Egypt: Country Economic Forecast: 08 Feb 2012

With political tensions still running high and FDI and tourism very weak, near-term growth prospects remain subdued. Year-on-year GDP growth was just 0.4% in the final quarter of 2010/11, giving full year growth of 1.8%, and the pace slowed to 0.2% in the opening quarter of 2011/12. We now expect growth of just 1.2% in 2011/12 and the risks to our forecast of around 3.5% in 2012/13 are clearly on the downside. The political uncertainty continues to take a heavy toll on the external accounts. Although weaker tourism, down 13% in 2010/11, was partly offset by a lower trade deficit and rising workers' remittances, sharply lower FDI led to a US$10bn balance of payments deficit in 2010/11. And with the current account deficit rising to US$2.2bn in Q1 2011/12, reserves fell to just US$18bn in December. More encouragingly, it now seems likely that the authorities will agree new funding with the IMF soon, having turned down the offer of a US$3bn facility last June. But the threat of further credit rating downgrades remains. Elections in November-January saw Islamic parties, dominated by the moderate Muslim Brotherhood, winning close to 60% of the seats in the lower house. And faced with mounting unrest, the ruling military council has been forced to bring forward nominations for the presidency, meaning that presidential elections can now be held in April or May, rather than July. But amid the worsening violence, many people feel that the army may be the only institution that can prevent a slide into even deeper chaos.