FINANCE & POLITICS: Trouble in North Africa

Tunisian flagGood equity performance may mask deep political problems in Egypt, while tensions remain in Tunisia. Orlando Crowcroft reports.

Two and a half years after Egypt and Tunisia sparked the Arab Spring by toppling their autocratic presidents, the future of both countries remains deeply uncertain.

In Egypt, President Mohammed Morsi is still not close to implementing fiscal reforms to secure a loan of $4.8 billion from the IMF, while Tunisia’s own IMF deal has not completely banished fears that political instability could hamper the country’s recovery.

The political situation in both countries is unstable. Egypt’s Muslim Brotherhood seem increasingly unpopular and a breakdown in order in Cairo makes headlines at least once a week. Meanwhile, in Tunisia, the assassination of opposition leader Chokri Belaid has kept tensions high, as have rising food prices.

The stock market is not immune to the political unsteadiness, but in Egypt analysts say the situation could be worse. Although the Egyptian stock index is down around 10% in dollar terms compared with before the revolution, the EGX 30 index, which measures the performance of the top 30 companies, is up about 20% compared with last year.

The capacity of the index to bounce back has kept investors interested, says Sherif Salem, a portfolio manager at asset management firm Invest AD. Investors may be wary of missing out on rallies such as the one that began in June 2012 and ended with the market rising 38% by November. Another rally, in January this year, was prompted by foreigners buying stocks, including new money from South African investors, he says.

“I think in the back of people’s mind is the thought that you only need some sentiment to change in Egypt for the market to turn. If you get a few decisions taken that are even mildly positive, you could find this market really start to take off,” says Salem.

But positive decisions in Egypt could still be some way away, with analysts now expecting the IMF deal, which would pave the way for donations from the EU, World Bank and the US, to be postponed until after the election. Egypt’s government is understandably wary of austerity measures that would accompany an IMF deal, especially in the face of low economic growth, high unemployment and rising food prices.

“When you look at the strain that Egyptian public finances are under, the necessity of adjustment has never been greater, but the difficulty of implementing them has never been more elevated. I mean, we’ve had no growth in Egypt now for two to two-and-a half years,” says Simon Williams, chief economist, HSBC Middle East, based in Dubai.

The government has also been fighting to defend the Egyptian pound, which plunged against the dollar in the wake of political unrest at the end of last year. In 2010, a dollar cost 5.7 Egyptian pounds, now it costs about 7. HSBC estimates that Egypt’s reserves cover less than three months’ worth of imports and it was reported earlier this year that much of the $2.5 billion given to the country by Qatar has been spent trying to shore up Egypt’s currency.

The expectation that the Egyptian pound could fall further is only adding to the reluctance of foreign investors to come back to Egypt. The IMF estimates that foreign direct investment in the country this year will be at its lowest level since records began in 1980. Both HSBC and London-based research group Capital Economics expect the Egyptian pound to fall to 7.5 to the dollar as the government steps up currency restrictions and limits access to dollars for local companies.

“When everybody expects the currency to fall then people will be reluctant to put money in, because even if you make a return on investment you will still make a loss on the currency depreciation,” says William Jackson, emerging markets economist at Capital Economics.

The situation is rather less daunting in Tunisia, where it seems the government is unlikely to need to use its $1.7 billion in IMF funding, agreed in April. The government is opting instead to fund its budget deficit – expected to be around 5%, according to HSBC estimates – with a US-backed bond issue, a sovereign sukuk slated for July and direct budget support from the EU and the World Bank.

Some would say the Tunisian government has handled its crises better than Egypt. After the assassination of Belaid in February 2013, a new prime minister was quickly appointed and a new government in place within the constitutional deadline of two weeks. In contrast, Egypt’s Muslim Brotherhood struggled to handle a constitutional crisis at the end of 2012 that rumbles on to this day.

“We’ve seen that it is much better for the Muslim Brotherhood to be part of the opposition instead of running the country,” says Salem. “It’s obvious they don’t have the experience, which is causing a lot of problems.”

The Tunisian government has implemented fiscal reforms. In March 2013 it imposed a 1% increase on the highest salaries, raised petrol prices by 7%, increased tax on alcohol
and reduced subsidies on milk. HSBC expects the 2013 budget deficit to reduce as a result, though the bank also warns that fiscal tightening will do little to stimulate weak growth in the country.

Tunisia’s consumer price index, which measures inflation, was at 5.8% year-on-year in February – with food prices up 7.8% – and further subsidy cuts could push that even higher. The repercussions of this will be a key factor in Tunisia’s next general election, scheduled for the end of 2013, in which the Islah (Reform) Front, an Islamist party, is expected to run for office for the first time.

A key difference between the two neighbours, other than size, is that while Egypt has always been dependent on foreign money, particularly in its capital markets, Tunisia has long imposed restrictions on its markets and currency. When the revolution broke out in Egypt in February 2011, there was more than $10 billion of foreign money in the country’s treasury bill market – all of which has now gone. As a result, while Egypt has lost massive amounts of liquidity, the Bourse De Tunis has been stable, even rising slightly in 2013.

“There is good and bad to having your capital markets open to foreign investors. It’s generally a positive thing, but in times of severe financial strain not having foreign money in your system is positive because you don’t see those painful outflows,” says Liz Martins, senior economist at HSBC Middle East.

Looking forward, both countries will benefit from having wealthy patrons. Tunisia can rely on US support for its bond issuances and a rosy relationship with international donors, while Egypt’s friends are closer to home. With loans from Qatar, Turkey and even Libya already forthcoming, Egypt’s size and importance as an Arab power has bought it a great deal of patience in the Arab world.

“It still occupies this geo-political position where ultimately people, Qatar in particular, will in the end stave off a worst case scenario,” says Jackson.

©2013 funds global MENA

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