What’s next for Egyptian finance?

It saddens me that my bearish predictions on Egypt’s economy, stock market and public finances after the fall of the Hosni Mubarak regime last February haven proven on the money. Egypt has been and will be in political limbo until the Supreme Military Council holds the election and gives its blessings to a new government and Constitution.

Yet the outlook for Egyptian financial markets will remain uncertain as its political crisis coincides with an emerging markets contraction as Europe’s sovereign debt crisis spooks the global markets. The unrest in Tahrir Square had a predictable impact on the Egyptian economy. Tourist arrivals have plummeted, meaning tens of thousands of jobs are gone Tourism, after all, is estimated at 12 per cent of the Egyptian economy. Youth unemployment will plague any future governments in Egypt. FDI has collapsed as investors recoil from political risk. A post-election devaluation is highly probable. Hosni Mubarak’s pro-market version of crony capitalism had created on economic tiger on the Nile in the past decade and attracted billions in Arab, GCC and Western investments.

Yet even the Mubarak regime, autocratic as it was, could not shrink Egypt’s huge public sector, privatise the economy or reduce the population’s dependence on bread subsidies. Unlike Eastern Europe after the fall of the Berlin Wall, it is doubtful if an elected Egyptian government will risk the high political cost of economic reform and pro-market policies. The Turkish model is not relevant angry for Egypt’s future because no political party has a majority mandate and no IMF programme is feasible. In fact, dependence on American aid after the Camp David accords bloated the Egyptian military high command and enabled Cairo to escape the austerity diktat of the IMF.

Egypt’s financial woes are not a high strategic priority for the Obama White House and the EU, both superpowers mired in their own banking and economic crises. Moreover, Egypt does not have the population/leadership that can create a South Korea/Taiwan style economic miracle. The military elite is simply not willing to reduce its economic role, as in Pakistan, a precondition for economic reform in Latin America in the 1980’s. Nor did Hosni Mubarak’s model of “crony capitalism” create a mass consistency for economic reform. On the contrary, it will be impossible for another Egyptian government to privatise state assets, since the military owns and operates hundreds of state owned companies. It is surely a strategic mistake that the Military Council turned down offers of IMF and World Bank loans. Economic reform, the stock market, privatisation, liberal economics are anathema to both the military high command and impoverished 40 million Egyptian workers who were enraged by Mubarak’s elitist, top down economic model.

The Egyptian economy will go into recession this autumn, as GDP is a mere one per cent even now. The election could be preceded and followed by more political violence and the caretaker Prime Minister has ruled out privatising. Europe’s recession will also hit Egypt’s Sinai LNG/fertiliser exports and Suez Canal shipping. Moreover, rising food prices could again ignite industrial unrest and food riots, phenomena that were recurrent in both the Sadat and Mubarak era. Inflation is still a chronic problem in the Egyptian economy. The Egyptian pound is no longer a viable easy currency and it can easily depreciate to E£6.30 after the election even if there is no devaluation.