsi's government did sign the much-needed IMF's $4.8bn loan deal last November, but failed to ratify or implement it.

His reluctance to sign the deal was, in part, down to the austerity measures that were conditional on it. Taxes would have increased and, more importantly, fuel and fuel subsidies would have been cut.

Such moves would have made the government extremely unpopular and, no doubt, would have resulted in mass protests.

But by not implementing the strings that were attached to the IMF loan, the economy deteriorated further and the inevitable ousting happened anyway.

Where next?

It's almost impossible to have any sort of economic stability in the face of political turmoil. By taking control, the Egyptian army may provide the degree of stability necessary to bring the donors and investors back, if only in the short-term.

Hence, the jump in Cairo's stock market. The cost of insuring financial exposure to Egypt in the Credit Default Swap (CDS) market has also fallen.

However, this initial euphoria may be short-lived - underneath the harsh economic realities remain.

Karim Shafaei is the chairman of Al Ismaelia for Real Estate Investments, a firm that refurbishes old buildings in Cairo.

He told the BBC it's almost impossible to do business under conditions of such uncertainty.

Family celebrates in Cairo on 3rd June 2013 Will the optimism last this time?

"Without knowing where the laws of country are going, what form the economic policy is coming I'm unable to make investments without knowing what the risks are that I'm taking," he said.

As an example of the difficulties facing any authority that replaces Mr Morsi, analysts point to the issue of fuel subsidies.

Currently, the cost of keeping the price of fuel low gobbles up nearly 8% of the country's GDP. So, any formula implemented to permanently boost and stabilise Egypt's economy has to address this through a subsidy cut.

The trouble is, any government replacing Mr Morsi's will be only too aware that Egyptians would be more than willing to take to the streets if their lives are made any harsher.

Nonetheless, many, like Karem Shafaei, remain optimistic.

"The hope we have is that, whatever is happening now, the turmoil and the inability to do business, will result in a better society that is able to set more healthy economic policies, have more transparency politically that will allow more investors to come in and eventually see a society that flourishes."

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