Africa, Economy & Trade, Financial Crisis, Headlines, Middle East & North Africa | Analysis

EGYPT: Tall Claims Only Lower Confidence

Analysis by Adam Morrow and Khaled Moussa al-Omrani

CAIRO, Oct 23 2008 (IPS) - Following the volatile reaction of international markets to the U.S. financial meltdown, Egyptian officialdom has hastened to reassure a skittish public that the local economy would be spared the worst effects of the global crisis. Many independent commentators, however, are not so sure.

"Despite official statements to the contrary, the global financial crisis will certainly have an adverse effect on the local economy," Hamdi Abdelazim, economy professor and former head of the Cairo-based Sadat Academy told IPS.

Two weeks ago, the U.S. stock market suffered some of its biggest losses in history, with the Dow Jones industrial average falling by some 18 percent. Most other major stock markets around the world followed suit, with many recording comparable losses.

Nor were Middle Eastern bourses spared. In the same week, the Cairo and Alexandria Stock Market (CASE) also plummeted, with the exchange's main share index, the CASE 30, falling by almost 20 percent.

"The crash in the U.S. had an instantaneous effect on the local bourse," said Abdelazim. "Many foreign investors, in a state of panic about falling markets worldwide, sold their holdings off in huge numbers, causing share prices to nosedive."

Government officials, already facing criticism over the state of the economy, hastened to reassure the public that the global turmoil would have a limited impact – stock market aside – on Egypt's financial sector.

On Oct. 12, Prime Minister Ahmed Nazif announced that the Central Bank of Egypt (CBE) would guarantee savings deposits made at local banks. Describing the Egyptian banking sector's fundamentals as "solid," he told reporters, following an emergency meeting chaired by President Hosni Mubarak, that the guarantee would cover "most retail banks operating in Egypt."

Nazif went on to say that the CBE had already adopted a series of measures that would serve to offset the worst potential effects of the crisis. "These measures include the deposit of Egyptian foreign currency reserves in reliable banks, and diversification of the nation's basket of currencies to include euro, pound sterling and yen."

Some local commentators, however, criticised these and other official assessments as overly optimistic.

"It was astonishing how these officials calmly rejected domestic worries by claiming the foundations of the Egyptian economy were so strong that they would successfully resist any violent shocks in connection with the disastrous global financial crisis," economist Gouda Abdel-Khaleq wrote in leftist opposition weekly Al-Ahali Oct. 15. "These officials have fuelled our fears by limiting their optimism to the influence of economic reforms allegedly achieved in the domestic market."

Abdelazim said such official announcements amounted to little more than "politically motivated attempts to reassure the public" that do not reflect the real situation. "Of course Egypt's economy will suffer. And the CBE will be forced to dip into its dollar reserves in order to offset the effects of the crisis." According to official data, the CBE currently has total foreign currency reserves worth some 35 billion dollars.

According to Abdelazim, the global downturn – which mainstream commentators are finally admitting represents a full-fledged recession – can be expected to impact a number of the Egyptian economy's most vital sectors.

"The crisis will adversely effect tourism receipts, Suez Canal revenues and remittances from Egyptians working abroad," he said. "The local exports sector will also take a hit, because the EU itself – Egypt's main trading partner – has been badly affected and is now seeing a sharp drop in demand."

These sectors represent some of Egypt's top foreign-currency earners. In the first eight months of 2008, Suez Canal revenues reached some 3.6 billion dollars, up by almost 24 percent on the same period last year. In the first half of this year, Egypt's thriving tourism sector – which accounts for roughly 20 percent of the country's total foreign currency earnings – generated some 9.5 billion dollars.

Prime Minister Nazif has said that Egypt's GDP (gross domestic product) growth might still be maintained – despite the turbulence – at between 6.8 and 7.2 percent, Abdelazim threw cold water on the notion.

"Egypt's stated aim of surpassing 7 percent GDP growth this year can't possibly succeed," he said. "Foreign investment will dry up, and the growth rate can only be expected to decrease."

When it came to the banking sector, however, Abdelazim largely agreed with official statements, ruling out the possibility of a U.S.-style banking crisis – in which major financial institutions go belly-up – or a run on Egyptian bank deposits.

"Egyptian banks shouldn't have a problem because total deposits are generally greater than outstanding loans, while the CBE has big foreign reserves," he said. "There's little chance, therefore, of a run on banks, or of big financial institutions going bankrupt."

Nonetheless, the public appears to be hedging its bets. On Oct. 16, the official Egyptian Gazette reported that the sale of household safes had soared in recent weeks in tandem with waning public trust in the local banking sector and the stock market. "Worried people and young investors are taking their money out of banks and the stock exchange and buying safes for their homes," a local safes retailer was quoted as saying.