Egypt Government Crafts Stimulus Plan to Jump-Start `Sudden Stop' Economy

Ashraf Abdel-Wanis had plenty of reasons to join tens of thousands of fellow Egyptians in their successful push to oust President Hosni Mubarak. At 39, he last worked five years ago in a sugar factory and now gets by mainly on his wife’s $50 monthly salary and his mother’s pension.

“The Egyptian family’s nutrition consists of beans, lentils and beans,” he said in an interview in Cairo’s Tahrir Square, the plaza at the heart of almost three weeks of protests. “If they’re lucky, they cook vegetables once a week.”

Now with Mubarak gone, the plight of Abdel-Wanis and the 40 percent of his countrymen near the poverty line is prompting Finance Minister Samir Radwan to develop a stimulus plan aimed at creating the jobs needed to avoid further social unrest. His plan also will need to compensate for domestic and foreign businesses that shy away from investing until the military council’s transitional rule ends.

“There’s a need for a stimulus package that’s very closely related to employment,” Radwan, a former senior economist at the Geneva-based International Labor Organization, said in a Feb. 12 telephone interview. “There are at least three sectors that can do the trick: industry and manufacturing, tourism and agriculture,” he told Bloomberg Television in a separate interview aired today.

Wider Deficit

The spending will probably widen Egypt’s budget deficit from last year’s 8.1 percent of gross domestic product and raise the government’s borrowing costs, according to Alia Moubayed, an economist at London-based Barclays Capital, and Mona Mansour, a research director at investment bank CI Capital in Cairo. The yield on the government bond maturing in April 2020 jumped to a record 7.2 percent last month. Policy makers may see these as acceptable trade-offs to bring down unemployment of about 9 percent, one of the sparks for the uprising.

“It’s critical that once the political process is clearer, that the economy recovers in order to deliver growth and jobs,” said Mohamed El-Erian, the son of an Egyptian diplomat and chief executive officer at Newport Beach, California-based Pacific Investment Management Co. “We should not be obsessed just with the politics,” even though that’s “crucial,” he said.

“We should also be thinking about what it takes to restart an economy that has been subjected to a dramatic sudden stop,” El-Erian said.

Lost Revenue

The turmoil has cost the nation about $1.5 billion of tourism revenue, according to Central Bank Governor Farouk El- Okdah. It has also forced companies to close and sent the currency skidding to a six-year low. Before Mubarak’s resignation, the benchmark EGX30 Index tumbled 16 percent in one week. The bourse has been closed since Jan. 27.

The Institute of International Finance in Washington has cut its forecast for Egyptian economic growth in this fiscal year to 1.5 percent from 6.1 percent, it said Feb. 4. It predicts the budget gap will rise to 9.5 percent of GDP, rather than decline to 7.9 percent. Radwan said that the gap may widen to 8.4 percent of GDP, while economic growth may slow to 4 percent from 5.1 percent in the previous year.

While 9 percent unemployment is the same as the current U.S. rate, economists at Bank of America Merrill Lynch said in a Feb. 4 report that it disguises considerable underemployment because a relatively small part of the working-age population actually has a job.

Youth Unemployment

The headline rate also masks joblessness for about 50 percent of people under 25, the economists said. Youth unemployment was a trigger for a revolt in Tunisia last month that removed President Zine El Abidine Ben Ali from office on Jan. 14 and gave impetus to Egypt’s anti-Mubarak movement.

Radwan said any new fiscal plan should include a “massive and realistic employment program” that would use “funds and wealth at the command of the state to attract the private sector.”

Among Radwan’s first initiatives since taking office last month was to create a 5 billion ($850 million) Egyptian pound fund to compensate people who lost property during the unrest and to pay benefits for those who became unemployed because of the crisis. He also gave permanent contracts to as many as 600,000 government employees who were classified as temporary workers and “basically had no rights,” he said. The ministry financed the steps with “savings from the budget” without affecting the deficit, he said.

Borrowing Cost

Government stimulus efforts aren’t new to Egypt. The administration of former Prime Minister Ahmed Nazif, whom Mubarak fired in January in a failed attempt to end the protests, passed two such plans in the last two fiscal years with a total value of 25 billion Egyptian pounds. They helped offset a slowdown in private investment, which fell to 48 percent of total investment in the 12 months through June 2009 from 65 percent a year earlier during the global financial crisis, according to government data.

Fresh spending will come at a cost for the government, said Barclays economist Moubayed. The average yield on six-month Treasury bills surged to 11.78 percent at an auction last week, the highest level since January 2009. The average yield on 91- day treasury bills was little changed at 10.95 percent yesterday at the first auction after Mubarak’s departure.

“Given the turmoil that the Egyptian economy has gone through, we cannot but expect a bigger deficit as the government attempts to jump-start” growth, Moubayed said. “We expect yields on local debt to rise, thus increasing the cost of domestic borrowing.”

Investment Pause

Foreign investment, a main driver of economic growth in the past five years, may take a “pause” in the next six months as investors await the economic policies of the military council, said Mansour at CI Capital. Greater stability after Mubarak’s departure may nevertheless boost sentiment, she said.

The military council yesterday suspended the constitution, dissolved parliament and said it will rule the country for a “temporary period” of six month or until parliamentary and presidential elections. The government of Prime Minister Ahmed Shafik will remain in place until a new cabinet is appointed.

The cost of insuring Egyptian government debt fell 13 basis points to 324 after Mubarak’s resignation on Feb. 11, according to CMA prices for credit default swaps, tumbling from as high as 379 basis points earlier in the day. The Market Vectors Egypt Index ETF, an exchange-traded fund that holds Egyptian shares, gained 4.5 percent in New York, according to data compiled by Bloomberg.

‘Create Certainty’

The government must make investors “feel comfortable in order that Egypt may continue to attract the capital it needs to grow,” said Sven Richter, London-based managing director of frontier markets at Renaissance Asset Management, an investment- management company. “It will now be important that the government create as much certainty as possible.”

More certainty is also important to Abdel-Wanis, the father of six who celebrated Egypt’s new beginning in Tahrir Square. “For five years I have been looking for my day’s food, and finally I found people to stand with,” he said.

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Maram Mazen in Khartoum at mmazen@bloomberg.net

To contact the editors responsible for this story: Claudia Maedler at cmaedler@bloomberg.net; Andrew J. Barden at barden@bloomberg.net

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