Moussa, a former foreign minister and secretary-general of the Arab League, would mobilize funds from Arab countries and international lenders to spend on infrastructure, according to his manifesto published earlier this month. He also pledges to restore security to encourage foreign investment, lowering yields that have surged about 50 percent since last year’s uprising.
“We will need to pump money into the economy to create jobs,” Ashraf Sweilam, Moussa’s economic adviser, said in a telephone interview from Cairo. “We will not increase the budget deficit a lot, especially if we restore security. This will improve sentiment and help us achieve a growth rate that counterbalances” the increased spending, he said.
Campaigning for Egypt’s first presidential election since the ouster of Hosni Mubarak began yesterday, with polling stations opening on May 23 and the winning candidate due to take office by the end of June. The country’s next ruler will inherit an economy saddled with the lowest growth rate and highest budget deficit among countries with traded external debt in the Middle East, International Monetary Fund data show.
Moussa, who led the field of 13 candidates in an opinion poll published yesterday by the Al Ahram Center for Political and Strategic Studies, expects public investments to widen the budget deficit “slightly” in the first year, said Sweilam. Cuts in energy subsidies and higher economic growth will help bring the deficit down to about 4 percent of economic output by 2017, he said. The shortfall was about 10 percent of gross domestic product last year.
Almost one million people lost their jobs after the uprising that ended Mubarak’s rule, as tourists shunned the country and clashes between security forces and pro-democracy protesters prompted private businesses to curtail investment. The unemployment rate climbed to 12.4 percent, the highest since at least 1992, according to official figures, while gross domestic product shrank for the first time in decades.
Egypt’s default risk has jumped 299 basis points, or 2.99 percentage points, to 609, placing the country ahead of debt- stricken Ireland on the list of the world’s 10 riskiest credits, according to data provider CMA. The economic crisis prompted Moody’s Investors Service and Standard & Poor’s to lower Egypt’s credit rating four times to B2 and B respectively, five levels below investment grade, effectively shutting the country out of international bond markets. The risk premium investors demand to hold Egypt’s debt instead of U.S. treasuries surged 289 basis points, or 2.89 percentage points, to 550 on April 30, JPMorgan Chase & Co. data show.
Moussa has vowed to “immediately employ” his regional and international contacts to plug a financing gap he estimates is as much as $12 billion and which may increase, according to his manifesto. While critics decry his links to the former government, Moussa’s connections could help him to attract funds from abroad, said Alia Mamdouh, an economist at investment bank CI Capital in Cairo.
Moussa’s reputation as a seasoned statesman could also give him an edge over opponents such as Islamist candidate Abdel Moneim Aboul-Fotouh, a former member of the once-banned Muslim Brotherhood. Aboul-Fotouh polled second in the Al Ahram study with the backing of 27.3 percent of those surveyed, compared with Moussa’s 41.1 percent.
Aboul-Fotouh has released a “preliminary” platform calling for the use of fiscal policy to “encourage investments in productive sectors that support employment.” He also pledges to reduce the budget deficit through raising revenue and not by introducing austerity measures. Like Moussa, he advocates a progressive income tax and a capital gains tax.
Samer Atallah, assistant professor of economics at the American University in Cairo and an adviser to Aboul-Fotouh, criticized what he said was the “reliance on borrowing” in Moussa’s plan. “It is the ultimate disease of the Egyptian economy: continuously relying on foreign borrowing,” he said in a phone interview.
The current government appointed by the military, which took interim power from Mubarak, is in talks with the IMF for a $3.2 billion loan as foreign reserves plunged more than 50 percent to $15.1 billion in March. The terms of a possible agreement and dates of disbursement remain unclear. The military initially vetoed the loan and subsequent negotiations have been delayed by disagreements between the government and parliament.
With political wrangling also delaying the writing of a new constitution, the powers of the next president remain unclear. Disenchanted by Mubarak’s accumulation of powers, many activists have called for a system that boosts parliamentary authority at the expense of the head of state. The Muslim Brotherhood’s Freedom and Justice Party makes up the largest bloc in parliament, followed by the Salafist al-Nour party.
While Mubarak “had full power and support from parliament, Moussa would have to deal with the Muslim Brotherhood and Salafists to reach a compromise agreement” on issues such as foreign loans and investment, said Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt.
Any foreign loan would probably come with “irreversible” conditions such as currency devaluation, said Dergachev, who used to invest in Egyptian treasury bills before the uprising.
“If Egyptian authorities want to have support from the IMF, a devaluation of 15 percent to 20 percent, in my view, will be a crucial condition,” he said. The pound, which is subject to a managed float, has weakened 3.9 percent since the start of last year. Forward contracts show investors expect the currency to weaken about 18 percent in a year.
Moussa’s campaign plays down the need for an immediate devaluation. “If we manage to get a successful program under implementation during the first 100 days and the first year, then there might not be a need for devaluation, especially as the only value for devaluation is to increase Egyptian exports” said Sweilam. “If we did not succeed, there is no value for devaluation. On the contrary, it increases our financial burden.”
Egypt’s trade deficit widened 7.6 percent in the six months through December to $15.6 billion, according to central bank data. The country is the world’s biggest importer of wheat and subsidizes energy products such as fuel, diesel and butane gas.
“In the short term, Egypt will be better placed to solicit external support, which will result in hard-currency inflows and will also help anchor investor expectations,” said Raza Agha, London-based senior economist at the Royal Bank of Scotland Group Plc.
“Egypt must reduce the size of its deficit by cutting subsidies, reducing the size of the public sector workforce, and through better debt management, and in time lower outlays for debt servicing,” Agha said by e-mail. “There is also a need to increase the size of the tax base, as many sectors do not contribute to public revenues as much as they should.”
Moussa’s economic policies won an endorsement from former Finance Minister Samir Radwan, who solicited the IMF loan last year as he tried to boost public investments to resuscitate the economy. Radwan was replaced in a cabinet reshuffle in July.
“There is high unemployment and the private sector is suffering, so public policy should step in,” Radwan said by phone April 19. “What I like about the program is the speedy response to people’s problems in the first stage. In the second stage, it lays the foundation for long-term growth.”