Egypt: uncertainty weighs on market, FDI

Egypt's real GDP will expand by 5.1 percent this year and likely between 5.7-6 percent in 2011 according to analysts, though at least two concerns loom: (i) fiscal decline exacerbatted by both political uncertainty (i.e. cryptic succession plans and Muslim Brotherhood-inspired social unrest) and rising inflation (core is beyond the central bank's unstated 6-8 percent comfort area, per Credit Suisse, while headline also markedly outpaces the MENA average) that tends to manifest itself into both government supported wage and subsidy growth; and (ii) deterioration in the current account (fueled in part by the aforementioned stimuli as well as softening Western demand, which accounts for 30% of the country's export markets).  International investors, it seems, are stuck in a wait-and-see period–the FT noted in mid-December, for instance, that the country's MSCI index noticeably lagged the EM index's YTD performance (2.7 versus roughly 9 percent) while Barclays wrote to investors that “FDI flows–historically the most significant component for capital inflows–remain lower than pre-crisis levels,” while J.P. Morgan noted that volatility in portfolio flows (Net foreign holdings of Egyptian T-bills stood at $9.2 billion in mid-October–compared with $530.4 million in December 2009–before selling off in response to a currency drop off that could have more room to fall if either or both of the two most cited reasons underpinning it (i.e. the central bank's accomodation for exporters and/or the public's anxiety of life post-Mubarak, who's been in power since 1981) hold water.  “Without the more sticky support from FDI inflows, this volatility will likely feed into the financing of the CA,” Barclays warned this month, while concurrently suggesting selling overvalued Egypt 20s and buying Qatari Dinar 20s in the short-term as the pair's typical 100-150bp spread had converged to parity.  Long-term, however, the story behind Egypt remains one of growth: the FT wrote that “while many neighbouring bourses are buoyed by hydrocarbon revenues…the EGX's potential is underpinned by a less volatile asset–Egypt's 80m consumers, many of whom ate rapidly becoming wealthier.  Moroever, the stock market is the best regulated bourse in the region, bankers and fund managers say.”  Yet ideologically the country is still far enough removed from what most economists would theoretically like to see (and arguably what the country absolutely needs to keep pace with the annual 650,000 new job seekers, as well as to chip away at a 40 percent poverty rate) for some investors to feel truly comfortable.  Widening gross public debt, for instance, has socialist roots, while food and energy subsidies not only hinder stability but also “crowd out priority spending on social and infrastructure needs,” per the IMF.  And without true reform in these and other areas such as the press and legitimate political opposition groups, religiously themed or not, Egypt's $20bn a year in FDI vision may be far fetched.  That said, even putting aside larger issues such as price stability and poverty–less radical improvments such as increased corporate and retail lending (the former of which admittedly hinges largely on the lack of proper financial auditing) could provide the economy with enough cash to either help spur greater reform or at least demphasize foreign cash flows.