Egypt’s stock market has surged to its highest level since unrest first flared nearly three years ago as the Arab world’s most populous economy begins to heal.
The main EGX30 index has risen nearly 50 per cent from a low in July in the wake of a second bout of turmoil that removed the Islamist president Mohammed Morsi.
Since then a wave of GCC funds have helped to repair ragged public finances and restore confidence in the wider economy.
“If things stay as they are, we think growth should accelerate over the course of 2014,” said William Jackson, an emerging markets economist at Capital Economics. “The Gulf-funded stimulus should support domestic demand.”
Investor anticipation has been building after Egypt said this month it planned to spend around 30 billion Egyptian pounds (Dh15.92bn) in a second stimulus package to be launched next month.
Ahmed Galal, the finance minister, was quoted by Reuters as saying the new spending would be financed by savings and aid from the UAE, Saudi Arabia and Kuwait. The trio pledged US$12bn in support to Egypt after Mr Morsi’s ousting.
Sheikh Abdullah bin Zayed, the UAE Foreign Minister, this week pledged that the UAE would “spare no effort” to support Egypt further.
The cash injection has helped to pull Egypt back from the brink of a fiscal crisis as foreign currency reserves last year dipped below the level recommended by the IMF to cover three months of imports. Foreign currency reserves stood at US$17.8bn last month, but before Hosni Mubarak’s ousting as president in February 2011, the reserves were twice as high.
The cash injection has come amid signs the economy may also be moving again. The private sector emerged from a downturn to post its first positive reading last month since September last year in HSBC’s purchasing managers’ index.
Underpinning the rebound has been a stabilising of the political outlook. Plans are progressing for a draft constitution to be put to a referendum next month, which would open the door for parliamentary and presidential elections, if passed.
But economic risks still weigh on the outlook.
Egypt’s urban consumer price inflation rose to a four-month high of 13 per cent last month, with food costs contributing to the rise.
Surging prices of goods were one of several flares that ignited public discontent in 2011.
“Inflation has been steadily rising over 2013, as EGP [Egypt’s currency] has depreciated and shortages of foreign currency have constrained imports,” said HSBC economists in a research report released this month. “Heading into 2014, we see little indication of any let-up in these trends.”
There has also been precious little progress in some of the structural reforms needed to make the economy more competitive and entice back foreign investment. When the Morsi administration was in negotiations about a $4.8 billion loan from the IMF until last year, the deal was hinged on the understanding that the government would begin to scale back costly subsidies on fuel and food.
The GCC money comes with no such strings attached.
A preliminary draft value-added tax law is reportedly scheduled to be released on January 24 but analysts are sceptical about the appetite for wider reform.
“While the influx of money from the Gulf means that this [reform] may not make much of a difference on what happens to stocks or growth in 2014, over a longer horizon it is crucial,” said Mr Jackson of Capital Economics.
tarnold@thenational.ae
