The market also celebrated President Mubarak's surprise announcement of constitutional change Experts have often said that, however extensive it may be, economic reform alone is not enough and that political reform must be forthcoming as well. This week President Hosni Mubarak granted them their wish when he announced that the constitution will be amended to allow for the direct election of the president via popular vote, rather than his nomination by parliament and a popular referendum. The proposed amendment is to be effective for the upcoming presidential elections scheduled for this September. The exuberant reaction boosted the country's already thriving stock market. On Sunday, the first day of trading, the broad-based Hermes Financial Index (HFI) rose 5.6 per cent. This represents the third highest daily percentage rise since January 1997 after the 7.2 per cent and 12.6 per cent daily percentage rises realised on 30 January 2003 and 2 February 2003, respectively the second and third days of trading following the floatation of the Egyptian pound. The CASE 30 index, including the bourse's 30 most active traded shares, recorded a 6.1 per cent increase. The total value of transactions recorded a 50 per cent increase on Sunday to reach LE500 million followed by LE400 million worth of transactions on Monday. The president's initiative brought to end fears of political chaos in a post-Mubarak Egypt, encouraging foreigners to go on a concerted buying spree. Foreigners were net buyers on both Sunday and Monday with their transactions counting for around 25 per cent of transactions on average. Commenting on the move, Business Monitor International (BMI), a print and online publisher of specialist business information on global emerging markets, said "the renewed burst of investor confidence reflects the lifting of an important barrier where reform is concerned." The market reaction was correctly anticipated in an analysis by EFG-Hermes: "Historic and cross-country evidence supports the assertion that the announcement/ implementation of significant political reform triggers a broad-based rally as investors adopt a lower risk premium and expect higher levels of foreign direct/portfolio investment in that respective country." However positive the reaction, experts do not expect it will reflect on the country's sovereign rating. James McCormack, senior director, Sovereigns Fitch Ratings, downplayed the announcement's potential implications for the sovereign rating as "modest". He explained to Al Ahram Weekly that Egypt's ratings have not been effectively constrained by the country's political structure. As a result, McCormack foresees only an indirect effect on the ratings. Fitch Ratings revised the Outlook on Egypt's BBB Long-term local currency rating from Negative to Stable in December 2004 in recognition of the economic policy changes introduced by the new government. Egypt's sovereign ratings had been under downward pressure for several years due to economic stagnation and the lack of an effective policy response. The long-term foreign currency rating is BB+, also with a Stable Outlook. On a similar note, a number of businessmen believe it does not have a direct bearing on the economic and investment climate in Egypt. "Democracy alone is not enough to achieve a strong economy. The criteria must also include transparency and stability of laws governing the economic life. This is what will make a difference in the long run," said Ahmed Abdel-Salam Zaki, chairman of the Credit Guarantee Corporation. Helal Sheta, former chairman of the Exporters' Division at the Federation of Egyptian Chambers of Commerce agrees with Zaki on the importance of a more investment-friendly culture. "What is more important in attracting foreign investors are the changes in the tax and customs regime," said Sheta. "To boost the capability of local manufacturers to produce high-quality products at reasonable prices and thus increase exports is more pressing than political reform," he added. Nonetheless, as Ahmed Galal, executive director of the Egyptian Centre for Economic Studies points out, "growth requires investment, and investment, whether domestic or foreign, requires stable political conditions and predictability of rules." He defined investment as a current cost with the promise of future return. "If you are unsure about the future, then you do not invest. That is why predictability is key," he said, elaborating that reform conveys a sense that people have a say in the power to change. "That puts a brake on sudden changes in policies which may constitute a risk element for investors." As McCormack of Fitch Ratings puts it, "it will now be critical for the authorities to manage public expectations, since neither the proposed constitutional amendment nor the enacted and announced economic reforms is likely to result in significant change in the immediate term. It can be particularly difficult to manage political change without falling victim to it as the process gathers momentum." Since the new cabinet came to power last summer, an impressive series of economic adjustments have taken place but the fact that it was not accompanied by political changes has been a cause of concern regarding the forthcoming elections . Mubarak has won the previous four "elections", through a system which sees parliament, dominated by his own National Democratic Party, nominate a candidate, who is then put through the test of a public referendum without direct competition. In none of these polls has the president won less than 90 per cent of the vote. "The news that the system is to change should increase Egypt's investment appeal -- despite the consistency a guaranteed fifth term for Mubarak would bring, the lack of representation is leading to growing dissent amongst the population, which threatens the country's political stability," said McCormack.
