Egyptian crisis looks bad for the economy

As crowds gather in Cairo for a million-strong march to oust President Mubarak, Picet has warned the economic and financial effects of Egypt's crisis are not good.

Oliver Bell, senior investment manager of the emerging markets team and manager of Picet’s Middle East and North Africa fund said the appointment by President Mubarak of a vice-president, the moderate Omar Suleiman, for the first time suggests that the end of his 30-year rule is in view.

He said: "There is still a large amount of foreign money in Egypt, around $20bn (£12.42bn), split between the equity and fixed income markets, so the biggest concern for investors would be capital flight; a weakening Egyptian pound; and, consequent boost to already high inflation.

"Egypt does have $34bn of foreign reserves and so the central bank would in theory be able to ensure an orderly exit by those that want it.

"One obvious concern would be a run on the banks, but the banking system is very liquid with loan/deposit ratios around 50 per cent and so they could manage fairly significant outflows before creating real stress in the system.

"Other concerns include the threat to oil transportation through the Suez Canal although only two per cent of global oil passes through Egypt.

"Worse for Egypt is the country’s reliance on tourism at 11 per cent of gross domestic product, which is clearly threatened by domestic instability."

Mr Bell also warned there would be possible regional knock-on effects

He said: "Drawing investment conclusions is no easier than political ones, either for Egypt or in the wider region.

"Whilst all eyes are on Egypt, there is no reason for complacency about neighbouring countries; Algeria, perhaps most at risk, is due another round of large protests on the 12th February, while turbulence in Morocco, Jordan or even Libya and Iran cannot be ruled out."