Egypt's Market Regression

A pro-Morsi supporter clashes with security forces in Cairo on Aug. 14 Photograph by Manu Brabo/AP Photo

With Egypt torn by political violence and desperate for financial aid, it’s hard to believe its economy was not too long ago touted as one of the more promising growth stories in emerging markets. The country was inducted into a new post-BRIC category called CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) and into Goldman Sachs’s Next Eleven (pdf)—even before the fall of strongman Hosni Mubarak in the January 2011 revolution. The transition to democracy was supposed to set the stage for far more investment and tourism.

One military coup and a bloody crackdown later, the Egyptian stock market and the country’s banks are closed in a nationwide state of emergency. On Wednesday, the benchmark EGX 30 Index slid 1.7 percent, its steepest drop in more than a month and the biggest among 94 benchmarks tracked by Bloomberg. Five-year credit default swaps, which insure the nation’s debt against nonpayment, now rank the country as one of the 10 riskiest credits in the world, according to data provider CMA.

At least 525 people were killed and more than 3,700 injured after police yesterday stormed a pair of camps where backers of former President Mohamed Mursi had congregated since the army removed him from power on July 3.

“We now believe that things in Egypt have the strong potential of getting much worse, pushing through the positive aura that has comforted local investors hoping [for] a business-friendly environment and no Muslim Brotherhood in combination with pressured fundamentals,” wrote, Emad Mostaque, a strategist with Noah Capital Markets, on Wednesday. “The organized nature of the Brotherhood and their chunky presence in society means they can be far more disruptive than the 2011 revolutionaries, particularly given that tactics will switch to full-on civil disobedience and slowing the economy down with some extremist elements targeting the tourism industry. The increasing sectarianism on the street is likely to be very difficult for the security forces to handle, versus the relatively centralized and organized crowds in 2011.”

Critically, the military-backed government that replaced Mursi was able to secure $12 billion of aid pledges from Gulf countries, including Saudi Arabia, to counter a plunge in Egypt’s foreign reserves by more than half since the January 2011 revolution. Until just a couple of days ago, Egyptian stocks were rallying on the hope that the new government—whatever shape it ultimately took—would be a better financial steward than the Mursi regime. Meanwhile, investors have complained of having problems with currency repatriation out of Egypt, a development that could boot the nation from MSCI’s official emerging market classification.

Now, with the crackdown’s death toll mounting, Egypt’s financial challenges are going on the back burner, says Larry Seruma, manager of the Nile Pan Africa Fund, which is avoiding local shares. He worries that a drop in earnings from exports and tourism will hit government revenue, which may in turn lead to a fiscal and bank liquidity crisis. “We see potential devaluation of the Egyptian pound, more increase in bond yields, inflation and a desperate need to get a deal with the International Monetary Fund,” he says. Seruma also cites the risk of sovereign and corporate bonds getting downgraded by rating agencies.

As for the the deferred dream of Egypt as one of the more promising emerging market growth stories: He points out that the nation is about to be robbed of its title of Africa’s second-largest economy, by Nigeria.

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