Billions of dollars in aid for Egypt will offer short-term relief to its battered economy but will not be enough to reassure investors worried about what the government will look like after a September election.
Pledges of support from the International Monetary Fund, World Bank, Western states and wealthy Gulf Arabs have provided welcome respite for Egypt after tourists and investors fled in the wake of protests that ousted Hosni Mubarak on 11 February.
Commitments could top US$25 billion, including soft loans and bond purchases. But what is not clear is when this money will land, what strings will be attached and whether Egypt's interim government can find enough viable projects to absorb the funds.
Adding to the uncertainty, Egypt holds a parliamentary vote in September whose outcome is far from clear. The group seen most likely to dominate is the Muslim Brotherhood, which has done little to outline economic policy or a national program.
"We've not seen enough detail to suggest all this money will come through," said HSBC senior economist Liz Martins in Dubai. "International lenders are wary of the political outlook and may be unwilling to part with their cash before stability returns."
The pledges of support have been welcomed in the markets, where many are concerned by the spiraling budget deficit expected to top 11 percent of gross domestic product in the fiscal year to June and the following year.
The benchmark EGX30 share index hit an eight-week high on Monday, still 24 percent below its level in early January.
Egyptian dollar-denominated treasury bond yields tumbled on 19 May, when US President Barack Obama pledged US$2 billion in loan guarantees and debt forgiveness.
Finance Minister Samir Radwan said on Monday that Egypt had agreed in principle on a US$3 billion, 12-month IMF loan. He also indicated the IMF had softened its usually strict terms.
"We have the usual metrics with benchmarks. You have to reduce the deficit by such and such time. This should not exceed that," he told Reuters, saying the deal would not have conditions "of the traditional kind" but did not give details.
Easier terms will help the government in the short term to meet the inflated economic expectations of Egyptians, who expect their lives to be transformed swiftly after their uprising.
"Plenty of external funding is good news, but whether that will come with strings attached remains uncertain. We see Egypt's capacity to implement a successful austerity program limited for now," said BofA Merrill Lynch Global Research.
Qatar has come up with the biggest package, offering US$5-10 billion that could include taking a stake in a new US$9 billion port near the northern entrance to the Suez Canal. But that kind of project will take longer to be felt.
Apart from the Saudi and IMF funding, "the rest is kind of medium-term impact," said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.
"That is OK, but we have to look at the conditions attached to the Saudi and IMF money as they're not going to lend without strings attached."
The balance of payments gap is set to more than triple to over US$10 billion in the fiscal year to June and even if aid starts flowing next month, the overall balance of foreign fund flows is likely to stay negative until September.
At that point, elections will signal what kind of government will emerge to replace the military rulers now at the helm.
A leading contender in the September polls will be the previously banned Islamist movement the Muslim Brotherhood, which for investors in Egypt would be a leap into the unknown.
"It is conceivable that the MB gains the largest bloc in upcoming parliamentary elections," said BofA Merrill Lynch. "Little is known on its economic agenda."
Many Egyptians question whether it will prove pragmatic on policy making, working with other forces as it has promised, or seek to impose a more stringent ideology, such as banning alcohol, which could turn off Western and other tourists.
"If we get an election result that investors like and puts Egypt on the road toward economic recovery and we see consumption picking up and investment picking up, that will be the trigger" for foreign investors to return, said Martins at HSBC. "We also need a result that doesn't inspire further protests."
But there is little sign of respite for now. BofA Merrill Lynch expects further outflows of funds over the summer as the treasury bills foreigners bought before the uprising mature.
"Foreign direct investment and portfolio flows are unlikely to recover until the dust settles on domestic politics, most likely in Q1 2012 at the earliest," it wrote.
Political fears aside, there is scant evidence of the recovery implied by economist forecasts that see growth doubling to around 4 percent in the fiscal year starting in July.
Tourism plunged 34 percent in the first quarter of 2011, central bank figures show, and March industrial production slumped according to BofA Merrill Lynch. Tourism and manufacturing represent over a third of gross domestic product.
The official unemployment rate jumped to 11.9 percent in the first quarter from 8.9 percent in the fourth quarter of 2010. Inflation was at its highest in a year in April at 12.1 percent.
Neither figure heralds an end to tensions that have flared into sporadic violence, often involving rows between Muslims and Christians who make up 10 percent of Egypt's 80 million people.
The central bank has been drawing down foreign exchange reserves to counter the drop in inward investment and portfolio inflows. Economists estimate it spent US$15 billion supporting the pound since January and few expect that long-held policy of support to stop.
The military-backed interim government has announced plans for a major investment drive but few details have emerged.
"I still don't see those huge projects, this huge investment program, announced by Samir Radwan four months ago," said Sfakianakis.
