After turmoil hit global markets and stirred fear of a possible world economic crisis, Egyptians are holding their breath, fearing their hopes for economic development could be jeopardised.
Earlier this week, an 8.5 percent plunge in the Chinese stock exchange sent global stocks plunging, among them the Dow Jones index, which dropped 588 points on what is now being called 'Black Monday.'
The stock market crash was sparked by the release of China’s manufacturing data, which showed that the factory activity of the world’s second-largest economy had fallen to its lowest level since 2009.
Egypt-watchers are concerned about a possible global economic crisis, driven by the slowing Chinese economy, that could impact Egypt’s economy, but analysts differ on the extent of the risk the Arab country could be exposed to.
“Given Egypt’s economic situation we need capital inflows either through investments or exports or tourism. Consequently, if the Chinese economy slows further dragging the global economy, this could negatively influence Egypt’s economy,” Samer Atallah, economics professor at the American University in Cairo.
Following the stock market crash, world investors questioned whether the time was coming for a hard landing for the Chinese economy, which could possibly lead to global economic stagnation.
“The market is possibly going through a correction following the release of manufacturing data which showed that stocks were overvalued,” Atallah said.
China’s main stock index fell around 37 percent on Friday from its year peak in mid-June.
However, the stock market is the least of China’s fears.
Observers foresee potential threats to China’s economy from industrial overcapacity surpassing demand, and high debt levels which hit 282 percent of GDP in mid-2014. Growing shadow banking also threatens the country's financial stability.
Following “Black Monday”, China’s central bank has loosened its monetary policy for the fifth time since last November, cutting its key interest rates and the amount of reserves the banks are obliged to hold, increasing the funds available for lending.
If the worst happens, the central bank has plenty of room to loosen policy, according to a report by The Economist, which referred to the possibility of lowering the one-year lending rate that stands at 4.6 percent.
“The economy is slowing, but even 5 percent growth this year, the low end of reasonable estimates, would add more to world output than the 14 percent expansion China posted in 2007,” added the report.
The central bank also devalued the yuan on 11 August – a move perceived by markets to boost exports - igniting worries of a likely currency war.
As for Europe, the European Central Bank (ECB) has showed its readiness to expand or extend its quantitative-easing programme if needed, as a slump in commodity prices and risks to global economic growth threaten its inflation goal.
The ECB started its monetary expansion programme – known as quantitative easing or bond purchases -- in March, weakening the euro to boost growth and lift inflation.
Additionally, the global market turmoil has cast doubt on the US Federal Reserve market-anticipated interest rate hike in September.
But according to William Dudley, president of the New York Federal Reserve and a Fed board member, a September rate hike is looking “less compelling” than it was a few weeks ago.
Despite a surge in global markets following Dudley’s comments and better than expected US growth data, worries about the underlying economic uncertainties remain in the air.
Egypt’s growth hampered?
Egypt’s stocks plunged more than five percent on Monday, before rebounding along with global markets.
Egypt, a net importer, could stand to benefit from the fall in international commodity prices; however, its market was hit on concerns of fading Gulf support for its economy.
Brent crude oil was at $49.91 a barrel on Friday after recovering from its lowest level in six and a half years on Monday, Reuters data shows.
There is an opportunity for Egypt in the global fall in prices “as we import a lot of basic commodities, energy, and others,” Mohamed Abu Basha, economist at EFG-Hermes, told Ahram Online.
However, the impact on Egypt’s trade balance is uncertain “as exports could end up falling more than a drop in imports,” Sherin El-Shawarby, an economics professor at Cairo University told Ahram Online.
The economic challenges faced by the Eurozone, which is Egypt’s main trading partner, could lower their demand.
The appreciation of the Egyptian pound against the euro is also making Egyptian exports more expensive.
However, “exports are not a crucial driver for the economy,” said Abu Basha.
Egypt could also see inflation easing on lower commodity prices, he added.
But cheaper oil weakens the Gulf economies which have showered Egypt with around 20 billion dollars in aid and grants following the ouster of president Mohamed Morsi in 2013.
“The question is, which will be more influential on the Egyptian economy, a fall in global prices or a crisis in the Gulf?” said Atallah.
“Even if Gulf countries were doing economically better, they were not expected to keep on giving aid at the same rate,” said Abu Basha.
Egypt’s state budget for the current fiscal year estimated aid and grants at LE2.2 billion ($281 million), down from the LE96 billion ($12.3 billion) in FY 2013/14 and LE23.5 billion ($3 billion) in FY 2014/15*.
“We are affected by the Gulf through not only aid and investment but also tourism and remittances, et cetera,” said Abu Basha.
But we can override the negative influence because there are several investment opportunities in Egypt following five years of slowing growth, he added.
On the other hand, Atallah believes that “when growth slows, everything shrinks, including private investment, which is what happened in the financial crisis of 2008.”
The financial crisis caused Egyptian remittances to register a one-year decline for the first time in ten years, but they have continued to grow steadily since 2009.
Net foreign direct investment also fell to $6.8 billion in the 2009/2010 fiscal year from a peak of $13.23 billion in FY2007/2008, shows central bank data.
A crisis would be impactful, but this does not mean decreasing foreign investments; it could just mean the increase would not be as much as hoped for, said Abu Basha.
Egypt’s growth target for the fiscal year ending June 2019 is 6 percent, up from the estimated 4.2 percent for FY 2014/15.
*The value in dollars was calculated based on current exchange rates.