Cairo: Euporic Egyptian fiancial markets reacted positively to the overthrow of President Mohammad Mursi yesterday.
Egypt’s benchmark bond yield headed for the biggest drop on record and stocks surged after the army deposed President Mursi in a move it said aimed to restore stability. The nation’s credit risk declined.
The yield on the 5.75 per cent bonds due in April 2020 plunged 1.01 percentage points, the most since the notes were sold in 2010, to 9.76 per cent. The EGX 30 Index of stocks rallied 7.4 per cent, the biggest jump since June 25, 2012, the first trading day after Mursi was declared Egypt’s first democratically elected president. The nation’s five-year credit default swaps headed for the largest slide since April.
Bailout on hold
Despite such market reaction, Egypt’s descent into even deeper political turmoil will almost certainly put a multi-billion dollar international bailout on hold and lead to an even more painful economic crisis, with worsening fuel shortages and higher prices on basic goods.
After protracted negotiations that have stretched for more than a year, Egypt had been inching closer to securing a critical $4.8 billion International Monetary Fund loan.
The military’s overthrow on Wednesday of Islamist President Mohammad Mursi will likely put the implementation of austerity measures needed to secure that loan into a dangerous limbo.
It also put the $1.5 billion in annual US military and economic assistance to Egypt in question.
President Barack Obama said he’s ordered his administration to review US foreign aid to Egypt, saying he’s “deeply concerned” by the military’s move, which he didn’t call a coup. By law, the US must suspend aid to any nation whose elected leader is ousted in a military coup.
The military moved in after four days of huge demonstrations against Mursi. Much of the anger grew from the country’s dismal economic situation and the ever-growing burden it projects on already strapped Egyptians.
Analysts said Egypt could be moving toward a worst-case scenario economically — from increasing fuel shortages and blackouts, a sudden and sharp depreciation of the currency that will make everything more expensive, and a depletion of foreign currency reserves so severe it could make importing critical oil and food items difficult.
“I think they are sort of entering uncharted territory,” said Caroline Freund, an analyst at the Peterson Institute for International Economics in Washington.
“Without political stability and policy predictability, investors and tourists are not going to come back,” Freund said.
Since the 2011 uprising that ousted longtime authoritarian leader Hosni Mubarak, Egypt has sunken deeper and deeper into economic malaise.
The uprising against Mubarak was driven by hatred of the heavy-handed police state, but also by deep-seated social and economic discontent in a country where nearly half the population of 90 million live below or near the international poverty line of $2 a day per person.
That discontent is still evident today on the streets of Egypt, where ordinary citizens lament the hardships.
Gihan Ebrahim, a 40-year-old mother of four filling up her shopping cart in a Cairo supermarket, said her impression was that prices had surged over the past year.
“There is no longer a middle class. They all became poor,” she said. “I think this period of instability is going to be long.”
Protracted fuel shortages are another source of anger and frustration. A common sight in the capital in the days before Mursi was overthrown was long lines of cars snaking around gas stations and blocking main roads in the city of about 20 million which already suffers from horrendous traffic jams.
A shortage of diesel, used by trucks and imported, is attributed to Egypt’s dwindling foreign currency reserves. Other fuel shortages have been linked to corruption and sabotage. The shortages contributed to anger against Mursi.
Government officials have blamed nervous hoarding and black market diversions for the shortages. Ahead of the latest wave of protests, Egyptians stocked up on staples, including fuel. And heavy government subsidies on fuel distort the economy, encouraging some to make quick profits by illegally reselling gasoline and diesel.
Phasing out subsidies
To secure the IMF loan, Egypt is under pressure to phase out $14.5 billion a year in fuel subsidies that are a heavy drag on the budget. The government spends an additional $4 billion to subsidise food, most of it going to bread.
The IMF sees fuel subsidies in general as wasteful and highly inefficient because they disproportionately benefit those wealthy enough to afford cars and fuel.
Still, Mursi’s government has repeatedly delayed implementation of politically unpalatable austerity measures, such as cutting those subsidies, likely out of fear of adding to unrest and losing votes in upcoming parliamentary elections.
Ahmad Al Sayyed Al Naggar, an economic expert at the Ahram Center for Political and Strategic Studies in Cairo, said there have been virtually no developments to improve economic conditions, and there will not be any until the political conflict is resolved.
“Mursi and his government have failed bitterly throughout this year to achieve any of the revolution aims of social justice and economic growth. It is essential to regain the political stability for the economy to move on,” he said.
“Fighting unemployment and poverty is one of the essential aims of the new wave of revolution.”
Absence of rescue package
In the absence of an international rescue package, Egypt has relied on tens of billions of dollars of loans from wealthy Gulf countries such as Qatar and even oil-rich neighbour Libya to shore up fast-depleting foreign currency reserves, used to pay for imports and to prop up the value of the local currency.
An Associated Press compilation in April found that Egypt had sought or was in talks for more than $30 billion in cash injections from other countries since the fall of Mubarak — the vast majority since Mursi was inaugurated in June 2012.
Freund said those cash injections may have bought Egypt some time. But in the end, they probably did the country more harm than good, because the money came with no strings attached, and Egypt did not use the time it bought to fundamentally fix the broken elements of its economy.
Samer Atallah, an economics professor at the American University in Cairo, said there is no potential for talks on loans unless Egypt clarifies its economic plan.
“Delaying the political consensus sends the economic cost to very high levels for the Egyptian family,” he said.
“The fear that the Egyptians are feeling has its effect on the economy. People reduce consumption, production decreases, there is no foreign currency income and every day the risk factor is increasing that Egypt will not be able to fulfil its obligations, especially wheat and fuel.”