Egypt's Power Vacuum Threatens the Economy

Investors cheered after Muslim Brotherhood candidate Mohamed Mursi was declared the winner of Egypt’s presidential election on June 24. The benchmark stock index soared 7.6 percent, the biggest gain since February 2008, and rose another 2.9 percent on June 26. The celebrations may prove premature should a battle over legislative power, currently held by the military, impede Mursi’s ability to follow through with campaign promises to reduce public debt, create jobs, and boost economic growth.

A standoff between Mursi and the military could delay a $3.2 billion International Monetary Fund loan needed to stem the worst decline in foreign reserves since 2004 and to cut record borrowing costs, according to economists at Bank of America, HSBC Holdings, and Standard Chartered. The budget deficit may widen to 10 percent of economic output this year, the highest for any Arab country, according to IMF forecasts. “The current institutional vacuum could jeopardize the very crucial aid and budget support that had been in the making for months now,” Philippe Dauba-Pantanacce, Dubai-based senior economist at Standard Chartered, said by e-mail on June 24. “In the short term, Egypt could be on a verge of a disorderly devaluation, with foreign exchange reserves dangerously low.”