What Investors Are Saying About Egypt

January 30, 2011

You can expect prices at the pump to go up. This could be like the years

folks.

Administrator

Egypt and the Markets: Buy More Oil

January 30, 2011

I will have a good deal more to say about the topic in my " Spengler " column in

Asia Times Online Monday morning, but the prospect of a failed state in Egypt

should worry the markets. I've been urging investors to buy oil stocks. Egypt

simply doesn't function as a country, and the spike in wheat prices may have

been the wheat-stalk that broke the camel's back-as a number of observers,

including Nourel Roubini, have been saying. If you live on $2 a day, as half of

Egypt's population does, a rise in the bread price hurts. Unofficial estimates

put unemployment at 25%, not the 9% reported by the government, and the

country's 700,000 university graduates compete for perhaps 200,000 job openings.

Half the country is illiterate. Nine out of ten Egyptian women suffer genital

mutilation.

Egypt imports almost half its wheat, despite years of government promises to

bring about food self-sufficiency. It's the world's biggest wheat importer. Food

and fuel subsidies alone account for 7% of GDP. Just to keep the population's

nose above water, that is, the Egyptian government each year must spend a sum

comparable to the Obama fiscal stimulus–year after year after year. How an

illiterate society that butchers its women is supposed to make an instant leap

to liberal democracy is not a question that lends itself to an answer.

In the short term, Egypt will face capital flight, a collapse of its critical

tourist industry, higher borrowing costs, in short, far less government capacity

to address the urgent needs of its hungry poor. We haven't yet seen food riots.

We probably will. The speculation about whether the next government will be

another iteration of Mubarak (perhaps with a new face), or an Islamist

government, or a liberalized government led by someone like Mohammad al-Baradei

is less interesting than the question: is Egypt governable? I expect rather a

failed state and a prolonged period of chaos, in which the financial impact of

chaos makes conditions worse, in a vicious cycle. That will leave two of the

three most populous Muslim countries–Pakistan and Egypt–in chaos, with spillover

effects for others.

Apart from oil, the economic impact of chaos in the Islamic world is small (as

Bernard observed some years ago, the whole Arab world exports less net of

hydrocarbons than Finland). But oil is the right trade now.

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