Last week’s military coup boosted Egyptian stocks by more than 10% as many traders hoped Egypt could make a fresh start after a year of economic decline under president Mohamed Morsi. But this week the market fell back to earth as unwarranted euphoria gave way to realism.
Violent clashes early this week between Islamists and security forces have “significantly raised risks of wider unrest”, says Raza Agha of VTB Capital. That makes it more difficult to form a government to tackle Egypt’s long-term problems.
These problems are energy subsidies, which have driven up deficits and public debt; dwindling foreign-exchange reserves; and the tanking Egyptian pound, which is raising inflation.
A deal with the IMF has been in the works for over a year. But IMF aid looks unlikely to be forthcoming as long as it’s unclear who’s in charge, says Una Galani on Breakingviews. For the same reason, there is also “little visibility on when or how much Egypt will receive from its rich neighbours”. Such cash injections have helped Egypt import food and fuel.
Meanwhile, the military’s overthrow of an Islamist president could galvanise regional extremism. “If Egypt lives up to its reputation as a regional trendsetter, an Arab winter may lie ahead.”