Several elections in the Middle East and North Africa in the latter half of 2010 and succession issues in a number of key countries have been keeping investors guessing. RGE pointed this out in a recent MENA Focus, available exclusively to clients: “Political Cycles Bring More of the Same?” In Egypt, for example, although the National Democratic Party (NDP) has a solid grip on power, the election cycle is adding to policy uncertainty that could worsen prospects for the foreign investment needed to kick-start domestic investment and diversify growth away from consumption. As RGE notes in its 2011 Global Economic Outlook, policy implementation delays in Egypt could add market volatility and restrain inward FDI as investors monitor the country’s political risk.
Egypt’s parliamentary elections took place in late November and early December, and, as expected, the NDP secured the majority of votes. Candidates of the opposition Muslim Brotherhood were again banned from running as a party and lost the seats they contested. Ahead of the second round, two of the biggest opposition groups – the Muslim Brotherhood and the Wafd Party – pulled out of the elections.
These results aren’t shocking, but the fact that the government is no longer trying to woo opposition leaders into the government does present some concern. If opposition parties become more radicalized, it could be an additional concern for Egypt, particularly as the move comes ahead of next year’s presidential election. Some, including Mohammed ElBaradei – formerly the International Atomic Energy Agency chief – called for the opposition to boycott the parliamentary elections even earlier, but many believed that there was too much at stake given the parliament’s role in domestic affairs. However, the low voter turnout at the parliamentary polls could extend into the presidential elections. Incumbent President Hosni Mubarak has announced
his intentions to run in what will be his sixth contest, and we believe he will win.
Even though RGE does not expect a regime change, policy uncertainty could add volatility to asset markets, lower trading volumes and deter potential investment until the election cycle is clearer. Lured by growth prospects in Egypt and throughout the MENA region, however, portfolio inflows continued in the weeks ahead of the parliamentary elections, helped by quantitative easing. We believe that the succession issues in Egypt will not be resolved before the elections, and there are risks of disruptions. Mubarak’s death could begin a period of considerable uncertainty before the situation stabilizes.
The election period will constrain the implementation of planned fiscal consolidation as populist measures swell the deficit to above 8% of GDP. A reduction in subsidies of key food staples will be nearly impossible, and planned new taxes will be delayed. Egypt’s debt levels remain manageable in the short term, in part because of strong growth rates close to 6%, but consolidation is a midterm necessity.
Moreover, policy uncertainty could affect specific sectors. In September 2010, Egypt’s high court confirmed a restriction on a 2005 land purchase by one of Egypt’s biggest property developers, Talaat Moustafa Group (TMG). The US$3 billion sale was ruled not to have been publicly auctioned, as was required by law. This decision against such a market-dominant player roiled Egypt’s stock market in mid-September, as shares of real estate developers led the market down.