Economy’s fragile economic recovery shaken by unrest

The doors and windows of the businesses that line Tahrir Square were shuttered again one morning last week, after nearly seven days of clashes between protesters and security forces downtown had killed at least three.

On a street nearby, Blue Sky Travel was still open for business.
Inside the customer-less office, Ashraf Mahmoud, counter manager for the travel agency, was preparing himself for yet another string of cancellations.
“Back before the revolution, we used to have one large group of tourists a month,” he recalled.
But in the past few months, Mahmoud said, things had begun to improve. The company had booked more trips during a period of relative calm following President Mohamed Morsy’s election.
Now Mahmoud fears the week’s turmoil could erase the recent gains.
“We are supposed to have a large tourist group coming in December, but God only knows if they’ll come now,” he said, shaking his head.
The country’s economy took a serious hit in the past week due to a combination of factors. Ongoing violence between security forces and demonstrators commemorating last year’s clashes on Mohamed Mahmoud Street have ushered a return of armored vehicles and tear gas to the streets, and a constitutional declaration announced by the presidency last week gave Morsy sweeping powers.
Given the security-sensitive nature of tourism, one of the country’s biggest sources of foreign income, the news could set the country up for months of vacant hotel rooms and nearly empty archaeological sites.
Tourism Minister Hesham Zaazou told the independent daily Al-Mal Sunday that he expected this year’s total tourist count to fall short of the expected goal of 12.5 million, saying he didn’t think the country would see more than 11 million.
Zaazou declined to share his opinion of Morsy’s declaration and expansion of powers, saying only, “We are operating in the shadow of conditions we have not seen over the course of our history.”
But tourism is only one facet of an economy that’s barely back on its feet, and that could be derailed by the political fallout of Mohamed Morsy’s expanded powers. Investors, many analysts have said, are unlikely to respond favorably.
Huge losses
The stock market lost LE29.3 billion of total market capitalization Sunday, the third-largest amount lost in a single day since January 2011.
The market rallied for a small recovery in the following days, with the main index, EGX 30, gaining 2.63 percentage points Monday, and a meager 0.02 percentage points Tuesday after the large pro-Morsy protests were canceled. 
The quick descent Sunday, many experts have said, shows investors’ disapproval of Morsy’s self-aggrandized powers and the division they have caused, but also security concerns over the ongoing street battles of the past week.
Mohamed Omran, the stock market chairman, said in a statement Monday that a suspension of trading, such as what happened following the uprising last year, is not on the table. He noted that the board is anxious to ensure free access by buyers and sellers to the market based on rules for offer and demand, as well as to ensure regularity of the trading process.
Sunday’s losses could have been much greater, stock market insiders said, if not for the presence of anti-panic measures the market adopted after its 38-day hiatus following the 2011 uprising.
The measures mean that if the index drops more than five points in a day, the market closes for a half-hour or hour break, and if the market drops 10 points in one day, market overseers consider suspending trading for the rest of the day.
Many analysts think that as long as there remain deep political and societal disunion over Morsy’s recent extension of powers, the market is unlikely to see real improvement.
“His declaration obviously has widened the divide among the people,” said Wael Ziada, head of research at EFG Hermes. “Consolidating all of the powers under his belt has caused significant unrest, even though it’s temporary, it’s called significant unrest. And investors expect a confrontation.”
Loans, and much more, on the line
With more uncertainty in the corridors of power and more unrest on the streets, some are worried that Egypt’s long-awaited preliminary agreement with the International Monetary Fund for a US$4.8 billion loan has also come into question.
IMF spokesperson Wafa Amr said the staff-level agreement on financial support from the IMF is based on the economic and social policies that the government plans to implement under its program.
She did say that the loan’s deliverance would be hindered by serious changes to the economic situation.
“Consideration of the agreement by the IMF Executive Board will require that there is no major change in the economic outlook and implementation plans, including prior passage of a revised budget for 2012/13 that reflects planned tax and spending measures, and that assurances from Egypt’s bilateral and multilateral partners regarding their expected provision of program financing will be forthcoming,” she said.
Many analysts have said it’s unlikely there could be any changes made to the loan agreement. Rather, the real economic reform plans the government had in place will be pushed to the back burner, amid swirling political concerns.
“You need wider political support to be passing an economic reform plan, which are difficult by nature, especially if they have to do with restructuring subsidies or taxes,” said Ziada. “It would be difficult in a climate like this.”
Amr Adly, director of the economic and social justice unit at the Egyptian Initiative for Personal Rights, thinks the government’s lack of leadership in economic decision-making has already led to an IMF-driven economic reform package.
He said he does not understand how Morsy’s government can tackle the deeply unpopular issue of subsidy reform and other budget cutbacks budgeted for this fiscal year.
“I know they have to do it,” he said. “But I don’t know how they will do it.”
In a worst-case scenario, Adly said that if the unrest in the street increases, it is likely that the government’s authoritarian grip will increase as well, with security fears invoked as justification.
Then, Adly said, Egyptians could have subsidy reform thrust upon them with no democratic recourse, due to the government’s growing budget constraints.
The budget deficit is already larger than it was projected to be at this point in the year, Adly said, meaning the government will likely have to begin lifting subsidies on diesel fuel sometime in 2012. That could cripple the economy and cause price rises across the board.
“We really don’t have any time,” he said. “We really cannot afford to have more of what we’ve had the past few days.”
He, and other analysts, spoke with urgency about the country’s bleeding economy.
While nearly everyone agrees now is not the time for more unrest, there are some who say that Morsy’s declaration — which, among other things, frees him from any judicial oversight, gives him lawmaking powers, and allows him to “take the necessary actions and measures to protect the country and the goals of the revolution” — is not a power grab, but just what Egypt needs during this difficult period.
Ali al-Tahry, president of Catalyst Partners, an investment firm that focuses on small- and medium-sized enterprises, thinks Morsy’s declaration was appropriate for the current political situation in Egypt, because it only gives him special powers for a limited period of time.
He told Al-Mal that by declaring that the Constituent Assembly must ratify a constitution within eight months of convening, Morsy was speeding up the writing process and allowing the country to move forward.
He warned, however, that blood in the street would only exacerbate the market’s volatility.
A bumpy road
If the situation does become more unpredictable, it will only become more expensive for the country to borrow domestically and abroad.
Egypt’s nine-month borrowing costs climbed to the highest level in six weeks Sunday after Morsy’s declaration, according to a Bloomberg report. The average yield on LE3.5 billion of nine-month notes gained 30 basis points, or 0.3 of a percentage point, to 13.19 percent, the highest level since a 14 October sale.
But how Egypt’s international financiers will handle the news is unclear. In recent days, both US and European Union leaders have expressed concern over Morsy’s extension of his powers, but it remains to be seen if foreign investors will treat the move as a step toward authoritarianism or as a bump in the long and treacherous road to the country’s economic recovery and democratic transition.
“We still think that Egypt’s medium-term growth prospects are positive,” Capital Economics, a UK-based macroeconomic research firm, wrote in a chart book on Middle East economies, released Monday. “But if nothing else, the events of the past few weeks illustrate that progress over the next year will be extremely bumpy.”
Meanwhile, Mahmoud at Blue Sky Travel was trying to come up with offers — any offers — that might lure tourists. Mahmoud  said maybe Arab-targeted tourism or “cheap tourism” might entice customers.
“Or maybe we should present special offers to Sharm el-Sheikh or Aswan, but not to Cairo,” he wondered, while just a street away, protesters had once again set up tents in Tahrir Square.
This piece was originally published in Egypt Independent's weekly print edition.

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