September 2011
When the world's biggest economies sneeze, Egypt comes down with an economic flu
August has yet again proven itself a challenge for markets. Thirty years ago was the beginning of what was described as the worst economic crisis since the Great Depression, sparked by the Mexican finance minister's announcement on August 12, 1982 that his country was unable to make its next debt payment. Because several Latin countries were in the same boat as Mexico, the Mexican debt crisis began a years-long domino effect and the world found itself facing two of the worst nightmares in its financial and economic history -- the Savings and Loan (S&L) crisis (1988-1991) and the 1997 Asian financial crisis.
Last month also saw the US House of Representatives narrowly avert yet another financial crisis by agreeing to raise the debt ceiling.
Since the Marshall Plan in 1947, economic stability is considered the basis for political stability in the US and Europe. US Secretary of State George Marshall believed that stability across the Atlantic would be important to maintain US stability and development over time. In Marshall's age, there may not have been as many unknown variables in the equation as there are now -- such as the price of oil, a commodity that became the main source of energy during the second half of the 20th century.
The European Coal and Steel Community (ECSC) was the predecessor to the European Union. This united trading bloc gave Europe's biggest powers the ability to cooperate in utilizing oil. After 25 years, the world did change, providing it with new ingredients for the so-called stability equation, first economically and later politically.
Oil's role
The 1980s financial crisis was less dire because the nations that suffered most were the least developed countries (LDCs), although the Western giants had to swallow losses as lenders. The main driver of the crisis was oil price hikes following the Arab-Israeli War in October 1973. The hikes resulted in high production costs for LDCs that already had high debt burdens, which led to the ever-growing reliance on loans and then problems ensuring payment.
As the debt increased, so did the service payments. At the same time, increases in oil prices impacted internal economic indicators -- lower production and exports, higher input prices and inflated unemployment rates all led to the announcement that reared its ugly head in 1982.
The Paris Club was formed after the failure of the International Monetary Fund (IMF) to resolve the LDCs' debt crisis. The failure was recognized as something similar to what the US witnessed with the S&L crisis. The two crises may not be related on the surface, but some believe there is a connection because two consecutive US administrations tried hard to find internal solutions but were unable to stop the S&L crisis.
Egypt was not that distant from all the trouble, even though the Egyptian economy had its own story -- that of war-exhausted coffers, high debt over the course of a century as well as other internal political issues that were affecting its economic decisions.
Looking through history and also living in these turbulent times, it feels very much the same -- the LDC crisis impacted big countries' cash flows. The S&L crisis also impacted the international demand on exports and products from the Far East due to a volatile foreign exchange system that made products more expensive.
In 2008, the Northern Rock bank issue sparked concerns regarding mortgage valuations, leading to the collapse of Lehman Brothers that turned the US sub-prime mortgage crisis into a global financial disaster. By late 2009 and early 2010, Europe started suffering from lower cash and investment flows from the US and the Gulf. And as European countries sought to remedy this through more borrowing, the makings of the EU sovereign debt crisis began.
All of this has impacted the capability of industrial countries and mega corporations that now depend on component factories in Asia. In other words, these factories, which are hiring Asian laborers, might face a devastating investment drain soon. In addition to this, the decreasing value of global currencies makes Asian exports more expensive, which could lead to lower sales and income.
How will Egypt be affected?
As part of the global economy, Egypt is inevitably suffering the repercussions of the multitude of financial trouble in the eurozone and US. (Approximately 40% of the nation's economy is related to outside markets.)
After withstanding the turmoil of the January 25 Revolution and the first state budget in the post-Mubarak period, the economy was hit by the US debt ceiling crisis. Although it did not sneak up on everyone, the US debt issue was pushed aside for nearly four months as Democrats and Republicans went back and forth on the issue before finally raising it in the halls of Congress.
The disagreement between the two political parties in the House and Senate made investors fear they would not reach an agreement by the deadline.
The Arab Spring has also negatively impacted industries and markets: Libya's revolt impacted oil prices, while the Yemeni case raised fears about piracy in the Red Sea.
As the sovereign US debt rating has been downgraded, this raised fears regarding its commitment to payment, which could cause the US dollar to drop in value. Because the US dollar is the accepted currency worldwide, this could lead to a revaluation of foreign exchange rates and balances between currencies, including the Egyptian pound.
Should the value of the US dollar start to plummet, this will impact tourism, exports and the foreign reserve, although it is diversified between gold and other currencies. There will be some benefits if oil prices drop. The downgrade in oil prices will gradually soften the pressure on the state budget regarding subsidies on products such as gasoline and other energy sources. Also, lower-priced imports could help control inflation and support end-product production instead of intermediate production.
