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from Monday over on TalkMarkets: http://www.talkmarkets.com/content/global-markets/egypt-devaluation-the-inevitable-finally-happens?post=111819

11/7 – Though no one was outwardly surprised by Egypt’s shift last week to a flexible exchange-rate regime – ~16.75/USD Monday from an 8.88 peg the central bank had maintained since March (following a 13% devaluation, at the time the largest slide since 2003) – the EGX30 has nevertheless added nearly 15% since Thursday as punters priced in a CBE paradigm shift that effectively unwound tightened monetary effects that dollar pegging wrought since the end of the Fed’s QE roughly two years ago (though pound appreciation against a basket of currencies began up to a year earlier).  For a country whose BoP is defacto dependent on private remittances and external (GCC and IMF) largesse (the former, namely Saudi Arabia, has hitherto buttressed FDI, while the latter is now expected to extend a roughly $12bn loan given both the devaluation and a corresponding 47% rise in fuel prices) “free currency” is seen by pundits as a welcome first step to help the import-dependent nation become more dynamic against a backdrop of ever-dithering trade and tourism (two primary pillars of hard currency).  Since 2010 Egypt’s FX reserves have roughly halved from a peak of ~$35bn (around half a year’s worth of import cover).  And interim “capital controls” such as deposit caps only supported black market premiums which importers increasingly bid to maintain production at capacity but which in turn further depressed the amount of remittances finding their way through official channels (~10% per former CBE Governor Hisham Ramez).

What’s next then for Egypt’s economy?  Though devaluation and already in-place tariffs (note some tariffs are to be cancelled) certainly favor domestic over foreign goods, short term inflationary effects—especially food prices—shouldn’t be dismissed (Arqaam Capital eyes ~18-20% by year-end, a peak of ~22-24% next year vs 14.1% in September) and will likely require at least short-term  targeted subsidies (especially since certain industries—such as retail—will feel the brunt of shrinking imports (although commentators point out that ~90% of imported consumer goods were being hitherto purchased at black market rates).  As EFG Hermes, an investment bank, mentioned in its research note to clients over the weekend, the accompanying 300bps increase in interest rates will drive system liquidity and incentivize carry trade investors, but also theoretically raise borrowing costs.  That said, it noted, companies as a whole are not highly leveraged and the supply side related inflationary forces are, at the margin, more one-off than secular given weak domestic demand.  Banks remain cheap, for instance (<1x p/b), given resilient corporate loan books, declining NPL ratios YTD and high capital adequacy ratios which should help assuage fears that CBE regulations to increase bank lending to the SME sector over the next four years by ~$25bn USD (roughly a quarter of total sector loans) could impinge on asset quality.  Small cap banks in particular remain a solid bet on Egypt’s newfound top-down, bottom up economic vision, especially given recent CBE instruction regarding reclassification of bond holdings.  Otherwise, export-focused firms and/or those with inventory cover and pricing flexibility (Heremes cites Eastern Tobacco, specifically) should prove solid, asymmetric ways to add Egyptian exposure.

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Though still up by over 40 percent YTD, Egypt’s benchmark equity index looks ripe for a near-term correction—a thesis we’ve put forth in recent weeks primarily on the back of the country’s wobbly and inadequate external financing state which we estimate should continue to strain borrowing costs, adding stress to the country’s terms of trade while  further crowding out private borrowers before it is resolved.  Adding to our concern are possible negative feedback loops emanating from the country’s financial sector and its repercussions on growth and fiscal performance.  A newly released working paper from the IMF[i], for instance, details “significant links between emerging market banks’ asset quality, credit and macroeconomic aggregates” while specifically pinpointing a reversal in [gross rather than net] bank related and foreign portfolio and bank flows [and not FDI] as the most statistically relevant (i.e. highest R-squared correlation) independent variable considered upon which asset quality (NPL/total loans) depends.  Ensuing growth contraction, weaker terms of trade and depreciating nominal exchange rates ultimately can negatively impact balance of payments (as well as possibly the feedback channel on investment, per the authors, given “new orders for capital equipment [would be] more expensive in an environment of deteriorating private sector balance sheets”).

