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Egypt's Finances Worse Than Feared?

posted 8 Jul 2013, 09:21 by Mpelembe   [ updated 8 Jul 2013, 09:22 ]
Reuters Business Video Report - Escalating violence in Egypt.

At least 51 people were killed in Cairo on Monday, as the country's political crisis intensified.

The continued turmoil on the streets also shook Egypt's main share index.

Investors had initially cheered President Mohamed Mursi's departure - but stocks lost some of the previous week's gains, falling around 3.5%.

Within Egypt, there are growing fears the country's public finances may be worse than previously estimated.

Ahmed Heikal is Chairman of Citadel Capital and is based in Cairo.

 Ahmed Heikal, Chairman, Citadel Capital

"You have a budget deficit this last year of 240 billion pounds, which is close to 12% of GDP. And next year, if nothing is done, I think we are looking, we are staring in the eye of 320 billion pounds, which would be approximately 15-16% of GDP. Numbers that cannot be sustained, especially when you are starting from a debt to GDP level of around 100%."

The central bank has burned through two-thirds of its cash reserves in defending the Egyptian pound since the start of 2011 when former ruler Hosni Mubarak was removed and foreign investment dried up.

The reserves are needed to pay for imports - and Egypt currently doesn't have enough funds to pay for three months' worth.

Local media say Cairo is seeking financial aid from Gulf states.

 Ahmed Heikal, Chairman, Citadel Capital,

"The Governor of the central bank is today in Abu Dhabi. Saudi for sure, the king has called our president and promised a lot of financial aid and I am sure they will follow through. Kuwaiti will do the same and the Qataris will come maybe for a different reason, they want to be perceived as helping Egypt, and not having been aligned specifically with the Muslim Brotherhood."

Egypt may also have to turn to the IMF, in the hope of securing a $4.8 billion loan deal.

But even with that cash - structural reforms are seen as essential.

 Ahmed Heikal, Chairman, Citadel Capital

"We should not have this aid from the Gulf take away our eyes away that we need the structural adjsutment programme to take place, otherwise we will wake up in a couple of years', or a year-and-a-half's time, after the money is gone and with a much bigger problem."

Any reforms will have to be introduced gradually - as they are expected to be highly unpopular.

The key to getting the economy back on track will be ensuring stability quickly.

And the longer the violent clashes continue, the more tourists will be detered from visiting, an income stream Egypt can ill afford to lose.