Egypt's Uncertainty Leads to Investor Angst

Frontier market investors like Paul Herber, manager of the Forward Frontier Strategy Fund, are monitoring the situation in Egypt very closely.

Thus far, the mayhem in Egypt that began with the ouster of its first democratically elected president has stayed within Egypt, but Herber is nevertheless concerned that there could be a spill-over into other countries in the region that he is invested in—countries that, like Egypt, are in the very initial and vulnerable stages of the slow and painful transition toward democracy.

“Next door to Egypt, you have Libya, which is also trying hard to determine the right path forward,” Herber said. “Then there’s Tunisia, which is in more or less the same position, and, of course, Syria, which needs no further explanation, and Lebanon, which is already flooded with Syrian refugees.” All these countries are struggling with newfound democracy and the biggest risk—for them as well as for the foreign investment community—is that they turn away from that course, Herber said, and that they turn away “not through the ballot box but by other ways.”

These are also nations where there’s also a high probability that religious factions may take the upper hand and where long-term military rule is not to be discounted. That said, the Egyptian market actually regained some stability on the news that the military had taken over in Egypt, but this, Herber said, was largely due to the fact that the government of ousted premier Mohamed Morsi had not done enough to tackle Egypt’s endemic macroeconomic problems. Another factor was the hope that whoever comes into power next will take the necessary steps to effect much-needed changes in Egypt.

Egypt, which was downgraded to single B-minus with a negative outlook by Fitch Ratings in the aftermath of the military coup, is facing a gaping budget deficit of 13.5% of GDP, the highest of all Fitch’s rated sovereigns, and its debt-to-GDP ratio is forecast to rise by a staggering 85% this year. The serious shortages of foreign exchange reserves in the country have impeded private sector activity, tourism revenues have been more or less non-existent, an unofficial currency market has emerged and arrears to oil companies have accumulated. Although the ad hoc bilateral cash flows that have been propping up the Egyptian economy should continue (some of the Arab nations immediately pledged their financial support to the interim Egyptian leaders announced on July 9), there’s nevertheless a lack of clarity as to the size and the frequency of these.