The IMF’s findings echo a rather ominous assessment of the Egyptian bank sector from Moody’s last November wherein analysts noted in the midst of various downgrades that “although data published by the Central Bank of Egypt (CBE) points to lower non-performing loans for the system as of June 2011 . . . these figures benefit from the CBE’s directive allowing different NPL classification rules for retail and tourism loans for three and six months, respectively, after the January 2011 revolution . . . [and we] expect that the full extent of asset-quality issues will begin to emerge in the next few quarters…”  To wit Commercial International Bank (CIB), Egypt’s largest private creditor by assets (third overall) and one of five institutions whose local and foreign-currency deposit ratings were slashed last fall, disclosed in its recent full-year 2011 earnings report that while its NPL ratio stood at 2.8 percent (up slightly from 2.7 in 2010 but in line with historical averages and well under the GCC mean since Egyptian bank loan books are underexposed to the riskier retail sector in comparison to GCC peers) the absolute number rose by over 20 percent y/y.  Taken in tandem with the fact that foreign currency deposits across Egypt rose by 14 percent (an implicit red flag on future asset growth given said deposits must be channeled to foreign currency loans per law) while provisions leapt from LE6mn to 321mn over that same period and one may reason that NPL ratios could indeed be under some strain in future quarters given that net capital flows (as discussed last week) slackened considerably since last July (and are estimated to reach nearly USD6bn FY11/12) while the aforementioned dollar deposit figure grew—suggesting a similar trend for gross flows.  Moreover, per the IMF’s capex hypothesis, investment has been a detracting headwind on GDP since early 2011 as real GDP, which averaged ~4 percent annually in the years pre-revolt now struggles to remain above flat.

Note: Where might the EGX be headed?  Simple Fibonacci analysis would indicate that because the index failed to retrace even past its .5 retracement (vis a vis the three-year, 2010 high versus the December 2011 low) a broader, secular downtrend remains in tact.  Moreover in the short term a weekly close <4300 would indicate that a lower-low from December is likely impending.  We expect, however, that a 10 percent correction from today’s levels (~5080), particularly if combined with positive macro and/or geopolitical developments will be well received by investors and offer an impetus for strategic longs to gain traction). 


[i]  De Bock, Reinout and Demyanets, Alexander.  Bank Asset Quality in Emerging Markets: Determinants and Spillovers.  IMF WP/12/71.

This piece as well as past Maghreb commentaries (as well as weekly sub-Saharan Africa analysis) can be found at: www.alterioresearch.com

Last week’s Alterio report initiated Maghreb as well as SSA-focused analysis:

Our initial report on Mashrek Maghreb macro conditions comes at an increasingly sensitive time for the region’s economies as roughly one year following a seismic ‘Arab Spring’ lead shift within the culture’s broader civic paradigm the need for political and economic synergy remains as critical as ever to achieving lasting, viable stability and growth given a stark dichotomy between the need to address high unemployment, social inequality, tax reform and subsidies versus the need to maintain fiscal discipline as well as secure financing against a dim backdrop of ever-deteriorating EU demand (EU imports of Moroccan goods grew 7.8 percent in 2011, for instance, down from 19.8 percent growth in 2010), largely uncompetitive export baskets and food/fuel dominated (i.e. price taking) import ones.  As we touch upon in this initial commentary, however, there exists within the region—and moreover the broader Middle East at large—a convoluted catch-22 whereby, as described in a recent research note (see citation) the “need for regional economic linkages across the Arab world” sits in direct contrast with “political incentives of Arab elites [that] are not fully aligned with opening regional markets” and by extension helps nurture a fragmented economic model which seems to particularly effect [in terms of total share of merchandise exports as % of GDP] resource-poor, labor abundant countries such as Morocco, Tunisia and Egypt.[i]

