The uprising in Egypt and the departure of Hosni Mubarak may be revolutionary for the Egyptian people, but it remains to be seen whether the events will be a crisis for the international community. For one thing, the upheaval is unlikely to produce a financial crisis.
Egypt is not well integrated into the international financial system; its banks have been isolated from the international banking system; its government bonds held abroad are limited in number and were already rated as junk bonds before the uprising; and its stock exchange is relatively undeveloped, catering mostly to local investors.
The likelihood of an Egyptian sovereign debt crisis is slim. Investors and financial analysts can be assured that we will not see the kind of banking and financial contagion that we have witnessed over the past several years.
Nonetheless, Egypt’s foreign exchange reserves will likely be depleted quickly, particularly as tourism, a key source of hard currency that accounts for 10 per cent of its gross domestic product, grinds to a halt. Egypt will undoubtedly seek international loans to assist in its sorely needed economic reconstruction and will likely turn to the United States, the International Monetary Fund, and the World Bank.
One should keep an eye on Saudi Arabia as well. Just as the Saudis offered $1-billion to prop up the Lebanese banking system after its 2006 conflict with Israel, they may be inclined to use their vast capital reserves to preserve economic stability in Egypt. After all, Saudi Arabia hosts a million Egyptian workers and will want to ensure it does not have a refugee crisis on its hands.
And while the prospects of a financial crisis may be limited, it is interesting to see oil markets overreacting to the Egyptian uprising. Oil prices have risen and teetered around $100 (U.S.) per barrel, causing concern in commodity markets.
Yet it is important to note that Egypt is not a major oil producer and has resorted to importing oil to meet its domestic needs. The recent rise in oil prices is not due to a decline in the supply of Egyptian oil. Rather, oil markets are reacting to speculation that the crisis in Egypt could spread to the oil-rich Middle East.
This fear of contagion overlooks some important caveats. True, demonstrations have spread in recent weeks to Jordan and Yemen, but these are not oil-rich countries. Arab oil-exporting countries are concentrated in the Persian Gulf and they are not nearly as prone to popular uprising as their oil-importing neighbours.
Thanks to their oil wealth, Arab Gulf countries tend to have better socioeconomic indicators than their less well-endowed neighbours: They boast lower unemployment thanks to the bloated public service that absorbs local labour; lower rates of poverty owing to their generous welfare systems; and generally lower rates of corruption as many Gulf countries have been competing to attract international firms that seek a level playing field.
Market analysts were also spooked by worries about the Suez Canal shutting down. Let’s keep in mind that 2.5 per cent of the entire world’s supply of oil passes through the Suez Canal. But the politics of the situation should actually allay market panic. Worries that the conflict could spread to the Suez Canal is premised on the assumption that the Egyptian and Israeli armies might go to war, as they did in 1956, 1967 and 1973. This ignores the fact that the Egyptian military is staunchly secular and could not be easily swayed to go to war, even by an Islamist-led government.
Much as in contemporary Turkey, the Egyptian army will remain a check on a pluralist government dominated by populist Islamist parties. Moreover, the Egyptian army’s greatest patron, the United States, is a fierce ally of Israel and provides Egypt with $1.3-billion (U.S.) in weaponry every year. A conflict on the Suez is simply not in the Egyptian army’s interest and is unlikely to transpire.
So while the domestic political fallout of the Egyptian uprising remains undetermined, chances are that this crisis will not have international economic ramifications. Markets need to worry less about rumours and speculation and could benefit from stronger political-economy analysis.
Bessma Momani is a senior fellow at the Centre for International Governance Innovation and an associate professor of political science and history at the University of Waterloo.