Guest post: Egypt, shine a light | beyondbrics – FT.com

What started as a revolt in Tunisia has now spread to Egypt and appears irreversible and far-reaching in its potential impact on the entire Middle East. And while it’s too early to discuss the implications on the Egyptian economy and capital markets, we can envisage three distinct phases taking place over the next year: the current phase of the crisis, a transitional phase until elections take place, and finally a post-election phase.

We are likely to witness profoundly negative short-term repercussions when it comes to Egypt’s economy, capital markets and investment outlook. The complete paralysis of all economic activities, excluding the Suez Canal, in and by itself a US$5bn annual rent check for Egypt, is estimated to cost US$300m daily. And given the rentier nature of the Egyptian economy where the state is the predominant recipient of such rents that include the Suez Canal, tourism, oil & gas, etc., it is likely that many of those sources would be compromised in the short term in the absence of strong, domestic productive sectors. And this doesn’t include paying for the damage to the current infrastructure including roads, commercial and residential buildings, historical sites etc. and the cost of increased subsidies to pacify Egypt’s young and restive population.

With a budget deficit of over 8 per cent of GDP and a gross debt/GDP ratio of 75 per cent plus, the Egyptian state will undoubtedly face fiscal pressures even if they resort to financing the deficit locally, which is the bulk of the current debt stock anyway. Egypt’s exchange rate regime will also come under pressure. Already, the one-month NDF market is pointing towards a 10 per cent depreciation from the pre-crisis spot price and this is before any capital flight takes place (highly likely assuming no capital controls). This would help fuel inflation over and above the increase via elevated food prices which had already taken place, and put additional pressure on an already tight stockpile of foodstuff and medicinal reserves. In turn, it would considerably derail an economy that was projected to grow at 5 per cent plus in real terms this year. But to put it in perspective, the Egyptian debt ratio appears palatable by international standards (Greece’s debt/GDP ratio is 130 per cent and its 5-year CDS trades 580 bps wider than Egypt) and it is likely that multilateral institutions such as the World Bank and the IMF would be eager to lend a hand.