The resulting chill on private investment further exacerbates the aforementioned EU macro squeeze and places a greater premium on [and cost to] external financing.  The latter element refers to an ongoing [region wide] balance of payments dilemma which will demand continued attention from investors in the coming year given trending declines since 2009 in respective capital accounts (admittedly most acute in Egypt where FDI fell by over 50 percent in 2011 to just over $USD2bn and portfolio flows saw a similarly marked collapse) and weakening trade balances intensified by subsidized, sticky domestic demand (most notably the oil import bill which at ~9 and 7 percent  of GDP in Morocco and Tunisia, respectively, is uncomfortably high), a strong correlation to Eurozone growth (more than 88 and 80 percent of Moroccan and Tunisian exports, respectively, go to the EU) and in Egypt’s case a projected gradual depreciation of the EGP (though we do expect the CBE to exert a generally tightening monetary bias over the course of the year while also promoting repatriation of foreign assets and generally tightening liquidity in the domestic banking system to retain deposits) given a dangerously low import cover that has fallen from 6.2 months to 3.7 months since last summer and threatens to further chill capital flows given omnipresent domestic political uncertainty, highlighted most recently by the High Administrative Court’s declaration that the voting system used to elect a new parliament last winter was unconstitutional—a decision that in turn could derail not only a new constitution, but May’s planned elections and an ultimate transition from military-to-civilian rule by year’s end (not to mention potentially jeopardize roughly $4.2bn aggregate in aid requested from the IMF and World Bank)

To this end Egypt’s funding predicament gives us the most pause given the ramifications on the state’s cost of borrowing (evidenced by recent 3-year debt auction yield widening), even though [considering in part how important its export market is for a number of countries] the country scores comparatively higher per both our Contagion Score and Original Sin metrics and also saw a healthy rise in both remittances and Suez Canal receipts during the latest quarterly report which is reserve positive.  In light of said ambiguity we plan to continue to monitor official donor’s medium-and long-term lending figures as a proxy to gauge any secular turnaround in creditor sentiment.  We also remain cautious about equity valuations at current levels; despite a near 46 percent rebound in 2012, we fear the state’s crowding out of private sector borrowing and the ramifications on growth leave future cash flows vulnerable.

[i]  “The economics of the Arab Spring”, OxCarre Research Paper 79, Department of Economics, Oxford University, December 2011.

Aside from the need to hold [parliamentary] elections later this fall, enact a council to draft a new constitution, elect a new president and then form a new government–all while managing an ever-simmering divide between sectarian and secular parties and also redefining its geopolitical role (a recent rapprochement with Iran, for instance, along with the notion of curtailing historically below-market natural gas shipments to Israel have the region’s moderates in a flux)–the most pressing issue underpinning valuations in Egypt centers around the country’s financing needs and specifically the stability of FX reserves and by extension portfolio flows.  In a recent research note Barclays analysts remarked that the country’s total production index (a function chiefly of manufacturing, construction and tourism) was down by 25.3% and 22% y/y in January and February and forecast that resulting pressures on fiscal and current account deficits (total state revenues for the nine months to date, fiscal year, are down 5%) could bring Egypt’s gross fiscal financing (i.e. fiscal deficit + debt amortization) needs to 36% of GDP–though much of this is held by local banks who can be expected to rollover debt holdings.  Equally troubling is the fact that although imports are down 15.4% y/y, inflation continues its ascent: March and April headline inflation rose 11.5% and 12.2% y/y, respectively, up from 10.8% y/y in February, and an average of 10.5% over the past year, driven primarily by fruit and vegetable prices but also exacerbated by a deflating currency and wage hikes and subsidies (the latter account for over half of public spending, “limiting the government’s room to manoeuvre in terms of immediate cuts to current expenditures” per analysts).  Nevertheless the expectation of an IMF-World Bank lead lifeline should be adequate and implementation will theoretically place a ceiling in investors’ eyes regarding liquidity risk and hence encourage foreign investment.  Barclays concluded, for example, that the “availability of larger reserve positions – something the IMF and neighbouring Arab countries can help with . . . will go a long way in reassuring investors that Central Bank reserves are enough to cap any significant EGP depreciation pressures and help reduce concerns surrounding the fiscal risks – both in terms of reducing the cost of financing and lengthening its maturity structure, as well as easing the medium-term liquidity burden on the local banking system.”  Ratios to keep an eye on regarding the success of this venture are the country’s overall deficit (estimated to be about 11.4% of GDP by June 2012 versus a pre-revolt estimate of 7.9%), and public debt-to-GDP (~77.9% of GDP compared with 72.8% at end-June 2010).  In the meantime, while capital inflows back into the bond and equity markets are likely to remain subdued, per observers, now might be the time to start thinking about a bottom: arguably sticky institutional foreign money accounts for the bulk of remaining portfolio holdings and the EGX30 now has roughly two months of stable performance under its belt since the March reopening.

