Following the ouster of former president Mohamed Morsi, which has been dubbed by many as a “military coup,” a number of global financial firms expressed concern regarding how this political change will impact the economy.
Bank of America Merrill Lynch Global Research described the transition in a report as having created a “concerning precedent, although the subsequent roadmap is broadly in line with demands from the secular opposition, in our view.”
The research firm referred to the military’s political roadmap, which included the suspension of the 2012 constitution drafted by the Islamist government, as well as the formation of a committee to propose constitutional amendments. The roadmap includes plans to hold early presidential elections, the preparation for parliamentary elections, the formation of an interim technocratic cabinet and the appointment of the Head of the Supreme Constitutional Court as interim president.
The report stressed the need for foreign investment, stating: “In the absence of fresh Arab aid infusion, we think Egypt has a space of six months to calendar year-end before the external position tightens again.”
“Further Qatari support is improbable in our view, though rollover of disbursed debt is likely, and it may be that the UAE and Saudi Arabia step in with backstop support instead,” it stated.
It further cited the unlikeness of fiscal reforms to take place, to secure the much-delayed International Monetary Fund (IMF) assistance, highlighting concerns such as the long duration of the transition period, as well as possible reactions by the Muslim Brotherhood. The firm, however, expected that the transitional period would end by the year‘s end.
Since the ouster of former president Hosni Mubarak in 2011, the economy plunged into steady decline, and has been hard hit as tourism revenues dwindled, foreign currency reserves shrunk and the weak Egyptian pound boosted inflation to 8.2% as of May.
The research firm therefore estimated gross financing needs of $33bn over the next 18 months, which “suggests that the external position remains highly vulnerable.”
“The Central Bank of Egypt (CBE) could decrease the size of FX selling auctions to conserve reserves, in our view, but has limited firepower as reserves are just above the levels it deemed the minimum,” the report continued.
“Egypt is likely to remain difficult to govern, and the economic challenges argue for considerable downside risks in the absence of the timely emergence of a legitimate stable government that would re-engage with the IMF,” it concluded.
Another report by Nomura Global Markets Research, released on 4 July, which also labelled Morsi’s ouster as a coup, states that even though Morsi’s performance in handling the economic crisis was poor, his exit might do more harm than good. The report discusses how the uncertainty about the consequences of the current political tension in the country might lead to a static market.
Furthermore, it states that any improvements the Egyptian economy is currently experiencing, such as a rise in the stock and oil gains, are temporary. “We see any related upward market shift, be it in local markets (e.g., the 6.4% rise in the Egyptian stock exchange at today’s opening) or to oil, as temporary. Relative calm is likely to return to Egypt for now,” the report explained.
The report also warns of the possibility that the army transform Egypt into a latter-day Pakistan, in which the army uses its position as the arbiter of power to oust any democratically-elected government “in the name of the common good.” It also examined the long-term consequences and cited the repeated military intervention in Pakistan, since independence in 1947, as a damaging factor to the economy and feared that Egypt will take a similar path.
“It is somewhat ironic, we think, that a similar cycle could be starting in Egypt within weeks of a democratically-elected government in Pakistan serving for a full parliamentary term for the first time since independence,” it adds.