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Egyptian unrest may set off vicious economic cycle

Associated Press Modified: January 27, 2011 at 4:00 pm •  Published: January 27, 2011
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CAIRO (AP) — Fueled by fury over financial deprivation, the unrest roiling Egypt threatens to undermine the country's economic growth and further weaken the government.

The third straight day of protests sent the stock market plummeting Thursday, rattled investors and clouded what the government has portrayed as its crowning legacy: rising GDP and a surging private sector led by a construction boom and vibrant, seemingly recession-proof banks.

Many say the fruits of growth in this formerly socialist economy have been funneled almost entirely to a politically connected elite, leaving average Egyptians surrounded by unattainable symbols of wealth such as luxury housing and high-priced electronics as they struggle to find jobs, pay daily bills and find affordable housing.

The 10.5 percent plunge in the market left its year-to-date losses at more than 20 percent and traders warned that economic damage could widen if huge protests materialize Friday, as threatened by the opposition.

"Tomorrow will be a trigger," said Mostafa Abdel-Aziz, a broker with the Cairo-based investment bank, Beltone Financial. "If things pass quietly, there should be a technical rebound" when the market reopens on Sunday.

"But I don't think the overall sentiment will be reversed," he said.

The sustainability of most of the government's key foreign revenue sources — tourism, the Suez Canal, and foreign investment — hinges on investors' perception of stability in this nation of 80 million, the Arab world's most populous.

It's an image the government has carefully tried to craft for years, looking to buck a socialist legacy characterized by inefficiency, a bloated bureaucracy and waste, and fitful moves toward a free-market economy in the early 1980s.

The prime minister and the finance minister "have undertaken enormous reforms, but they're trying to undo more than 50 years of economic damage," said Angus Blair, Beltone's head of research.

Following a banking crisis in the late 1990s, the government enacted sweeping changes aimed at better regulating the financial sector and boosting private sector development. It set up a credit bureau, a mortgage law was passed and lavish housing communities sprang up around the outskirts of crowded Cairo.

The growth rate shot up from almost 4.1 percent in 2004 to almost 7.2 percent in 2008 before the global financial meltdown sent the world economy crashing.

Even then, Egypt fared well. While much of the West was in a recession, Egypt's gross domestic product came in at 4.7 percent in 2009 and 5.15 percent in 2010. Relying on buyers' advance payments instead of risky credit, the real-estate sector was one of the few in the world that escaped the global crisis largely unscathed.

But critics argue the gains were little more than window dressing. Roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day.

Food prices have steadily increased over the past three years, sustaining their elevated levels even as global commodity prices fell. Beef, which sold at 40 Egyptian pounds per kilogram ($3.20 per pound) a few months ago, now hovers at 65 pounds per kilo ($5.13 per pound) — making it a luxury many taste once a month or less.

"Food price and inflation is a crucial issue in Egypt," said Ann Wyman, head of emerging markets at Nomura. "Egypt ranks, for us, as one of the most vulnerable countries for high food prices. It's something you're seeing in the popular response."

Analysts estimate that food price inflation is currently at an unsustainable 17 percent yearly.

Clashes in January 1977 over an increase in the price of bread — known in colloquial Egyptian Arabic as Aish, or life — ended with several killed.

Housing remains another key sticking point. While villas in new communities with names like Beverly Hills and Allegria are abundant for the wealthy or the upper middle class, the rest of the population struggles even to find one-bedroom apartments.

The issue came to a head late last year when Talaat Mustafa Group, the biggest publicly traded developer, was sued by a businessman over a contract under which it secured millions of acres of desert land to build its lavish Madinaty project.

The case threatened to rip the country's real estate sector apart on grounds that the government violated the law in awarding the land through a no-bid process. The issue was resolved when the government set up an independent committee — one which included members of the same housing authority that illegally granted the land — and decided to re-award the land to TMG under largely the same terms.

"We saw the corruption in Madinaty," said Ahmed Sayed El-Naggar, an analyst with state-sponsored Al-Ahram Center for Political and Strategic Studies. "This was land that should have gone to the people but went to people in (the ruling National Democratic Party)."

TMG was headed at the time by Talaat Mustafa, a tycoon who was convicted of plotting to murder his Lebanese diva girlfriend. Mustafa was, like several other business moguls, a member of parliament.

The government faced an uphill economic battle even before the protests. Subsidies are expected to consume about 100 billion pounds ($17.4 billion) of the country's budget this year, and any attempts at cutting these benefits are dangerous.

The problem becomes more dire if the tensions persist or shift to Red Sea coastal hotspots where tens of thousands of tourists flock to escape frigid winters.

So far, tourism appears to be largely unaffected, with operators across Europe saying cancellations have yet to really surface. Only side-trips to Cairo and Luxor have been cut, while resorts like Sharm el-Sheikh are still on the itinerary.

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Associated Press writers Nataliya Vasilyeva in Moscow and Juergen Baetz in Berlin contributed to this report.