A fund manager, who spoke on condition of anonymity, toldThe Media Line that the kind of things the government needed to do in order toassuage protestors would be economically beneficial and require policies thatare business-friendly so as to encourage foreign direct investment (FDI).
“People in the streets are asking for three things – toimprove the poverty situation, for jobs and free elections,” the fund managersaid. “The first two are economic drivers – higher employment and more subsidiesfor basic needs. The government doesn’t have resources to boost subsidieswithout higher taxes. But, if they increase taxes, there will be less spendingand fewer job opportunities. That means they will turn to FDI.”
But Pigat said he was less optimistic because Egypt’smilitary is in control of the transition and might continue to wield power evenafter elections. The army owns vast swathes of the economy, including land,factories and tourism enterprises and will be loathe to cede it to the privatesector or to increased competition.
“We don’t have anycertainty that any new government will be more business friendly or morewilling to push through business reforms,” Pigat said.
He estimated that Egypt’s GDP growth in the currentfiscal year, which ends in June, will slow to 3.2% from a previous forecast of5.1%.Aside from domestic turmoil, Egypt’s economy faces theinflationary impact of climbing global prices for food and energy. Higher petroleum prices will boost revenues from the Suez Canal, a major route for the world oil trade, andlift incomes and job prospects for Egyptians employed in the oil-rich Gulf,Cowan said. But steeper inflation will cut into people’s income, reducing theirpurchasing power, he said. He forecasted consumer prices rising to a 15%year-on-year rate by the end of 2011 from an average of 11% last year.However, Pigat told The Media Line that the most seriousimmediate problem facing the government was the flight of capital out of thecountry. Investors moved hundreds of millions of dollars out of thecountry on January 26 and 27, prompting the central bank to shut the country'sbanks for a week. Although Egypt'sCommercial International Bank (CIB) said on Tuesday its clients transferredabroad only 25% of what it had been preparing for, Pigat and other analystssaid the flow was likely to resume. The re-opening of the stock market couldboost it.“It’s undeniable that capital is flowing out of the economy,which is one of the reasons they were forced to close the banks,” Pigat said.“That’s the biggest risk to the economy going forward. It has pronounced implications for balance ofpayment and Egyptian pound.”In Egypt’sfavor, the central bank has $35 billion of foreign currency reserves, enough tocover seven months worth of imports. That, together with possible imposition ofcurrency controls, could prevent a severe depreciation of the Egyptian pound,Pigat said.