President Mohamed Morsi's move to declare absolute executive power ignited immediate anger in Cairo's streets. The full response of the economy, however, though expected to be equally harsh, is yet to be felt. Clashes broke out between supporters and opponents of President Morsi after he issued a decree granting himself sweeping powers, which his critics likened to policies of the regime hundreds died last year to topple. The current situation, according to Beltone Financial, would further interrupt domestic economic activity and deter foreign investment and tourism. “All this will continue to pressure Egypt's already widening twin trade and fiscal deficits,” the investment house said. The GDP growth rate fell to 2.6 per cent in the first quarter of 2012/2013 compared to 3.3 per cent in the previous quarter. Beltone also expressed concern that economic policy, which had taken a back seat since the revolution and only started to be a priority a couple of months ago, risks being sidelined again. Beltone's concerns are echoed by many market experts, especially when recent developments came only hours after the Egyptian government had reached a standby agreement with the IMF on a $4.8 billion loan. Disbursal of the first tranche of the $4.8 billion loan can only take place after the approval of the IMF executive board, which will meet in December. “What will be the IMF and EU's reactions to the decree? Any postponement or reversal of aid/loan pledges at this stage would be very damaging, and could have negative consequences for the pound and the economy more generally,” said Taymour Al-Derini, director of Middle East and North Africa Sales trading at Naem Brokerage. The EU had also linked part of its assistance to Egypt to the latter's success in acquiring the IMF loan. A member in the European Parliament earlier in the week urged EU Foreign Policy Chief Catherine Ashton to freeze all financial assistance to Egypt in reaction to Morsi's constitutional declaration. In the meantime, IMF spokeswoman, Wafa Amr told Al-Ahram Weekly that “consideration of the agreement by the IMF Executive Board will require that there is no major change in [Egypt's] economic outlook.” Amr added that the disbursement of the loan is also linked to assurances from Egypt's bilateral and multilateral partners that their expected provision of programme financing will be forthcoming. According to a Cairo based economist who preferred to remain anonymous, this week's events could raise concerns about the stability of institutions in Egypt, thus undermining the stability of the political system for a while. “Lingering uncertainty could cast doubt on the stability of the government and the executive authority going forward, which could easily threaten the prospect of securing a loan with the IMF or other international donors,” the source said. With these concerns in mind, market observers held their breaths before and through the first trading session in the stock market after Morsi's decision to assert more powers. And red was the colour of market monitors Sunday with the EGX30 losing almost 10 per cent — its highest intraday loss since January 2011 — while trading on most of the blue chips was suspended as they lost more than the daily permitted decline value. Accordingly, the index surrendered its spot as the world's best performer this year, tightening its gains through 2012 to 36 per cent. However, aggressive trading by Arab and foreign investors in the attractively priced market Monday and Tuesday rebalanced panic selling by locals, resulting in the market changing its direction to advance by almost 3 per cent in both sessions. The Egyptian Stock Exchange board held a meeting Sunday where any possibility of reducing working hours or suspending transactions as a means to shield the market was ruled out. Pharos Securities' Hani Geneina wrote in a report that while foreigners buying into the market now may be rational behaviour, investors should reduce equity exposure. “Under all scenarios, the rift between Islamic movements and seculars/judges have widened materially and hopes towards reconciliation in the short term have been shattered by mistrust.” According to Geneina, Egypt has no buffer left to weather another shock in the tourism sector and investment, so clients should account for this by significantly raising their required risk premiums. Such a premium was already offered by the Egyptian government in the auction held Saturday to sell treasury bills and bonds. The nine-month borrowing costs climbed to the highest level in six weeks to reach 13.19 per cent, while the yield on three-month bills increased 20 basis points to 12.5 per cent. Moreover, yield on the nation's 5.75 per cent dollar-denominated bonds, due in April 2020, advanced one basis point to 5.13 per cent on 23 November, according to prices compiled by Bloomberg. As for the Egyptian pound, it held stable against the dollar, while Forex bureaus witnessed relative high demand on the greenback, “demand was not high enough to push the rate,” according to Mahmoud Al-Sebaai, head of Al-Nouran Forex bureau. While there were no signs until Tuesday of any change in Morsi's decision, the economist who spoke to the Weekly stressed that retracting the decision could help stave off anger in the short-term, while the fact remains that the country does not have consensus to establish and vote on a long-term constitution, and does not have a parliament. Furthermore, the economist pointed out that the crisis has revealed the level of suspicion that has developed between the elected president and the judiciary. “These issues should be fixed, and immediately. In the absence of defined institutions and good cooperation, having an elected president will not be sufficient to assure the international community that the political transformation in Egypt has produced a stable structure to move the country forward.
