Egypt economists anxious about US bailout plan

Sherine El Madany
7 Min Read

CAIRO: It is often said that when the US sneezes, the rest of the world catches a cold. Now, the US has caught pneumonia and the rest of the world is aching. As major US financial institutions declare bankruptcy – the global economy is paying the bill.

“I am not a big fan of the decoupling theory, said Wael Ziada, director of research at Egypt-based investment bank EFG-Hermes. “The ongoing global financial turmoil offsets growth and FDI [foreign direct investment] here.

EFG forecasts a 6.2 percent growth in fiscal year 2008/09 year – down from last year’s 7.2 percent, the fastest pace in almost 20 years – mainly triggered by slower private consumption as well as a global economic slowdown.

As for FDI, Ziada expects the figure to diminish to $8 billion in the next year. FDI currently hovers at $13 billion equivalent to 10 percent of GDP.

Global markets have plummeted since mid-September after investment bank Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over, and the Federal Reserve threw a lifeline to the battered financial industry.

The Lehman demise and the fire sale of Merrill Lynch follow the failure of Bear Stearns and the government bail-out of US mortgage giants Freddie Mac and Fannie Mae which in turn come after the nationalization of Britain s Northern Rock.

At the core is the sub prime mortgage crash and the associated debt bubble that had given millions of people across the globe unfounded feelings of wealth and the lifestyles that accompany it.

In Egypt, soaring food prices triggered violent protests in some areas in the country this year. This prompted the government to raise public sector salaries by 30 percent and then nudge up fuel prices to finance the wage increase.

With the economy growing at its fastest pace in decades, rising inflation has emerged as a tough challenge for the government in a country that has low per capita income and high poverty relative to other Middle East nations.

Urban inflation soared to a fresh 16-year high of 23.6 percent in the year to August – led by food and fuel price rises – piling pressure on the central bank to raise interest rates for the sixth time this year.

“Globally, commodity prices are rising in manner not seen since the 1990s, Ziada pointed out. “The most significant impact of this rise is reflected on food prices because these are the biggest component of the CPI [consumer price index].

“Because Egypt imports most of its food products, we’ve seen a structural shift in inflation, and it’s here to stay, he added. “Inflation might slowdown in the next year, but still double digits will stay in the year, and single high digits will stay in 2010.

Hiking fuel prices last May by almost 35 percent further boosted inflation rates, he continued.

While international prices for agricultural products, such as wheat, were retreating, Ziada said this is not fully reflected locally.

The Reuters-Jeffries CRB index, a global commodities benchmark, is trading at its lowest level since last October, after markets like gold, copper, wheat, corn and soybeans gave back most of the gains they made earlier this year.

“This [global price decline] is not fully transmitted locally, but it will be felt eventually but not with the same magnitude as with international markets, Ziada explained.

While fear the world’s economy could be slipping into stagflation continues to mount, some voices see a glimmer of hope. “The global economy is still growing despite everything, said Angus Blair, head of research at Beltone Financial. “If the bailouts in the US work out.we’ll have a slowdown rather than global recession because other emerging markets are still growing.

Blair remains bullish on Egypt and believes a 6 percent growth in Egypt in fiscal year 08/09 is still good enough vis-à-vis other growth rates in other markets. “This is still very good growth, and Egypt will continue to be attractive. Assuming the bailout plan works in the US, I remain optimistic that we will get through this.

Other economists deem sustainable FDI figures Egypt’s lifeboat out of the turbulent waters of the global economy. “We need those FDI figures to be able to weather the storm we are going through, said Hisham El Khazindar, managing director of Citadel Capital. “This will take sound reform policies.and not crowd cheering [statements].

Signals sent by our government such as changing tax structure in the free zones and the flip-flopping of Agrium are not good signals for our FDI, he added.

One way to sustain FDI figures is to move ahead with the Cabinet’s privatization program, suggested Mohamed Taymour, chairman of Pharos Holding for Financial Investments.

“We need a more realistic and pragmatic way in performing privatization. We need to improve the FDI environment in Egypt and show that we mean business and that privatization will continue, he pointed out. “We need to privatize three to five businesses to show investors that Egypt is open for business.

However, as the government attempts to move towards privatization, it bumps into a relentless public outcry. “If the government is going to privatize, it [has to] earmark proceeds into sectors that will positively affect the public right away such as education, healthcare and infrastructure projects, Taymour added.

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