Will Brotherhood stick to plan to improve economy?The strength of the recovery will depend partly on whether the government can win the trust of the business community. Government officials leaked to Egyptian media this week a tentative plan to stabilize state finances, the first detailed plan in a year. It aims to cut the budget deficit to 7.7 percent of GDP in the 2013/14 fiscal year from an estimated 8.4 percent this year, and lower the public debt to 77.5 percent of GDP from 82.2 percent.It seeks to make spending on public subsidies more efficient, reform income and real estate taxes, offer Egyptian expatriates 50,000 plots of land to raise $15 billion over the next four years, and possibly auction fourth-generation mobile telecommunications service licences.This plan could come to nothing if the political forces that will dominate the government after June, principally the Muslim Brotherhood which won nearly half the seats in January's parliamentary elections, do not support it actively.Pushing through austerity measures to cut the budget deficit will be extremely hard after a revolution fueled by popular discontent with economic conditions -- especially for the Muslim Brotherhood, which draws much of its support from the poor."We have seen really great political maturity by the Brotherhood, but they are now going to get an economic test and the decisions they must make will require equal if not greater maturity," said Sterne at Exotix.Financial markets are starting to conclude that the government may be up to the challenge, however. The stock index is up 44 percent so far this year, though it is still 28 percent below last year's peak.Most of the equities buying is by Egyptian investors rather than foreigners, who are still worried by the possibility of a currency devaluation. But there are also signs that foreign investors are becoming less nervous about Egypt; the yield on its dollar-denominated, 5.75 percent bond maturing in 2020 was below 7 percent this week after soaring as high as 8.38 percent in mid-January. The yield remains much higher than levels around 5.3 percent at the start of last year.In the foreign exchange market, downward pressure on the Egyptian pound appears to be easing. A scramble by Egyptian individuals and companies to change their pounds into dollars has slowed, partly because the central bank has been raising interest rates, making local bank deposits more attractive."There was a lot of dollarization of deposits in the first half of last year and that has now slowed dramatically," said Andrew Long, head of HSBC's operations in Egypt.The central bank's foreign reserves have been shrinking by around $2 billion every month and hit $16.4 billion in January, less than half their level a year earlier. In coming months the reserves could drop so low that they are insufficient to support the value of the pound, forcing a sharp depreciation.But if capital flight slows, Egypt succeeds in obtaining IMF aid in March, and the government resorts to other stratagems such as a $2 billion Islamic bond issue under consideration, it could stop the reserves from sliding much further in coming months.Then, if by the second half of this year the economy is recovering and a stable civilian government is in place, capital could start flowing back into the country. Any subsequent depreciation of the pound might be minor and controlled, designed to make exports more competitive rather than the result of a crisis.February data on foreign reserves, due to be announced in early March, will help to show whether such a rosy scenario is likely."Once reserves start running out and you are raising interest rates there comes a point where rates are not effective and the pound sell-off starts to accelerate," said Said Hirsh, Middle East economist at Capital Economics in London."We're still optimistic about Egypt beyond this period. It could be the fastest growing economy in the Middle East very soon...But in the near term it is still in a very difficult situation."
Analysis: Economic gloom begins to lift in Egypt
By the end of June, Egypt is expected to have civilian rulers with a mandate to make difficult decisions on economic policy.
Will Brotherhood stick to plan to improve economy?The strength of the recovery will depend partly on whether the government can win the trust of the business community. Government officials leaked to Egyptian media this week a tentative plan to stabilize state finances, the first detailed plan in a year. It aims to cut the budget deficit to 7.7 percent of GDP in the 2013/14 fiscal year from an estimated 8.4 percent this year, and lower the public debt to 77.5 percent of GDP from 82.2 percent.It seeks to make spending on public subsidies more efficient, reform income and real estate taxes, offer Egyptian expatriates 50,000 plots of land to raise $15 billion over the next four years, and possibly auction fourth-generation mobile telecommunications service licences.This plan could come to nothing if the political forces that will dominate the government after June, principally the Muslim Brotherhood which won nearly half the seats in January's parliamentary elections, do not support it actively.Pushing through austerity measures to cut the budget deficit will be extremely hard after a revolution fueled by popular discontent with economic conditions -- especially for the Muslim Brotherhood, which draws much of its support from the poor."We have seen really great political maturity by the Brotherhood, but they are now going to get an economic test and the decisions they must make will require equal if not greater maturity," said Sterne at Exotix.Financial markets are starting to conclude that the government may be up to the challenge, however. The stock index is up 44 percent so far this year, though it is still 28 percent below last year's peak.Most of the equities buying is by Egyptian investors rather than foreigners, who are still worried by the possibility of a currency devaluation. But there are also signs that foreign investors are becoming less nervous about Egypt; the yield on its dollar-denominated, 5.75 percent bond maturing in 2020 was below 7 percent this week after soaring as high as 8.38 percent in mid-January. The yield remains much higher than levels around 5.3 percent at the start of last year.In the foreign exchange market, downward pressure on the Egyptian pound appears to be easing. A scramble by Egyptian individuals and companies to change their pounds into dollars has slowed, partly because the central bank has been raising interest rates, making local bank deposits more attractive."There was a lot of dollarization of deposits in the first half of last year and that has now slowed dramatically," said Andrew Long, head of HSBC's operations in Egypt.The central bank's foreign reserves have been shrinking by around $2 billion every month and hit $16.4 billion in January, less than half their level a year earlier. In coming months the reserves could drop so low that they are insufficient to support the value of the pound, forcing a sharp depreciation.But if capital flight slows, Egypt succeeds in obtaining IMF aid in March, and the government resorts to other stratagems such as a $2 billion Islamic bond issue under consideration, it could stop the reserves from sliding much further in coming months.Then, if by the second half of this year the economy is recovering and a stable civilian government is in place, capital could start flowing back into the country. Any subsequent depreciation of the pound might be minor and controlled, designed to make exports more competitive rather than the result of a crisis.February data on foreign reserves, due to be announced in early March, will help to show whether such a rosy scenario is likely."Once reserves start running out and you are raising interest rates there comes a point where rates are not effective and the pound sell-off starts to accelerate," said Said Hirsh, Middle East economist at Capital Economics in London."We're still optimistic about Egypt beyond this period. It could be the fastest growing economy in the Middle East very soon...But in the near term it is still in a very difficult situation."