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The Economic Impact of the Egyptian Political Crisis

With the resignation of Hosni Mubarak after 30 years of ruling Egypt, the nation must now recover from the month long “revolution” that led to Mubarak’s resignation. Nevertheless, amid the post resignation celebrating, the realities of Egypt’s future may not be what the anti-Mubarak protesters originally intended.

As Egypt recovers from its recent instability, the economic impact in the aftermath of Mubarak’s 30 year reign will most likely be subdued at best. Egypt’s robust economy will still experience considerable growth despite recent events, with GDP expanding by 4.2 percent, revised downward from 6 percent.

The direct cost of the recent uprising, along with a sizable decline in the Egyptian economy will likely not have much of an effect on the world economy. Egyptian GDP is only around $215 billion, a small fraction of the world economy’s GDP of $58 trillion.

Furthermore, despite the size of the country’s population of 85 million, its GDP makes up less than 10 percent of the total combined GDP of the Middle East and North African countries combined. Given the size of these numbers, even a complete collapse of the Egyptian economy — a highly unlikely event — would have little effect on the world economy.

Financial Impact of the Egyptian Crisis

Egypt’s financial situation and its impact on other countries are also limited. According to the Bank for International Settlements or BIS, Egypt is only liable for a total of $50 billion in corporate and government loans, debt which is held mostly by European banks. The exposure to U.S. banks amounts to only $5 billion. This affecting the countries net working capital.

Despite the fact that such small amounts represent a drop in the bucket to most multinational banks, the Cairo Stock Market lost over 16 percent of its value over a two day period. The exchange has been closed since January 27th and will reopen on March 6th.

The Egyptian Crisis’ Real Impact

Perhaps the real impact of the Egyptian crisis lies in the subsequent unrest seen in other Middle Eastern countries, most recently in Libya. Many are concerned that other countries will follow suit and create further instability in this large oil producing region. The rising price of oil therefore, has resulted in the largest economic impact of the Egyptian crisis.

Crude oil has recently risen to over $100 per barrel, driving up transportation costs around the world, and pressuring already burdened economies. If the trend continues, higher oil prices may sabotage the feeble global economic recovery currently underway.

While supplies of oil have for the most part not been disrupted, and even if the Suez Canal was compromised only 2-3 million barrels of oil per day flow through the canal. World oil supply is around 88 million barrels per day, so temporarily rerouting the oil around the Horn of Africa would represent a viable solution.

Nevertheless, markets run up on fear and even more so with a commodity of such global importance. Crude oil now looks poised to test the all time high of $147 a barrel made in 2008.

The Crisis’ Impact on the Egyptian Pound

The Egyptian Pound has been resilient, at least against the U.S. Dollar, with the USD/EGP rate hovering at the 5.80 level before the protests began, and rising only to 5.95 at the height of the crisis. The exchange rate then stabilized at the 5.88 – 5.90 level after Mubarak’s resignation.

The lack of extreme volatility during the protests and after Mubarak’s resignation shows that the Egyptian economy is expected to continue expanding, albeit, at a slower pace in the near term. A number of online forex brokers offer the possibility of trading Egyptian Pounds. Nevertheless, check the broker’s reputation and regulating body and compare other brokers’ markets to make sure you get a fair spread. Keep in mind that trading currencies on margin is risky and not appropriate for all investors.

Image: jscreationzs / FreeDigitalPhotos.net

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