MENA CDS activity of late is eerily reminiscent of the risk “contagion” caused by investors questioning Dubai’s debt-servicing capabilities in late 2009 when [irrational] fear spilled-over to Abu Dhabi as well even though the latter’s fiscal integrity was never seriously in question, a fact later confirmed when it underwrote a bailout.  But if such objective measures are largely ignored in the market of default probability perception, perhaps it should come as no surprise that more nuanced, subjective ones such as the differences between the historical, social and economic dynamics of say, Saudi Arabia versus Egypt, also fail to be carefully analyzed.  Even The Economist’s latest stability rankings, for instance (see chart)–the result of ascribing a weighting of 35% to the share of the population that is under 25; 15% to the number of years the government has been in power; 15% to both corruption and lackofdemocracy indices; 10% for GDP per person; 5% for an index of censorship and 5% for the absolute number of people younger than 25–seem inadequate.  An accompanying piece, for instance, notes that in Saudi Arabia (whose marginalized Shia population is, unlike in Bahrain, a relative blip) the unity of unrest seen elsewhere may be structurally unlikely: “Building an opposition movement is difficult in Saudi Arabia.  [While] grievances are plenty: about living standards, poor schools, lack of jobs, the government is adept at using repression, propaganda, tribal networks and patronage to divide and weaken any opposition.  Middle-class liberals are wary of democratising steps that might give more power to anti-Western Islamists.  State-backed clerics have denounced the Egyptian and Tunisian protesters, and issued fatwas against anything similar in Saudi Arabia.  Only in the [admittedly oil rich] eastern province—home to a large Shia population—is there much tradition of protest.  But community leaders there are cautious, and desperate to avoid any accusations that they are a ‘fifth column’ for Iran.”  Barclays too notes that addressing how immediate tensions in the region may unfold is at least partially dependent on a given military: “Bahrain’s military is almost entirely composed of Sunnis and there is a significant foreign element in the ranks as well. Hence, they may be more willing to brutally suppress dissent than their Egyptian counterparts and the regime may not be as concerned about possible splits within the officer corps,” it wrote to clients.  That said, perhaps such “nuance” is just noise from the collective market’s point of view.  The real concern for Saudi Arabia may not be the emotional state of its Shias but rather the physical soundness of the 18-mile-wide strait Bab el-Mandab.

I maintain that the underlying impetus driving the coup in Cairo relates principally to the price of food and specifically to that of wheat (Egypt is the world’s biggest importer); while certainly the littany of grievances in Egypt touched upon poverty, unemployment, cronyism, corruption and an overall lack of legitimate political opposition, as The Economist noted back in 2005 “Egyptians have tended to shrug off electoral shenanigans and police hooliganism as part of their lot.  [Decades] of one-party rule, mostly under martial law, have left the country socially atomised and sceptical of even the possibility of effecting change.”  Wheat price volatility, by contrast, is a fairly new but increasingly sinister phenomenon (the rolling standard deviation of percentage changes in the price over twelve months has trended up from about 5% during the 1980s and 1990s to about 15% today; see chart left), especially for a government whose fiscal deficit as a % of GDP has consistently widened over the past few years in an effort to subsidize costs and thus somewhat neutralize per capita inflationary effects on the average citizen who devotes roughly forty percent of his income to food (bottom right).

