Egypt’s Power Vacuum Threatens the Economy

The IMF wants to see consensus before committing more funds | Borrowing costs soar Yield on nine-month Egyptian treasury bills

Alaa Shahine


Investors cheered after Muslim Brotherhood candidate Mohamed Mursi was declared the winner of Egypt’s presidential election on June 24. The benchmark stock index soared 7.6 percent, the biggest gain since February 2008, and rose another 2.9 percent on June 26. The celebrations may prove premature should a battle over legislative power, currently held by the military, impede Mursi’s ability to follow through with campaign promises to reduce public debt, create jobs, and boost economic growth.

A standoff between Mursi and the military could delay a $3.2 billion International Monetary Fund loan needed to stem the worst decline in foreign reserves since 2004 and to cut record borrowing costs, according to economists at Bank of America, HSBC Holdings, and Standard Chartered. The budget deficit may widen to 10 percent of economic output this year, the highest for any Arab country, according to IMF forecasts. “The current institutional vacuum could jeopardize the very crucial aid and budget support that had been in the making for months now,” Philippe Dauba-Pantanacce, Dubai-based senior economist at Standard Chartered, said by e-mail on June 24. “In the short term, Egypt could be on a verge of a disorderly devaluation, with foreign exchange reserves dangerously low.”

At stake for Mursi, 60, are promises he made to voters who toppled Hosni Mubarak in a popular uprising last year in protest of policies they said swelled the pockets of the rich and left the poor grappling with unemployment, inflation, and police repression. As part of his platform, Mursi pledged to create a fund for unemployment benefits, boost economic growth to 7 percent a year on average, from 1.8 percent, and cut the budget gap to less than 6 percent of gross domestic product by 2016.

Foreign investment in government debt almost vanished after the revolt, and along with it more than half of the country’s foreign reserves. The latter slid to $15.5 billion in May from $36 billion on the eve of Mubarak’s ouster, central bank data show. Egypt’s borrowing costs have soared over the 17 months since the uprising. The average yield on nine-month, local-currency treasury bills rose to a record 16 percent at a sale hours before Mursi was declared the winner on June 24.

The Muslim Brotherhood has vowed to continue a sit-in in central Cairo’s Tahrir Square until the Supreme Council of the Armed Forces, or SCAF, reverses its declaration to take over legislative powers, made after a court ruling effectively dissolved parliament this month. The military retained veto powers over the drafting of a new constitution. The nation’s budget for the fiscal year starting July 1 also needs military approval in the absence of parliament, according to former lawmaker Ziad Bahaa-Eldin.

“We cannot view the election result as establishing a new order in Egypt or ending the power struggle between SCAF and the Brotherhood,” HSBC economists wrote in a June 25 report. At best, Mursi’s win may pave the way for the two groups to work out an “uncomfortable modus operandi that could allow for the formation of a new, Islamist-led coalition government willing to rule within boundaries agreed with SCAF,” they said.

Investors are keeping a watchful eye on developments. “First news seems to be positive for Egypt’s bonds, but the euphoria can be set back quickly” if the ongoing power struggle between the president and the military is not resolved, says Sergey Dergachev, who helps manage emerging-market assets at Union Investment Privatfonds in Frankfurt. “I do regard this risk as real, and still maintain a cautious stance on Egyptian assets.”

Egypt first requested a loan from the IMF last year. The IMF linked its approval to Egypt’s achieving broad political consensus. On June 26 the agency said it’s ready to support the country in the face of “significant immediate economic challenges.” The Muslim Brotherhood had said it didn’t want IMF funds disbursed to a military-appointed government. While that government is on its way out, in the absence of a parliament it is not clear when or if the loan will go through. The “constitutional vacuum and the lack of parliament or clearly defined presidential powers could likely delay the program further,” Bank of America analysts wrote in a June 26 report. “Time is not on Egypt’s side.”

The bottom line While stocks climbed more than 10 percent after Mursi was declared president, investors are nervous about his ability to govern.


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