Duelling Indicators: Egypt’s Economic Future

The state of Egypt’s economy is the subject of much debate these days. Although it is more sensitive to instability and negative international perceptions because tourism contributes eleven percent of its GDP, at a population of 80 million, Egypt is the largest domestic Arab market, hungry for consumer goods manufactured at home or abroad, and it produces the world’s best cotton in a year of price spikes on agricultural products.

Of course, exactly how economic policy will shape Egypt’s future is uncertain. Neoliberalism versus caution and economic nationalism will be the competing tendencies. Two interesting links on this subject this morning:

The repeated (5+ times now) delay of the reopening of the Egyptian Stock Market is dragging down GDRs in the west and threatening a severe deflation of the Egyptian pound upon its reopening (Bloomberg). [A Global Depository Receipt is a security that trades on an international market, in this case the NYSE, convertible to a set number of Egyptian (or other usually emerging market) shares (1:10 for example) but is not linked by price. I had a plan once to run an arbitrage scheme to exploit price differences between NY and Cairo, but the “spread” was never much more than the fees to convert the securities.] The delay now is credited to the regulator’s desire to set up an insurance/compensation account for local individual investors who run the risk of getting wiped out by the moves of large institutions on the first day the bourse reopens. The demand on dollars versus the pound will spike when the sell off of international investors, so the exchange rate will also fall, with a host of other negative effects. But because the value of all shares traded on the Egyptian market, around $12 billion, is worth only 10% of the annual GDP (whereas the US market cap is $14 trillion, relatively equivalent to its GDP), and the businesses listed are only the largest industrial enterprises, many of which are still partially backed by the government, I think the overall economic effect of even a severe crash will not be that large. But waiting will make it worse: “Off like a Band-Aid,” guys.

On the other hand, Al-Masry Al-Youm English posts a dissenting, optimistic essay (uncredited, unfortunately) wondering about the economic opportunities that may open up now that the crony capitalists’ business monopolies have been shaken up/wrecked. However, as with the compensation for the small Egyptian investors, I think the political tide will shift against privatizations and sales to multinationals for the next few years at least. Unfortunately, FDI (Foreign Direct Investment) is one of the principal “indicators” of how an emerging economy is faring these days, so Egypt may have trouble attracting brand-new investment unless it is willing to continue privatizing or globalizing existing enterprises and markets.