By Amr Ramadan
Daily News Egypt
CAIRO: Last week the Egyptian stock market witnessed its largest single-day drop in two years when its main index, EGX, fell by 5 percent on Sunday, May 9. Experts ascribed the drop to the Greek unfolding financial crisis, but the reaction of the Egyptian economy as a whole to the European crisis is yet to be seen.
Although the EU and International Monetary Fund said they would provide Greece with a $136 billion bailout, and Athens has announced sweeping budget cuts, there is still a question of whether the Greek debt crisis would spread to other countries, Egypt in particular.
European countries are coming together to stop Greece’s debt crisis causing the euro to slide. The euro dipped to $1.2358 on electronic trading platform EBS on Friday, its lowest position since October 2008.
Omneia Helmy, lead economist at the Egyptian Center for Economic Studies, says that the falling value of the euro to the US dollar is the main cause for alarm.
“The main problem for us could be the exchange rate. As a result of the [Greek] crisis, the euro might continue to fall in the face of the dollar.”
“Since the EU is our main trade partner with regards to exports and imports, such change in their currency will affect our mutual trade.
Ultimately, our exports will be more expensive to European consumers and this will affect our competitiveness in EU markets,” said Helmy.
“Imports from the EU will be more expensive for final and intermediate products as all our transactions are in US dollars,” she added.
Mohamed Taymour, Chairman of the Cairo-based Pharos Holding for Financial Investments, made the same argument in an article he wrote for the independent daily Al-Shorouk.
“The movement of the Egyptian pound in international markets is linked to some extent to the US dollar. The pound is now rising against foreign currencies — especially the euro, the sterling and the Swiss franc — in line with the recent rise of the dollar, despite the high inflation rates in Egypt compared to trading partners,” he wrote. “This might cause the loss of our competitiveness in global markets if this continues.
“Although it is necessary to point out that the relative stability of the currency has led to an increased flow of foreign investment, which is required in all cases.”
According to Reham ElDesoki, senior economist at Beltone Financial, the crisis will not affect Egypt in the short term.
“The Greek debt crisis, while somewhat affecting the foreign exchange market in Egypt, will not, in our opinion, have a significant effect on trade in goods and services with the European Union in the short term, due to several factors,” ElDesoki said in a statement.
“On the overall current account level, we expect the deficit to widen slightly in FY2009/2010 to $4.8 billion, from $4.4 billion in FY2008/2009, as imports growth picks up and exports growth remains subdued.
Improved services receipts and transfers will serve to prevent further deterioration in the current account, due to the widening merchandise trade deficit,” she explained.
Learning from the Greeks
Taymour lauded Egypt’s relative insulation from the Greek Crisis but said that a lot could be learned from it in terms of policies.
“The economic situation does not look like that of the faltering European economies, Egypt is a state that has control of its monetary policies and can tailor them in the manner in which suits [its] own interests,” he wrote.
“Egypt also enjoys the confidence of global financial markets, enabling it to borrow from the world market on reasonable terms as shown in recent Egyptian bond offerings. The domestic debt of 71 percent of national income in the end of 2009 is manageable.”
Taymour suggests the government should learn from the Greek experience and reduce its subsidy bill in order to lessen the burden on the budget.
“It is no secret that the bulk of the deficit is due to the current subsidy policy adopted by the government, especially energy subsidies, which are expected to increase in the next FY2010/2011 to LE 70 billion, which represents approximately 6 percent of national income.”
“What is needed now is to have a clear plan to get rid of energy subsidies gradually over a reasonable period of time with the development of policies necessary to take into account the social dimension and to compensate low-income groups.”