However, it is still too early to assess the full impact on the Egyptian economy, particularly before the elections. Investors and officials alike will also have to keep tabs on the EU and US's debt talks as well as the ongoing Arab Spring and Western protests and riots, which together form a recipe for instability and uneasiness. © Business Today Egypt 2011
When the world's biggest economies sneeze, Egypt comes down with an economic flu
August has yet again proven itself a challenge for markets. Thirty years ago was the beginning of what was described as the worst economic crisis since the Great Depression, sparked by the Mexican finance minister's announcement on August 12, 1982 that his country was unable to make its next debt payment. Because several Latin countries were in the same boat as Mexico, the Mexican debt crisis began a years-long domino effect and the world found itself facing two of the worst nightmares in its financial and economic history -- the Savings and Loan (S&L) crisis (1988-1991) and the 1997 Asian financial crisis.
Last month also saw the US House of Representatives narrowly avert yet another financial crisis by agreeing to raise the debt ceiling.
Since the Marshall Plan in 1947, economic stability is considered the basis for political stability in the US and Europe. US Secretary of State George Marshall believed that stability across the Atlantic would be important to maintain US stability and development over time. In Marshall's age, there may not have been as many unknown variables in the equation as there are now -- such as the price of oil, a commodity that became the main source of energy during the second half of the 20th century.
The European Coal and Steel Community (ECSC) was the predecessor to the European Union. This united trading bloc gave Europe's biggest powers the ability to cooperate in utilizing oil. After 25 years, the world did change, providing it with new ingredients for the so-called stability equation, first economically and later politically.
Oil's role
The 1980s financial crisis was less dire because the nations that suffered most were the least developed countries (LDCs), although the Western giants had to swallow losses as lenders. The main driver of the crisis was oil price hikes following the Arab-Israeli War in October 1973. The hikes resulted in high production costs for LDCs that already had high debt burdens, which led to the ever-growing reliance on loans and then problems ensuring payment.
As the debt increased, so did the service payments. At the same time, increases in oil prices impacted internal economic indicators -- lower production and exports, higher input prices and inflated unemployment rates all led to the announcement that reared its ugly head in 1982.
The Paris Club was formed after the failure of the International Monetary Fund (IMF) to resolve the LDCs' debt crisis. The failure was recognized as something similar to what the US witnessed with the S&L crisis. The two crises may not be related on the surface, but some believe there is a connection because two consecutive US administrations tried hard to find internal solutions but were unable to stop the S&L crisis.
Egypt was not that distant from all the trouble, even though the Egyptian economy had its own story -- that of war-exhausted coffers, high debt over the course of a century as well as other internal political issues that were affecting its economic decisions.
Looking through history and also living in these turbulent times, it feels very much the same -- the LDC crisis impacted big countries' cash flows. The S&L crisis also impacted the international demand on exports and products from the Far East due to a volatile foreign exchange system that made products more expensive.
In 2008, the Northern Rock bank issue sparked concerns regarding mortgage valuations, leading to the collapse of Lehman Brothers that turned the US sub-prime mortgage crisis into a global financial disaster. By late 2009 and early 2010, Europe started suffering from lower cash and investment flows from the US and the Gulf. And as European countries sought to remedy this through more borrowing, the makings of the EU sovereign debt crisis began.
All of this has impacted the capability of industrial countries and mega corporations that now depend on component factories in Asia. In other words, these factories, which are hiring Asian laborers, might face a devastating investment drain soon. In addition to this, the decreasing value of global currencies makes Asian exports more expensive, which could lead to lower sales and income.
How will Egypt be affected?
As part of the global economy, Egypt is inevitably suffering the repercussions of the multitude of financial trouble in the eurozone and US. (Approximately 40% of the nation's economy is related to outside markets.)
After withstanding the turmoil of the January 25 Revolution and the first state budget in the post-Mubarak period, the economy was hit by the US debt ceiling crisis. Although it did not sneak up on everyone, the US debt issue was pushed aside for nearly four months as Democrats and Republicans went back and forth on the issue before finally raising it in the halls of Congress.
The disagreement between the two political parties in the House and Senate made investors fear they would not reach an agreement by the deadline.
The Arab Spring has also negatively impacted industries and markets: Libya's revolt impacted oil prices, while the Yemeni case raised fears about piracy in the Red Sea.
As the sovereign US debt rating has been downgraded, this raised fears regarding its commitment to payment, which could cause the US dollar to drop in value. Because the US dollar is the accepted currency worldwide, this could lead to a revaluation of foreign exchange rates and balances between currencies, including the Egyptian pound.
Should the value of the US dollar start to plummet, this will impact tourism, exports and the foreign reserve, although it is diversified between gold and other currencies. There will be some benefits if oil prices drop. The downgrade in oil prices will gradually soften the pressure on the state budget regarding subsidies on products such as gasoline and other energy sources. Also, lower-priced imports could help control inflation and support end-product production instead of intermediate production.
However, it is still too early to assess the full impact on the Egyptian economy, particularly before the elections. Investors and officials alike will also have to keep tabs on the EU and US's debt talks as well as the ongoing Arab Spring and Western protests and riots, which together form a recipe for instability and uneasiness. © Business Today Egypt 2011
