The curious case of the Egyptian economy: not a single recession in 22 years
According to economists, any country that experiences a revolution should have an economic recession within six months. For anyone who has followed our news, this was not the case in Egypt, and curiously, still isn’t. One of the strangest economic facts that very few people cite about this country is that it hasn’t suffered a technical recession since 1992. Wars, economic booms, economic meltdowns, revolutions, coups, whatever, the Egyptian economy continued to grow at various degrees for 22 years, which is more than one can say about most European countries.
After three years of an economic slide due to instability and lack of tourism (but no recession), the Egyptian interim government, aided by some of its friends in the Gulf, seems intent on making an economic comeback, or so it kept saying. While the government has a blank cheque from a number of Gulf states, there is a credit limit attached. The risk for most economists and investors is that this credit limit is reached before a sound economic policy is enunciated and deployed by the government. The government still doesn’t officially have one, but now we are starting to see a little hint of the direction that they are taking.
The Gulf aid packages have eased pressure off currency reserves, exchange rates and the general budget, and it allowed the government to start paying off some of its debts and making payment plans on the rest of them. For example, Egypt will this week complete the payment of $1.5bn of the $6.3bn it says it owes oil firms, which is in line with a more long term payment plan to cover the rest. A report by Fitch highlighted that Egypt’s external debt has been decreased to reach 18.9% of GDP, which are mainly medium and long-term debts and contracted on a concessional basis. The interim government also aims to reduce the budget deficit from 14% in FY 2012/2013 to 10% at the end of the current fiscal year. If you have no idea what that means, it means that for the first time in three years, we have a government that seems to have some economic and fiscal objectives. This is why it came as no surprise when for the first time since January 2011, Fitch Ratings agency upgraded Egypt’s economic outlook from negative to stable on Friday, while maintaining its long-term foreign and local currency sovereign credit rating at B-. We used to be CCC+, which is Greece territory, and no one wants to be Greece at the moment.
This is a good start, and a good sign, but not nearly enough, nor is announcing that the Egyptian-Saudi Businessmen Association is about to be launched this week. What matters is having a clear plan to attract investors, cut spending, and provide a more transparent competitive business environment for the private sector to get the economy going again. One way to do this is for the government to initiate and commission big infrastructural construction projects to the private sector, like building roads, developing slums and ignored governorates, which the government did. It also awarded the collective contracts of projects valued over $1bn, not to the Egyptian private sector, but rather to the Egyptian military by direct order. Needless to say, that by doing so, they are depriving the private sector of much needed work, and the whole affair screams corruption and nepotism, but I guess one can’t have a “war on terror” without a “Halliburton” that gets contracts by executive orders. Someone in the current government is enjoying his remake of the US Bush years very much.
While there should be a greater fuss about this, everyone in the business community is brushing it aside, and not out of fear of being critical of the military, but rather for the same reason why a company like Fitch would deem Egypt, with all of its news of instability, a “stable” country. For the first time in three years, the whole world knows who is running the show and will continue to run the show in the country, and that’s the Egyptian military. Having an entity in Egypt that operates as the guarantee of the continuing existence of the state- after a year and a half of revolutionaries destabilising it and a year of Muslim Brotherhood rule completely mismanaging it- makes certain businesses and investors comfortable with investing here. Egypt might be a “failed state” at the moment, but there is someone in charge who will continue to be in charge and that’s good enough for some investors.
Further investments will follow based on the simple formula of “state building”: with every check mark next to a political step (the constitutional referendum, the presidential elections, the parliamentary elections and the formation of the government), more money will pour in. It is unlikely that further protests or clashes will affect the flow of this money this time for a very simple reason: people now expect it from Egypt. The country has such a horrible image world-wide at the moment, that there is literally no place for it to go but up. It will simply be part of the “country risk” in any investment assessment or valuation: just one of the factors, instead of the deciding factor.
Egypt’s economy is curious because it is, as any economist observing it would tell you, an experiment. It follows no model, and it is driven mainly and solely by its huge population. We have at least 90 million citizens in this country, which means that if they just wake up, eat, defecate and sleep, there is a huge economic cycle that will take place just to sustain that. Also, they are absorbed by consumer culture, and don’t have responsible spending or saving patterns, and continue to have an insane birth rate to boot. It’s an economy that will keep going based solely on population momentum, and for that there will always be investors.