With shrinking world food supplies in the near-term, increasingly unpredictable weather patterns and the expected secular rise in Asian food (and specifically meat) consumption one may question to what degree this dynamic is priced into budget projections (i.e. for Arab policy makers set on further subsidies), the yields demanded by creditors or even sovereign default protection.  Barclays wrote today for instance that Egypt credit spreads “rallied following the announcement of President Mubarak stepping down, with 5y CDS tightening to about 320, a level not seen since the beginning of the protests on 25 January.  Investor perceptions of a potentially improved longer-term outlook for Egypt (in terms of social stability) in a post-Mubarak era may continue to support momentum for Egyptian spreads to tighten at this stage.”  The contention here, however, is that social stability and fiscal/food policy is hopelessly intertwined, in Egypt and elsewhere.  Yet even putting aside the vexing conundrum of who or what exactly will now follow in Mubarak’s footsteps, the interim period is not likely to be kind for fiscal prudence (increased spending is correlated with social unrest) and thus inflation, which at 10.8% y/y already trumped consensus.  Barclays, for one, advises clients to “scale back into short credit positions” on any further spread tightening.

Egyptian-American and Pacific Investment Management Co. Chief Executive Mohamed El-Erian on CNBC Monday:

“How Egypt evolves in the next few days and weeks matters a great deal — and not just for Egyptians but also for the world economy. It matters in ways that are unusual and, for many, unfamiliar.  Unlike China, Egypt is not a major source of global demand nor is it a major exporter. Unlike commodity-rich countries, Egypt does not directly influence world prices. But Egypt is a critical enabler and, as such, indirectly touches many other nations.  With its control over the Suez Canal, Egypt is a major gatekeeper of global trade. Even more important, its role and standing in the Middle East makes it a critical participant in promoting geo-political stability in an area prone to volatility.  Where the country goes from here will have an impact on the wellbeing of the global economy and stability of the world’s financial markets. In analyzing this, there are four things to remember.

First, the concept of so-called managed change, or what some people in Washington are calling orderly transition, is critical. Everyone, including the Egyptian government and opposition movements, agrees that the country cannot simply reset to where it was seven days ago; and all wish to avoid chaos. But they differ widely in the meaning of change, and the associated journey. As such, Egypt needs a mechanism to reconcile very different views of managed change.  Second, it matters how the opposition evolves from here. Their vocal protests must now be channeled into an actionable and detailed, forward looking agenda. This is critical not only for Egypt’s internal stability. It is also essential to counter concerns outside Egypt that what is unquestionably a secular movement could be hijacked by theocrats.

Third, Egypt is not helpless. It has solid economic foundations, large international reserves and minimal external debt. More importantly, the armed forces are respected and liked by most citizens. The military understands what is at stake. In contrast to many other developing, the armed forces, if asked, can help facilitate economic and political reforms, including free and fair elections.  Finally, while the instability in Egypt is being driven mainly by internal factors, it would be foolish to ignore external contributors. Egyptians are feeling the pain of surging commodity prices and food inflation. This problem will become more acute as some other governments around the world boost their stockpiling of foodstuff to guard against social unrest.

No one can predict what will happen in Egypt. The situation is unprecedented, and there are many moving pieces and legacy issues in play. My gut tells me that, over the next days and weeks, the country will find a way to manage change. And whether my gut is right or not, governments around the world would be well advised to draw lessons from these historic events.”

