The appointment by President Mubarak of a vice-president, the ‘moderate’ Omar Suleiman, for the first time suggests that the end of his 30-year rule is in view. It seems likely that either Suleiman and his new appointed cabinet colleagues or the army—which has remained passive and whose leaders have declared support for the Egyptian people—will persuade Mubarak to resign very soon.
But even if Mubarak and his family flee to Saudi Arabia, where so many deposed autocrats seem to end their days, neither Suleiman nor any other putative leaders waiting in the wings such as the Nobel laureate Mohammed El-Baradei, would seem to promise both democratic reform, stability and regional policies sympathetic to the West.
It is quite possible that Mubarak’s resignation would provoke the protestors to demand a complete dismantling of the regime, leaving power vacuum to be exploited by Muslim extremists, both from Egypt and elsewhere in the region. The Iranian revolution in 1979 provides an ominous example of what could happen.
Crisis undermines investment case for Egypt
The economic and financial effects of Egypt’s crisis are not good. There is still a large amount of foreign money in Egypt (around US$20bn), split between the equity and fixed income markets, so the biggest concern for investors would be capital flight; a weakening Egyptian pound; and, consequent boost to already high inflation. Egypt does have US$34bn of foreign reserves and so the central bank would in theory be able to ensure an orderly exit by those that want it.
One obvious concern would be a run on the banks, but the banking system is very liquid with loan/deposit ratios around 50% and so they could manage fairly significant outflows before creating real stress in the system. The banks are currently closed (their ATMs are allowing a maximum EGP1000—US$170—withdrawal per person per day) and while the internet and telephone lines are down for most, they have remained open for banks. The Egypt banking system is predominantly a corporate one as the population is very under-banked.
Other concerns include the threat to oil transportation through the Suez Canal although only 2% of global oil passes through Egypt. Worse for Egypt is the country’s reliance on tourism at 11 per cent of GDP, which is clearly threatened by domestic instability.
The stock market has also been suspended since Sunday, although GDRs for some blue chips have been trading in London. Once Egypt re-opens for business, presumably when the streets have calmed down, the true impact will become clear. One thing is for certain: the equity risk premium has increased dramatically for the foreseeable future, while the investment case for one of the fastest growing countries of recent years may have been fundamentally undermined. Still, some modest comfort may be found in the fact that the Tunisian stock market reopened this week, having been closed since 14th January.
Possible regional knock-on effects
Drawing investment conclusions is no easier than political ones, either for Egypt or in the wider region. Whilst all eyes are on Egypt, there is no reason for complacency about neighbouring countries; Algeria, perhaps most at risk, is due another round of large protests on the 12th February, while turbulence in Morocco, Jordan or even Libya and Iran cannot be ruled out. Against this background, the GCC countries currently look like an oasis of stability.. Many of these countries have more expats than nationals and many of these nationals receive large handouts from their governments that keeps them satisfied. Inflation is also less of an issue. Saudi Arabia is the one possible exception, where the transition of power once an ageing (and recurrently ill) King dies needs careful watching.
 | Oliver Bell
Senior Investment Manager,
Emerging Markets Team | |
