Crisis in Egypt spurs fears of impact on global economy

From the streets of Cairo to the worlds largest trading floor, the CME Group in Chicago.. the ripple from the Egyptian unrest is starting to become a worry on the global economy. (Jan. 31)
Washington Post Staff Writer
Tuesday, February 1, 2011; 12:00 AM

Political turbulence in Egypt is casting a pall on world financial markets, driving up the prices of crude oil and food and creating new risks for the shaky world economy in the months ahead.

Oil prices on Monday reached their highest levels since 2008, and investors sold off both stocks and bonds of many developing nations, particularly in the Middle East. Those shifts came despite few signs that the Egyptian turmoil is having much direct impact on the world economy. Egyptian economic output is about the same size as that of Alabama, and while the country controls a crucial shipping channel, the Suez Canal, that key connector between Europe and Asia has so far remained open.

But the turbulence on financial markets shows how political upheaval in one place - first Tunisia, now Egypt - can set off hard-to-predict reverberations around the world, possibly undermining the global economic recovery. In this case, investors are most concerned that other Muslim nations, particularly those with autocratic leadership and vast oil reserves, will soon see their ruling regimes threatened as well.

"What's going on in Egypt has again reminded us that the world economy is not out of the woods, and that things we do not anticipate can have a significant negative effect on global markets and risk sentiment," said Rachel Ziemba, a senior analyst with Roubini Global Economics.

The economists' and investors' fear is that political developments could disrupt oil exports from Saudi Arabia or other nations, even temporarily. The price of oil rose to $92.19 on Monday, its highest level since October 2008, and up from $85.64 on Thursday, as investors priced in the higher probability of an interruption in oil supplies.

"There's not a huge risk to oil supplies from Egypt directly, but that could change if dissent spreads to other oil-exporting nations," Ziemba said. "The big issue is that the economic grievances present in Egypt are there across the Middle East. Will they spark unrest in the same way? It's hard to predict."

An analysis by economic consulting firm IHS Global Insight shows that every $10.70 increase in the price of crude oil, if sustained, would add 25 cents to the price of a gallon of gasoline in the United States and lead to 270,000 fewer jobs being created over the course of a year.

If political turmoil spreads further, it could undermine the confidence of investors in developing economies, which have been playing an increasingly important role. In recent years, investors have come to view developing nations as a potential source of high returns and relatively low risk, leading to a flood of investment into both major economies like China as well as "frontier" markets like those in sub-Saharan Africa.

"Now you have Tunisia, and Egypt and everybody is going to be a bit jittery. People will think twice. Stability can be a real mirage, as we have seen," said Todd Moss, vice president at the Center for Global Development.

Developments in Egypt could still prove encouraging. A smooth transition to a new government could pave the way toward further economic reforms. So far, Egypt has been adopting these reforms fitfully.

But this outcome is by no means assured. Egypt's last revolution, half a century ago, produced the widespread nationalization of private property under former president Gamal Abdel Nasser. Until the country's direction becomes clear, investors and business executives may move to the sidelines.

Moody's on Monday downgraded the country's investment standing, which will make it more expensive for Egypt to borrow money. Its stock market remains closed after dropping 16 percent in a day, and its $30 billion in foreign reserves could be stretched if the central bank decides it is necessary to try to prop up the value of a falling Egyptian pound.

International organizations also were trying to monitor more urgent concerns, such as whether the country has adequate supplies of wheat and other staples in reserve in the event that the current political paralysis continues. Egypt is heavily dependent on imports for these crucial products.

The greatest threat posed by Egypt's troubles for the global economy - absent a spread of popular revolt to other nations in the Middle East or beyond - is the disruption of shipping through the Suez Canal. But analysts are optimistic the canal will remain open, regardless of the fate of Hosni Mubarak's regime.

The Egyptian military "is aware of the importance of ensuring the smooth operation of the Suez Canal, which is not only a vital source of Egypt's foreign currency receipts, but also ensures the supply/movement of crude oil," said Ashraf Laidi, chief market strategist of CMC Markets in London.

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