With this in mind, dozens of international financial institutions issued reports as guidelines to their investors chock-full of their own predictions on Egypt’s recovery. 

 

 

To understand the conditional optimism, its important to analyze the Military Council’s report, which was the first official statement about 3QFY2011/12. The report also included some of the figures analysts and investors depend on when issuing their outlooks.

 

 

Since the revolution started in earnest on January 28, the first month of 3Q was not affected, which is why the report didn’t include January numbers. 

 

 

The most interesting figures are found in February. After all, February saw Egyptian police completely withdraw from the streets, creating a security gap. It was the same month the military took over the role of securing the country’s streets, in cooperation with citizens, and the Egyptian economy ground to a halt (although things did seem to improve slightly toward the end of the month). 

In March, Egypt’s return to “economic normal” began in earnest, albeit slowly. But that soon changed as its recovery gained momentum at the tail-end of 3Q. 

 

 

The Military Council’s report also included Egypt’s internal and external debt levels. Between January 1 and March 31, Egypt’s debt was just over LE 1 trillion. Surprisingly, despite the revolution’s devastating effects, the nation’s debt-to-GDP ratio is still in the “safe zone”, having surged 10% to reach 90% of GDP. Although that number may seem high at first glance, Egypt is known for its large debt ratios. 

The worst news, by far, were the losses experienced by some of the country’s biggest money makers. 

 

 

Tourism, which traditionally represents nearly 11% of the GDP, dropped nearly 80% due to mass cancellations and few new reservations. (Traditionally, Egypt’s main markets for tourism are Europe, the US and Russia.) Adding to the woes is Arab tourists’ reluctance to visit, even though they typically flood Egypt during this time of year.

 

 

On the external economic relations front, investment flows fell to zero from a projected $6 billion (LE 35.75 billion). Moreover, the ever-growing demand for US dollars after banks reopened as foreign investors attempted to exit the country caused Egypt’s International Foreign Reserve to drop $8 billion (LE 47.67 billion) to $28 billion (LE 166.85 billion) from $36 billion (LE 214.52 billion).

Despite these harsh facts, financial experts are predicting a more rosy future for the nation. 

 

 

Two days after the Military Council’s report was issued, Barclays Capital released its report “Egypt: The New Money Star.” The bulk of the report focused on the needs of the current interim government, predictions on growth rates for the current fiscal year and what the recovery period could look like. 

 

 

According to Barclays, the Egyptian government will need $6-7 billion (LE 35.75 billion to LE 41.72 billion), amounting to nearly 11% of Egypt’s GDP, during the upcoming fiscal year to balance the budget deficit. The report’s authors forecast the magic number will hit 10% of GDP. They also stated that Egypt would need another $16 billion (LE 95.36 billion) during 2012 to cope with the country’s deficit the year after. 

 

 

The growing deficit is a result of Egypt’s vanishing current balance surpluses it had become accustomed to over the past three years, due to increases in both domestic and international investment inflows and surging figures generated from several sectors, with a particular emphasis on tourism. The report also attributed the increase in the debt burden to rising subsidies and pay hikes announced in an attempt to absorb public outrage over inflation and deteriorating living standards.

 

 

Barclay’s findings indicate that financial support will not be difficult to garner as the international community still sees the importance of Egypt as a political and economic player in the region. The real challenge will be managing the pressures on the pound’s value, avoiding the depletion of the country’s foreign reserve and liquidity problems that are likely to emerge as the government struggles to address various problems. 

 

 

The report states the key will be the government’s ability to wisely spend the loaned money as opposed to simply throwing money at its problems haphazardly. 

 

 

Mark Franco, an economist and ambassador of the European Union Commission echoed this point during a recent lecture at Cairo University. 

 

 

 

“What helps a developing economy is not how much aid it is receiving,” said Franco. “What really helps is how do you use it. 

The Barclays report stated it was unlikely that Egypt will see a quick recovery of capital inflows, which are essential to boost GDP growth, as long as the security issues persist and continue to dominate headlines. GDP growth is expected to reach 1.7% for FY2011/12 and 3.6% for FY2012/13. Prior to the January 25 Revolution, GDP growth was slated to be between 6% and 7% both years.

 

 

The Bank of New York Mellon released a report on Egypt as well, which included some interesting statistics about Western investment in Egypt, particularly in the Egyptian Exchange. According to the report, the total investment from the region amounts to $5 billion (LE 29.8 billion), the bulk of which comes from the US and Europe. More than 150 foundations are currently investing in Egyptian stocks. Out of that, 15 foundations, which together manage 73 investment funds, are from the US, while another 124 foundations are from Europe. Most of those hail from the UK. 

 

 

Moody’s Investors Services also issued a report that focused on the sustainability and resilience shown by Egypt’s banking sector. However, it did flag concerns about the exposure of state-owned banks to government debt. It also noted concerns over sovereign bonds offerings, which it states constitute 35% of the banking system’s assets. As of March 31, the total offerings had reached LE 451.4 billion.

The report stated that these factors do not necessarily apply to private banks, which do not have the same level of exposure to government debt. Instead, the concern for private banks involves challenges they face in operating in a politically unstable environment.

 

 

The authors of the report state private banks will face an environment of limited-lending opportunities due to the economic slowdown, which is unlikely to encourage investors to expand their businesses or invest in new projects. 

 

 

Moreover, private banks are also facing a higher risk of loan defaults, particularly in the retail banking sector. Moody’s said there is an increasing probability of non-performing loans as retail clients may be unable to make payments on time. The report notes this pattern has already started to appear, resulting in extra provisions being taken by banks, which will put further pressure on their net profits.

The report concludes that the economy and banking sector are unlikely to stage a sustainable recovery as long as the political instability continues. bt