Egypt Business Network
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Dr. Nilgün Birgören Premium Member Group moderatorThe company name is only visible to registered members.Achilles Heel
Europe may have dodged a bullet in May thanks to a nearly $1 trillion (LE 5.6 trillion) bailout for Greece and its debt-laden neighbors, but the long-term future of those countries remains in doubt.
What is clear is that Athens’ near financial meltdown and Europe’s larger sovereign debt crisis could have a major impact on Egypt, say economists.
Severe belt-tightening by the region’s most fragile economies — Portugal, Italy, Ireland, Greece and Spain — could curtail foreign investment here, limit aid donations and slice into tourist visits. Budget cuts and tax increases, now on the table continent-wide, could also dampen demand for Egyptian exports, about 40% of which are bound for EU-member countries.
The EGX 30 has already felt the pain, plunging 5% on May 9 following global concerns Greece would not make an important 10-year bond repayment later in the month. The drop was the largest single-day dive in two years. (The bourse lost a whopping 360 points to fall to 6756.)
The EU’s financial crisis began to unfold last year after Greece’s new government admitted the previous administration had cooked its books, lying about the country’s staggering debt and public sector obligations.
Greece’s decline into debt started long before its newly-elected government discovered the shady accounting, and Trevisani says that the country’s problems have not been solved by the bailout.
As the crisis unfolded, other EU-member states were put under the microscope, highlighting Spain, Portugal and Ireland’s own spiraling national debt. Driven by a falling euro, 16 nations teamed up with the International Monetary Fund (IMF) to make the $1 trillion (LE 5.6 trillion) available in June.
Though the move boosted numbers on stock exchanges globally, the eurozone is not out of the woods yet, leaving Egypt to suffer economic repercussions of yet another financial meltdown.
In May, Economic Development Minister Othman Mohamed Othman admitted that the eurozone’s debt crisis would hamper the local economy, noting that over 40% of the nation’s exports go to EU-member countries.
That could put a halt to Egypt’s ambitious growth goals, which include effectively doubling exports in the next five years.
Othman did not go into detail on just how adverse the effects would be, instead focusing on Egypt’s positive GDP results for FY2008/09, which the government forecasts will jump from 4.7% to more than 5%.
He said his ministry would continue to monitor Greece’s situation via a committee now being formed. But unlike the government, economists here aren’t pulling their punches.
“This crisis is much worse than the Dubai financial crisis,” says economist Ahmed El-Sayed El-Naggar from the Al-Ahram Center for Political and Strategic Studies.
The damage to the tourism sector and foreign investment in Egypt will depend on how the euro fares in the coming months and whether the eurozone will be able to boost investor confidence, he says.
Greek protesters took to the streets in May, angered over the government’s decision to cut salaries, pensions and other benefits for civil servants.
The cuts, part and parcel of bailout terms from the IMF and the EU, are set to affect a huge portion of the labor force as the government employs almost one third of Greece’s workforce.
While unpopular, Greek authorities say the budget cuts and tax hikes are necessary to raise 30 billion (LE 204 billion) in just three years in order to cut the country’s sovereign debt. (Currently Greece’s debt stands at 115% of its GDP. Its deficit is over 12% of GDP.)
Economists worry that the bailout has actually made the situation worse since it will add billions more to Greece’s debt and could potentially force another crisis, should the government be unable to repay investors a second time.
The austerity package passed by the Greeks could also prolong the nation’s recession.
Deflating economies are particularly risky investments because there is no growth to provide the government with ready cash.
Egypt could face even worse straits should the euro dip further against the dollar, making it increasingly difficult for struggling EU countries to recover and grow in the future.
The euro is bad for non-competitive economies, like Italy, Spain and Portugal. Germany, and to some degree France, have high value exports, so they can support an expensive welfare state.
So far the Egyptian government’s hopes of achieving GDP growth of over 5% have remained stymied.
According to the Ministry of Finance, net foreign direct investment is still down compared to the same period a year ago. It reached $4.3 billion (LE 24 billion) between July 2009 and March 2010 compared to $5.2 billion (LE 29 billion) the period before, despite growth in 3Q2010.
Real GDP growth has risen, albeit slowly, hitting 4.8% for the first half of FY2009/10.
Exports have also seen a decline of 9.8% during the first half of the fiscal year, though officials still say GDP growth of 5.3% is achievable. Egypt needs to post strong 4Q results to attain its goal, which likely won’t be on the cards now that the eurozone has thrown investors into a state of confusion, says El-Naggar.
The less than stellar results are being compounded by fewer aid dollars. In March, the EU promised Egypt 450 million (LE 3.3 billion) for the next three years to help speed economic reform, but analysts worry that Europe won’t keep that promise. Egypt reported $4 billion (LE 22 billion) in development assistance in FY2008/09. This year the amount has dwindled to $1.6 billion (LE 8.8 billion) as of March.
Though the government is endeavoring to move away from foreign aid, now is not the time for lenders to be tightening purse strings if Egypt is to achieve any of its growth goals, says El-Naggar.
The amount of foreign direct investment and aid money could decrease.
Source: Hurriyet Daily
- 06 Jul 2010, 4:59 pm
