Isobel Coleman

Democracy in Development

Coleman maps the intersections between political reform, economic growth, and U.S. policy in the developing world.

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Volatility in the Egyptian Stock Market

by Isobel Coleman
November 29, 2011

A view shows the Egyptian Stock Exchange in Cairo in June 2011 (Asmaa Waguih/Courtesy Reuters).

Despite clashes in Egypt last week that resulted in over 40 deaths, Egypt’s first parliamentary election since the Mubarak era is progressing surprisingly smoothly. Polling places have not seen predicted violence and unrest since voting began on Monday, and independent monitors believe that voter turnout in this phase of the election “could easily rise above 50 percent.” The Egyptian stock market has also moved in tandem with the country’s recent political developments. Last week, stocks plunged amid uncertainty created by massive protests and violent crackdowns; on November 22, the EGX100 index dropped precipitously—about 5.4 percent—triggering an hour-long suspension of trading. However, Egypt’s stock indices rallied today in response to investor relief over relatively stable elections. This time, rapid gains in the EGX100 (5.01 percent) were enough to again suspend trading briefly.

While today’s stock market gains are a welcome respite for Egypt’s embattled economy, they belie the country’s weak economic fundamentals. Indeed, the country is flirting with economic meltdown.  Among its other fiscal challenges, Egypt faces urgent concern over its dwindling foreign currency reserves. Currently, Egypt holds about $22 billion in foreign currency reserves (as compared to over roughly $35 billion at the end of 2010), which covers only about three months of imports, the IMF’s minimum recommendation. In light of uncertainty over foreign currency reserves and last week’s violent unrest, S&P downgraded Egypt’s already non-investment grade bond rating to B+ from BB-, the country’s second S&P downgrade in five weeks. Foreign investment has declined from its $8.1 billion peak in 2008-2009 to $2.5 billion in the 2011-2012 fiscal year. Borrowing is also extremely costly for Egypt’s government, with one-year Treasury bills currently yielding about 14.725 percent.  Egypt could greatly reduce some of its borrowing costs if it accepted assistance from the IMF (the $3 billion IMF loan that Egypt rejected this July cost just 2.5 percent), but as many analysts are quick to note, Egypt needs a more stable government before the IMF extends assistance.

At present, Egypt’s economy risks falling into a vicious cycle: political turmoil decreases economic activity and investor confidence, while a failing economy in turn contributes to further unrest. (The government-owned Misr for Tourism reports that 80 percent of foreign tourists have canceled their trips since last week’s violence erupted.) Highly sensitive to the relationship between cost of living and political stability, the government has understandably avoided tackling its costly subsidy programs, which account for most of its near-Greek-level deficit. Despite these expensive subsidies, an October Gallup poll found that “fewer than one in three Egyptians say they are getting by on their present income, down from 43 percent in late September and early October 2010.” If the Egyptian currency continues its likely decline, consumer food prices will rise, with likely political ramifications. (Egypt in recent years has been the world’s largest importer of wheat.) Investors remain skeptical about Egypt’s political and economic future, particularly after last week’s turmoil, when “the country’s five-year credit default swaps—the cost of insuring Egypt’s sovereign debt against default” increased by 25 basis points. So expect the current volatility of the stock market to persist, at least until a more stable political environment emerges.

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