Egypt is not immune to the global fiscal meltdown, writes Sherine Abdel-Razek. But is it all bad news? With traders, analysts and investors in the global capital markets holding their breath in anticipation of Congressional approval of the $700 billion bailout plan, economists the world over are busy trying to predict whether the US government's decision to buy up the most toxic loans will be sufficient to disinfect the system. Initial enthusiasm over the rescue plan was quickly tempered, and after strong rebounds in global markets earlier this week by Tuesday questions began to be asked over whether the plan could really rebuild shattered confidence and the markets once again began to tumble. Egypt has not escaped the yo-yoing, with the capital market zigzagging its way between steep losses and unprecedented gains for 10 days now. The CASE30 index is currently 13 per cent lower than when Lehman Brothers filed for bankruptcy. "It has been caused by selling pressure from foreigners fleeing equity markets in search of safer investments such as gold," says Amr El-Alfi, deputy head of research at Commercial International Brokerage Company (CIBC). "They have been followed by Arabs who were already feeling the heat at their own bourses and then by local investors who are mainly driven by psychological factors. They panic and sell." The market was already reeling from five months of decline in which it lost almost 40 per cent of its value. El-Alfi estimates that the US subprime mortgages and subsequent crises on Wall Street are responsible for at least half of the loss. While one early reaction of the US authorities to the possibility of a full blown market collapse was to tighten rules on transactions and ban short selling, tightening regulations is not being contemplated in Egypt. "We don't need more regulations. The investment instruments currently available -- shares, bonds and treasury bills -- are not by nature risky," says El Alfi. The meltdown has not only reverberated in the capital market. Local banks deposit a high portion of their cash -- some estimate as much as LE114 billion -- with foreign institutions. "The problem is that while the Central Bank of Egypt [CBE] knows the value of the deposits banks are not obliged to provide the names of the foreign banks in which they have deposited their money," points out Ahmed Kora, former head of Al-Watany Bank of Egypt. "This makes it difficult to assess the scale of the problem and how it will affect the sector." A Banque Misr official quoted last week in Al-Ahram said that the bank held two million euros of bonds issued in 2001 by Lehman Brothers. While it was reimbursed one million euros after the US lender filed for bankruptcy it has yet to recover the remaining sum, which, he stressed, "represents an insignificant portion of Banque Misr's overall investment portfolio of one billion euros". So what will happen next? Analysts are divided, the overall picture remaining confused. Many investors are hoping the US bail out will prove a turning point, drawing a line under recent dramatic readjustments. And there is always the possibility that Congress may withhold its support. "If Congress rejects the plan the US economy will dive into recession and the dollar would lose more ground. The US is the world largest oil importer and on the back of a recession demand for oil will retreat pushing down the price of crude," predicts Magdi Sobhi, senior economist at Al-Ahram Centre for Political and Strategic Studies. Monette Doss, an analyst at Prime Securities, takes a different perspective. "If it happens, the decline in oil prices will be in our favour even though Egypt is a net exporter of oil." Doss explains that in the first three quarters of the current fiscal year the value of oil exports increased by 36 per cent compared to a 139 per cent increase in the value of oil imports. Even a decline in the dollar rate, though it might negatively affect Egypt's exports, is not without its advantages, according to Doss. "Egypt has a ballooning budget deficit which the government puts at LE60 billion. The only way to finance this deficit is to draw on Egypt's foreign reserves which are denominated in dollars. This will increase the demand for dollars and balance the appreciation in the value of the pound." But what of foreign direct investments (FDIs), on which the government until recently had placed such hopes? "The US is undergoing a credit crunch and will tighten credit rules which will limit American investments abroad," says Sobhi. Doss agrees, though she argues that FDIs were expected to decline anyway due to high inflation rates, the large fiscal deficit and social unrest caused by recent government policies. (see p.7)
