x Abu Dhabi, UAETuesday 16 January 2018

Economy was the crucial element Morsi got wrong

If Morsi had simply stuck to Mubarak's economic agenda at least for the short term, he would have done far better than he has and the crowds likely wouldn't have been baying for his blood all week.

Stock-market performance is often overlooked when millions of angry protesters mobilise against their government in revolt, at least while the barricades are still burning.

But anyone with half an eye on the Egyptian stock exchange this week might have been surprised to note a remarkable upturn in fortunes as hordes of angry protesters marched once more on Tahrir Square to lodge ultimate dissatisfaction with Mohammed Morsi, their president.

The EGX 30 Index was closed on Monday on account of the protests, but when it opened again on Tuesday lunchtime, share prices went through the roof.

The index surged nearly 5 per cent by the end of the day, as local investors cheered veiled threats of a military coup from the head of the armed forces and anticipated the swift removal of Mr Morsi from power.

But such a response seems to fly in the face of all logic.

Most economists would agree that the turmoil and chaos that comes with the forcible removal from office of a political leadership would not bode well at all for stocks.

An announcement of the type made by the Egyptian armed forces on Monday should, in contrast to events, have prompted a sharp sell-off.

So what happened?

Perhaps it was nothing more than a knee-jerk reaction from unsophisticated investors who failed to grasp the immediate economic consequences of the events unfolding in the streets.

Perhaps it was a simple expression of jubilation in harmony with the protesters outside the stock exchange who cheered and whistled each time a helicopter gunship buzzed overhead flying the Egyptian flag beneath it.

When the protesters yelled "leave" to Mr Morsi just as they had to Hosni Mubarak two years earlier, investors on the stock exchange floor yelled "buy".

While such action may not prove to be too prudent an investment strategy, it is a stark indication of the level of dissatisfaction with Mr Morsi's handling of the Egyptian economy.

In short, investors believe anything is better than the status quo, and that includes open revolt in the streets.

It is worth remembering that by most measures the Egyptian economy was faring pretty well in early 2011 when Mubarak was forced form power.

The world was three years in to the Great Recession but GDP growth was going strong, unemployment was still declining and the raft of economic reforms ushered in the middle of the decade was beginning to bear fruit.

According to IMF data real GDP growth in Egypt was running at 4.7 per cent in 2009 and just above 5.1 per cent in 2010. In 2011, after the February revolution, GDP growth sank to 1.8 per cent as the economy stalled.

Since Mr Morsi came to power a year ago, GDP growth has sunk further still to 1.5 per cent.

The picture is similar for unemployment. In the last two years of Mubarak's dictatorship the jobless rate ran at 9.5 per cent and 9 per cent respectively, IMF data shows.

But again the jobless rate rose to 10.4 per cent in 2011 and is now approaching 12 per cent.

Inflation, which is always cited as one of the principal sparks that lit the tinder of revolt in Egypt, was rampant as the price of wheat and cooking oil reached record levels around the world in 2010. But do not forget that Mubarak heavily subsidised bread to keep the price of a batch of local loaves at about 1 cent for decades.

Then there was the rationing that, while keeping the people trapped in miserable austerity, meant that external inflationary pressures were hardly noticed.

The point being, Mubarak's handling of the economy, at least by Third World standards, was pretty good.

I would not suggest for a minute that keeping the dictator in power would have been in any way acceptable, and I have nothing but admiration for the Egyptian people who risked their lives to bring about political change.

What is obvious, though, is that the economy was one crucial element of government that Mr Morsi did not have to change too much to get right.

Indeed if he had simply stuck to Mubarak's economic agenda at least for the short term, he would have done far better than he has and the crowds likely wouldn't have been baying for his blood all week.

What is obvious is that Mr Morsi has had no hand on the economy's tiller at all. He seems to have spent most of his time worrying about compliance with IMF loan demands while doing nothing to achieve it.

A simple accounting of what was working and what was not in terms of economic management would have scored him innumerable points with his electorate.

Today the protesters taking to the streets across Egypt are estimated to outnumber those who voted for Mr Morsi a year ago.

If there is a change of power this week, as seems increasingly likely, the first thing the new leader will have to do is work out how to get them back to work or very soon they will be massed in Tahrir once again and the wheels of revolution will continue to turn.