Risk of ‘economic blow-up’ in Egypt

Egypt mapThe risk of an 'economic blow-up' in Egypt has increased, warns Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management, highlighting the possibilities of a currency crisis, food price inflation and an oil price spike.

This could lead to more popular unrest in an already highly impoverished and polarised country, which once was a favourite among emerging market fund managers.

Egypt’s first freely elected president Mohamed Morsi was ousted by the army on Thursday, following mass protests from his supporters and opponents sides.

Since Morsi took over about a year ago, his government has failed to solve serious economic and social problems.

Today youth unemployment is high and Bakkum adds that a rising inflation rate is “keeping the Egyptian situation explosive”.

While the army was trying to prevent anarchy, it removed the first freely elected president and effectively restored the status quo.

“By removing Morsi and trying to avoid a situation of total anarchy, the military leadership is protecting its own large economic interests; more than 20% of the Egyptian economy is in the hands of the military,” he says.

The Egyptian economy has mostly been supported with packages from the International Monetary fund, the European Union and friendly Gulf states.

But Bakkum says now that the democratic legitimacy of the Egyptian leadership is gone, it has become more difficult to expect further foreign support.

“The fragile Egyptian democracy has not been helped by the coup,” he says. “The new interim leadership might look reasonable from the outside, but does not have large popular support.”

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