Egypt: between fear and hope

In the longer term, the developments could prove to be a step towards more stable political relationships in the region. This would be to the benefit of economic growth. It is hoped that the countries will follow the same path as Turkey. That country is an example of how an autocratic, army-backed regime can evolve in a more democratic direction.

That does not alter the fact that both the short and the longer term are surrounded by very many uncertainties. It is obvious that rising food prices, poverty among large sections of the population and autocratic government have become sources of great unrest. Assuming that the unrest in Egypt does not become structural in nature, the country’s considerable economic potential will remain unaffected.

Egypt’s economic strength

Egypt is one of the few countries in the world that has been barely touched by the credit crisis. Even without much global growth, Egypt is capable of generating annual growth of 5% to 6%, thanks to its powerful domestic growth engines. With large numbers of the population under 20 years old, the demographic situation continues to give a significant boost to the economy. Each year 650,000 young Egyptians enter the labour market and the number of households increases by 250,000. Because of the Suez Canal, crucial to the transport of crude oil, Egypt also occupies a strategic geopolitical position.

Great sensitivity to rising food prices

Egypt’s weak point is that, despite the fertile Nile delta, it is a major food importer. Mounting food prices were the initial trigger for the protests in Egypt, as they were in Tunisia. A large proportion of Egyptians live below the poverty line. Rising food prices therefore have an immediate impact on the degree to which many people can provide themselves with the basic necessities of life. The government has so far attempted to mitigate the pain of higher food prices with subsidies, but high budgetary deficits are limiting its room to manoeuvre. Because of Egypt’s dependence on the global food market, inflation is hovering around the 10% mark.

Possible contagion to other countries

With regard to possible contagion, the first countries that come to mind are Algeria, Yemen and Jordan. The problems of those countries are roughly the same as those of Tunisia and Egypt, i.e. wide differences between rich and poor, high unemployment and autocratic regimes that fail to take sufficient account of the needs of the people.

The crucial question is naturally whether the unrest will spill over to Saudi Arabia. Oil prices are already under upward pressure from the developments in the region. Unrest in Saudi Arabia, the world’s premier oil exporter, could lead to a new oil crisis that would be felt worldwide. Higher oil prices would force up food prices in North Africa further, creating a negative spiral. At the moment, we assume that Saudi Arabia will escape that unrest.

ING emerging markets equity funds

 ING (L) Invest Middle East & North Africa (MENA)
At the moment 11% (= underweight) of the fund’s portfolio is invested in Egypt. The fund’s equity selection is focused on companies with good prospects and whose management decisions are based on commercial considerations. Government bodies such as ministries and the army traditionally have large interests in Egypt’s economy.

ING emerging markets debt funds: Egypt – general views

Economic growth will be curtailed by the unrest. Egypt however is unlikely to run into any foreign exchange problems. The balance of payment has been healthy over the past decade, with diversified foreign exchange earnings coming from Suez Canal, oil exports and tourism revenues. The expected drop in tourism revenues will not pose any immediate problems. Egypt has a relatively small amount of external debt outstanding and ample FX reserves compared to the stock of debt.

 Emerging Markets Debt in Hard Currency
ING (L) Renta Fund Emerging Markets Debt (Hard Currency)
Increased political risk warrants higher spreads on the country, spreads have gone from around 200 bps to around 400 bps. Yet with a good creditworthiness as a starting point, the political uncertainty is very unlikely to translate into payment problems.
In ING’s EMD HC funds we have a slight underweight on Egypt, which represents 0.8% of the EMBI Global Diversified benchmark.

 Emerging Markets Debt in Local Currency
ING (L) Renta Fund Emerging Markets Debt (Local Currency)
In this fund we have no positions in Egypt as well as no positions in other Arab countries.

 ING (L) Renta Fund Emerging Markets Debt (Local Bond)
In this fund we have a clear underweight in Egypt (0.09% versus a benchmark weight of 0.23%). No other positions in the Arab world.