File the above, perhaps, under the “new normal” for global food prices, i.e. yet another reason (a hedge against social unrest) that demand and supply fundamentals across many-to-most agricultural softs will remain dislocated for the appreciable near-future.  Also pay close attention to the relatively new Egypt ETF.  The multiple gaps coincided with a huge swing in volume last week.  A return to its 200MA may be a positive sign to begin building new positions, while breaking the 50 day on strong volume (while closing somewhere above 20; look at that first initial gap as a resistance point going forward) and perhaps news of a newfound coalition would be a bona fide green light.

The protest-induced EGX30 plummet–Egypt’s stock index is now down 21% in two weeks after hitting a nineteen month low today–and corresponding 150bp spike in the yield sought by sellers of default protection (now 390 from 240 pre-Tunisia) is a sign, per Citigroup, that “the risk premium that investors require to hold Egyptian assets is likely to remain higher than it was.”  That said, from an investor’s point of view the current kerfuffle in Cairo, Alexandria and Suez (among other cities and towns) threatens to mask an underlying macro story whose forward progress hitherto (see statistics, right) and future potential remain as bright as the lack of political certainty is now gravely dim.  To that end, one observer noted, “the private sector in Egypt today is the largest employer in the country,” opining that this very state-detachment may in time help fuel the continued rise of “a lower middle class that maybe in five to ten years, assuming growth rate continue at a decent level, can graduate into … a middle class.”  Yet issues of rampant sectarianism and the effects of a chronically neglected educational system loom and act as a legitimate hindrance to the possibility of Egyptians, in the words of one author, “res[uming] their historic role as cultural and political trendsetters.” 

Nevertheless the FT writes today that the ultimate legacy of this latest bout of Arab unrest may just be the demise of tawrith, or inherited rule.  This shouldn’t necessarily come as a surprise:  The Economist noted last summer that “Egyptians may be renowned for being politically passive, but the rising generation is very different from previous ones. It is better educated, highly urbanised, far more exposed to the outside world and much less patient. Increasingly, the whole structure of Egypt’s state, with its cumbersome constitution designed to disguise one-man rule, its creaky centralised administration, its venal, brutal and unaccountable security forces and its failure to deliver such social goods as decent schools, health care or civic rights, looks out of kilter with what its people want.”  But what it does point to is a drawn-out resolution since “Egypt’s security forces, better equipped and trained than Tunisia’s, can probably crush the protests…but the government is already under pressure from Western allies to enact democratic reforms.” 

With the aged and ill-Hosni Mubarak on the way out, his son Gamal’s once-certain succession suddenly in question (allegedly several key military members were against him from the beginning), and the Muslim Brotherhood unacceptable to many (including Western donors), only Mohamed El-Baradei, the Nobel Prize winning former UN civil servant who headed the International Atomic Energy Authority, remains, though constitutional hurdles have made the possibly of his ascent hitherto impossible.  Add to this the seemingly neverending inflation story (yearly inflation from Dec 2009 to Dec ’10) averaged 11.1% y/y, the highest rate among MENA countries), which stands to get worse before it gets better due not just to government-mandated wage rises, but also to bread subsidies which are due to get more expensive since (per Barclays) “the global wheat balance has tightened in recent months as adverse weather conditions have lowered production prospects, especially in high-quality wheat grades.”  All of this throws a wrench into market bottom-feeders, though on a long and liquid enough timeframe the issue may be moot.  Myriad quality names–Egyptian Telecommunication, Commercial International Bank of Egypt and Orascom Construction, Elswedy Cables Holding and Al Ezz Steel Rebars, for instance–remain the foundation of a growing, diversified economy with tremendous upside potential.

