A plunge in tourism, tightened private spending and a slowing of net exports are all signs that Egypt's economic prospects are likely to remain 'weak' for the foreseeable future, according to a new report from a leading international bank.
"Risks will not dissipate quickly," notes Barclay Bank's just-updated emerging markets briefing, which weighs up the investment potential of the Middle East and North Africa's top-hitting countries, many of them now plagued by unrest.
"The rise of a new leadership with a greater role for Islamic parties will be... a dominant feature of Egyptian politics over the coming months... and will therefore shape investors' perception of risk towards Egyptian assets," it says.
Barclay's warning may have extra resonance this weekend, as Cairo contemplates Saturday morning's bloodshed on Tahrir Square and wonders exactly where the January 25 revolution is heading.
The ominious title of the market report? 'Point of No Return'.
The macroeconomic picture painted for Egypt is bleak in the short-term. Growth drivers have been hit hard as private consumption, investments and net exports all slow. And although the path leading to parliamentary elections is seemingly set, lingering uncertainty over the political transition and its outcomes -- as well as ad hoc incidents that affect the security situation -- are all acting as brakes on consumption and slowing the return of mass tourism. They're also holding down Foreign Direct Investment (FDI) and local investment.
Barclays cites occupany rates for hotels countrywide at 25-30 per cent in March -- up from 5 per cent in February but a pale shadow of the 70-80 per cent that's normally expected. On top of all this, sustained labour strikes and sit-ins have dented production levels in Egypt's factories as well as pushed wages higher in some cases. Good for workers, but a strikes against export competitiveness.
Put these all together and it looks like economic growth will be modest at best.
"Even if the government manages to increase spending significantly during the second half of the fiscal year, we believe that besides raising current spending, its ability to implement any large-scale... fiscal stimulus package will likely be difficult," says the report.
Barclays predicts a maximum growth rate of 2.3 per cent of GDP, implying nearly negative growth in the second half of the fiscal year and warning the eventual figure may be yet less favourable. In December 2010, Barclays tipped GDP to grow 5.7 per cent.
The slowing of tourism and FDI flows also look set to weaken Egypt's external position. Tourism accounts for an estimated fifth of total current account proceeds, and a dip in Egypt's exports -- oil and non-oil -- caused by ongoing labour protests will further pressure the account, thinks Barclays.
Nevertheless, a rise in Suez Canal receipts (up 17 per cent year-on-year in February) and a retreat in imports to Egypt due to a fall in domestic demand leave Barclays to expect a maintained current account deficit of around 2.5 per cent of GDP for this fiscal year. But the bank warns that a worst-case political scenario could almost completely destroy FDI inflows and even cause additional outflows.
Stuttering growth will also affect fiscal revenues, tax and non-tax, with increases in spending adding to pressure. Barclays estimates a revenue drop by 2 percentage points of GDP and reform packages raising spending by some 35 per cent year-on-year.
"Financing the growing deficits is the key challenges," says Barclays, adding that borrowing requirements will most likely need to be met via the domestic banking system. But the banks may be tightening their belts too, given current concern over liquidity, so their ability to relieve pockets of pressure may be limited.
For external financing, Barclays sees few alternatives other than drawing down the Central Bank of Egypt's already depleted foreign exchange (FX) reserves. The earlier accumulation of unofficial FX reserves helped to smooth sell-offs but this buffer has now been eroded, leaving only official ones.
The stock market, which reopened on 23 March after seven weeks, outperformed some analyst's expectations, Barclays still predicts foreign outflows of some US$4-5billion in the coming months.
It might surprise some that the report's main cause for optimism centres on Egypt's current rulers, the Supreme Council for the Armed Forces (SCAF).
Barclays praises the council's "committment to ensuring an orderly transition towards democratic rule" and the "necessary" measures it took to "contain uncertainty and provide some clarity about medium-term prospects".
In economics, of course, stability is often key -- while Egypt may not be changing fast enough for some demonstrators, the presence of a bastion of Old Egypt is normally thought to augur safety.
But even then there are misgivings. Barclay's report questions the decision by the Supreme Council and its appointed government to review several contracts involving large investors from the UAE and Saudi endorsed under Mubarak regime.
This might be, says its report, "sending the wrong signal about the direction the overall business environment in Egypt is taking, despite recent declarations ... confirming their commitment to a free market economy".