Pinchas Landau from The Jerusalem Post
recycles for uninitiated the analysis of the situation of the Egyptian economy released by Serhan Cevik. Serhan Cevik is a Vice President of Morgan Stanley who covers the Middle East and North Africa.
Landau very rightly notices that:
The state of affairs in Arab countries, including those directly bordering Israel, attracts virtually no coverage in the Israeli media.
Changes in government, and certainly terrorism, rioting or other negative news, are immediately reported, sometimes prominently, but anything normal, such as economic and social developments in our neighbors or in the Arab world generally, are treated on a par with news from Uruguay or Laos.
True. The shallow Israeli media never covers properly the neighboring countries apart from reporting about the million of Lebanese who showed up on the Martyrs' Square in Beirut or the increasingly more violent civil strife in Gaza . So Israelis who seek to understand better their region are forced to read The Economist
and other outside sources to get an idea of what's going on around us.
Even the pseudo intellectual Haaretz, whose intellectualism means mostly taking wild moral stances against its own society, never fails to leave his readers in blissful unawareness of the long term trends developing in the region. So the Israelis have little idea that recently Mubarak's regime has been diligently implementing a series of economic reforms, some of which included very unpopular measures which indirectly testifies to how serious the dictator got about the economy. Yet it appears that Mubarak still has quite a way to go before he can claim the title of Pinochet of the Middle East.
According to Cevik the economic growth is picking up and is predicted to reach tigerish 7% in 2007 and 7.5% in 2008. This is compared to an average of 4.4% in the 1990s and 3% in 2002 to 6.9% in the 2006 fiscal year. Yet Cevik is unimpressed by these achievements and denies that we got another economic tiger in the making here. Cevik points out to the fact that the year-on-year inflation rate has already surged from 3.2% at the end of 2005 to 11.8% in October 2006.
It appears that the economy is overheating.
In fact I would say that this combination of rising inflation and accelerating economic growth smells too much of a regular bubble fueled by inflationary politics. The economic history of the world is full of stories when two-three years of such a growth were followed by a decade of desperate attempts to stabilize the economy and to suppress the inflation and all too often led to acute political crises.
Cevik explains some of the inflation by the removal of fuel subsidies which is a right step and demonstrates commitment on the part of the regime which has guts to take painful and unpopular measures. Yet Cevik says this is only part of the story.
The budget deficit persists around 10% and the interest rates still remain negative despite recent increases. According to Cevik the growth base is extremely narrow limited to the gas industry and construction. Productivity growth remains very low increasing inflationary pressures in a country which also appears to be awash with petro-dollars from the Gulf.
Yet the root cause of the problem is the government's inability to get hold of its expenditures. Landau:
. . . the failure to sharply reduce the budget deficit during these good times suggests to Cevik that the boom is unsustainable and that trouble is brewing. The fact that the share of government expenditure within GDP is growing instead of falling basically gives the game away.
In short, Cevik says that the government failed to establish control over its fiscal policies, the current rate of growth is unsustainable and the monetary situation is getting out of hand. And the economy is ever more vulnerable to a possible slowdown of the global economy.
. . ."the euphoria surrounding the country's [high growth] could easily subside if the global economy goes through an abrupt and painful adjustment phase." There again, the Nile never was tiger territory.
It remains to be seen if indeed the current race would pick out soon, Cevik talking about dangers over the medium term. Yet reading Cevik leaves one with the feeling that Egypt is not such a tiger as we used to think and that the celebrations of the birth of a new free market economy in the Middle East came too early.
Given the tense political situation in Egypt, where the government has been arresting leaders of the Muslim Brothers over the last few days, acusing them of trying to set up a militia, it does not smell of a happy end for this, increasingly besieged by the domestic opposition, regime.
Serhan Cevik: The Dangers of Overheating
Labels: Egypt, The Arab Reform