Egypt’s real GDP will expand by 5.1 percent this year and likely between 5.7-6 percent in 2011 according to analysts, though at least two concerns loom: (i) fiscal decline exacerbated by both political uncertainty (i.e. cryptic succession plans and Muslim Brotherhood-inspired social unrest) and rising inflation (core is beyond the central bank’s unstated 6-8 percent comfort area, per Credit Suisse, while headline also markedly outpaces the MENA average) that tends to manifest itself into both government supported wage and subsidy growth; and (ii) deterioration in the current account (fueled in part by the aforementioned stimuli as well as softening Western demand, which accounts for 30% of the country’s export markets).  International investors, it seems, are stuck in a wait-and-see period–the FT noted in mid-December, for instance, that the country’s MSCI index noticeably lagged the EM index’s YTD performance (2.7 versus roughly 9 percent) while Barclays wrote to investors that “FDI flows–historically the most significant component for capital inflows–remain lower than pre-crisis levels,” while J.P. Morgan noted that volatility in portfolio flows (Net foreign holdings of Egyptian T-bills stood at $9.2 billion in mid-October–compared with $530.4 million in December 2009–before selling off in response to a currency drop off that could have more room to fall if either or both of the two most cited reasons underpinning it (i.e. the central bank’s accommodation for exporters and/or the public’s anxiety of life post-Mubarak, who’s been in power since 1981) hold water.  “Without the more sticky support from FDI inflows, this volatility will likely feed into the financing of the CA,” Barclays warned this month, while concurrently suggesting selling overvalued Egypt 20s and buying Qatari Dinar 20s in the short-term as the pair’s typical 100-150bp spread had converged to parity.  Long-term, however, the story behind Egypt remains one of growth: the FT wrote that “while many neighbouring bourses are buoyed by hydrocarbon revenues…the EGX’s potential is underpinned by a less volatile asset–Egypt’s 80m consumers, many of whom are rapidly becoming wealthier.  moreover, the stock market is the best regulated bourse in the region, bankers and fund managers say.”  Yet ideologically the country is still far enough removed from what most economists would theoretically like to see (and arguably what the country absolutely needs to keep pace with the annual 650,000 new job seekers, as well as to chip away at a 40 percent poverty rate) for some investors to feel truly comfortable.  Widening gross public debt, for instance, has socialist roots, while food and energy subsidies not only hinder stability but also “crowd out priority spending on social and infrastructure needs,” per the IMF.  And without true reform in these and other areas such as the press and legitimate political opposition groups, religiously themed or not, Egypt’s $20bn a year in FDI vision may be far-fetched.  That said, even putting aside larger issues such as price stability and poverty–less radical improvements such as increased corporate and retail lending (the former of which admittedly hinges largely on the lack of proper financial auditing) could provide the economy with enough cash to either help spur greater reform or at least deemphasize foreign cash flows.

Interesting special report in this week’s Economist on Egypt, ranging from the country’s “natural advantages” to speculation regarding the eventual Presidential successor to the 82 year old and “visibly ailing” Hosni Mubarak.  In regards to the former, aside from fertile land (though desert takes up 95% of it) that it has used to grow its agriculture, mineral and hydrocarbon industries, Egypt’s “Suez Canal has provided a steady stream of revenue, against little outlay, by providing the shortest shipping route between Europe and Asia. Constantly widened to accommodate the growing size of vessels, the canal can now handle all but fully laden supertankers and giant bulk carriers. Revenues doubled in the boom from 2002 to 2008, hitting a record $5 billion that year. After a slump in 2009 they have started to climb again and look set once again to exceed $5 billion this year.”

   

Moreover as the above charts indicate, Egypt’s economy–once the victim of high taxes and state managed, central planning–continues to mature while public debt has fallen and foreign investment rises.  Additionally, robust domestic demand cushioned the effects of the global credit crunch, a promising sign if developed economies in fact embark on a prolonged flirtation with slow inflation.  And with roughly 40% of the 83m plus of its burgeoning population under the age of 18, the seeds for Egypt’s continued growth and consumption are in place, assuming policies to remove a startling number out of poverty are achieved.

One particularly enticing industry for investors is cement, of which Egypt is one of the world’s bigger producers.  Earlier this week Egypt’s Suez Cement group, the country’s largest listed cement maker by market value and a unit of the Italcementi group, reported a 4.8 percent increase in net sales to 3.4 billion pounds.  The firm supplies approximately 26 percent of Egypt’s market for grey cement and 42 percent for white cement.

JGW

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