Economic Nerves Shaken By Egypt Crisis; Impact So Far Confined To Region, Oil Price - ING IM

Tom Burroughes

4 July 2013

The risks of an economic crisis and associated currency turbulence have increased as the Egyptian military intervened into the country’s politics this week, argues Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management.

This week, the army ousted the government of president Mohammed Morsi, a move that has been seen as preventing a violent clash between his opponents and supporters (in the latter case, the likes of the Muslim Brotherhood).

Since the “Arab Spring” uprisings of 2011, one impact of unrest has been a flight of money from the North Africa and Middle East region to jurisdictions such as Switzerland and London, prompting warnings from wealth industry figures to be vigilant about illicit money transfers.

Economically, the latest Egyptian crisis ahead of the Morsi ouster had the effect of boosting crude oil prices although the market has stabilised. Brent crude oil for August delivery traded around $105 per barrel this afternoon, down by 0.65 per cent from the market open (source: Bloomberg).

“In the past year, the Morsi administration has not been able to make any progress in solving the huge economic and social problems in the country. The high youth unemployment and rising inflation rate is keeping the Egyptian situation explosive,” Bakkum said in a note.

“But the army ousted an elected president. The fragile Egyptian democracy has not been helped by the coup. The new interim leadership might look reasonable from the outside, but does not have large popular support,” he continued. Bakkum noted that the army has also acted to protect its interests: more than 20 per cent of the Egyptian economy is run by the military.

Turkey

“Not a big surprise, but still interesting was the reaction to the coup from Turkey. The government in Ankara condemned the coup and the ruling AK Party called it a sign of backwardness. The Turkish government shared with the Morsi administration its Islamist agenda and its ambition to reduce the power of the military,” Bakkum said.

Bakkum said the risk of an “economic blow-up has increased”.

“Since the beginning of the Egyptian uprising, in January 2011, the Egyptian economy has been kept afloat with big support packages from IMF, European Union and friendly Gulf states. With balance-of-payments and budget dynamics still acute, but with the democratic legitimacy of the Egyptian leadership gone, it has become more difficult to expect more foreign support in the coming period. Money that was already pledged, might not be disbursed now. This increases the likelihood of a sharp depreciation of the Egyptian pound,” he said.

He noted that a currency crisis in Egypt will worsen the current difficult position, as Egypt imports many basic foodstuffs. A falling Egyptian currency will push up food prices and trigger more unrest in an impoverished country.

Bakkum said it was hard to know what will be the foreign impact of the crisis, although the main implications will be felt in the Middle East. He said the oil price could be pushed higher.