Morsi’s year of economic pain | beyondbrics

After the Arab Spring swept Egypt’s former president Hosni Mubarak from power, there would be a tough transition, followed by economic recovery. That was the theory, at least.

The reality is that under now-former president Mohamed Morsi, ousted from power this week, Egypt’s economy has deteriorated. Political impasse may have forced the army’s hand, but the economic problems are arguably as much a factor in Morsi’s removal.

Beyondbrics looks at some of the key economic indicators under Morsi – and at where Egypt goes from here.

Our charts show what has happened since Morsi came to power, except where indicated.

Unemployment (especially among young people) was a big factor in the Arab Spring. Under Morsi, it got worse and is now at around 13 per cent. Whatever the political motives behind widespread protest, joblessness will always heighten tension.

Source: Bloomberg

Meanwhile inflation has also ticked upwards, to more than 8 per cent.

Source: Bloomberg

At the same time, the central bank has allowed the pound to weaken to more than E£7 to the dollar – making exports more competitive but hurting import prices. This means that fuel imports have become more costly and the government has lacked the ability to remove expensive fuel subsidies – something the IMF has made much of. Failure to reach agreement on an IMF deal – now clearly off the table – meant that a much needed $4.8bn loan and other financing didn’t come through.

Source: Bloomberg

As a result, although foreign reserves have been propped up by loans from Qatar and others, they remain low. This is one area where things have not deteriorated under Morsi, but reserves are still at critical levels.

Source: Bloomberg

At the same time, the government’s ability to tackle structural reforms – required by the IMF – has been limited by a spiralling budget deficit, now at nearly 15 per cent of GDP. Although the economy has been growing – something of a surprise, recording 2.1 per cent in Q1 2013 – this is not enough to reduce unemployment. And growth has been largely based on tourism, which may be hit by the current turmoil, and on government services, which added 1.5 percentage points to the annual growth rate, according to Capital Economics.

Source: Capital Economics

So investors have marked a premium on Egypt’s borrowing costs. Yields on the 2020 5.5 per cent bond are now above 10 per cent.

Source: Bloomberg

Although the main equity index, the EGX 30, has seen surges in recent days, it is still down over Morsi’s tenure, and down for 2013 to date as well.

Source: Bloomberg

So where next? For the economy, support from other Gulf countries such as Saudi Arabia and the UAE will be critical as Egypt faces massive external and fiscal financing requirements.

Raza Agha, economist at VTB Capital, spelt out Egypt’s position thus:

Our estimates for Egypt’s gross external financing requirements over FY14 (July 2013 to June 2014) are $19.5bn assuming zero capital flight (i.e. zero errors and omissions on the balance of payments)… On the fiscal side, Fitch expects a general government deficit of 12.2 per cent of GDP in 2013, while annual rollover requirements of public debt are to the tune of 25 per cent of GDP, second to only Lebanon in the region.

So although the focus right now is on who is running the country, the military’s next moves, and possible elections, Egypt’s fate – and avoidance of economic collapse – will be as much determined by the UAE and Saudi Arabia as by domestic politics.

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