Interpreting Middle East Economic News and Analyzing Market Trends

Top 10 reasons why Egypt is headed for economic disaster

Since the end of the revolution in 2011, there has been a lot of optimism on Egypt’s future.  In 2012, Egypt witnessed a democratic election which signaled an end to decades of Mubarak’s authoritarian rule.  The military stepped down and allowed a democratic transition to take place.  For the first time many Egyptians felt hope and optimism that the future will be much brighter for them.  This optimism was felt outside Egypt as well as foreign investors began looking at investing in Egypt.  Middle Eastern investors took the opportunity to snap up Egyptian banks.

This optimism, however, has now faded as the difficulty in transitioning to democracy became apparent.  Since President Mursi took office, things have been going down hill for the country.  Egypt faces enormous challenges, which few are willing to discuss much less attempt to address.  This is why we see Egypt headed for economic disaster.  Here are the top 10 signs that show why the country is facing such an ugly future:

  

1.  With a population over 85 million, growing at 1.9%, and over 50% under the age of 25, Egypt faces a huge challenge in managing this demographic time bomb.  Youth unemployment is already high and will continue to rise every year as the growth of the economy will not keep up with the number of people looking for work.

https://www.cia.gov/library/publications/the-world-factbook/population/EG_popgraph%202012.bmp

Source:  CIA World Factbook

2.  The country is running out of foreign currency reserves and is in need of cash.  The IMF is not helping by strong-arming Egypt into accepting a $4.8 billion loan under poor termsNegotiations with the IMF continue, but in the end, Egypt will accept their terms since they will not have much choice.  Don’t forget, the IMF always gets paid and a country cannot default on the IMF, it has ways of securing assets in countries.  In Egypt’s case, it can take over the Suez Canal, for example, if the country were unable to repay its loan.

3. Growing frustration with the new government is leading to new protests, which are quickly escalating:

4. These protest are turning more violent not only towards the government, but also towards the Christian minority:

5.  As a result, tourism is down and has yet to recover to pre-revolution levels.  The country is dependent on tourism for foreign currency and there is no sign the tourism numbers will rise given the protests and rising violence.

6.  In order to help balance its budget and please international lenders, the country needs to reduce subsidies and raise taxes.  This has caused additional protests and hardship.  Egyptians already spend a high portion of their incomes on food and this is on the rise.

7.  Inflation is rising and the Egyptian pound continues to depreciate.

Chart forUSD/EGP (USDEGP=X)

8. Shortages of food and fuel are beginning to develop.

9. With a faltering economy, businesses and factories are closing.  According to one report, 4,500 factories have closed since the revolution accelerating the rise in unemployment.

 

10. Egypt’s credit rating is already rated “below investment grade” (junk) and is on negative watch.  Once it drops further it will be considered highly speculated and in default territory, borrowing cost will rise exacerbating the stress on the economy.

 

There are no easy solutions for Egypt.  One can only be hopeful that the country can pull itself up in the long-run.  In the short-run, however, things are going to be very difficult for Egypt and its people.