Interview: Mohamed El Erian
What short- and medium-term challenges do you expect Egypt to face as it renews its investment potential following recent political events?
MOHAMED EL ERIAN: There is no doubt that Egypt faces significant short-term challenges that have inevitably increased uncertainty among foreign investors. However, these challenges are part of the transition process that Egypt is undertaking towards greater democracy and respect for individual rights. If navigated well, successful reforms would place Egypt on a much firmer political, social, institutional and thereby economic footing over the medium and long terms.
What steps should be taken to help investor confidence in the Egyptian economy? Will the new IMF loan help set the benchmark for foreign investors?
EL ERIAN: First and foremost we must stabilise the foreign exchange situation. We must also work to restore full economic activity and undertake structural reforms to improve the competitiveness of the economy. This will perpetuate job creation, enhance financial soundness and strengthen social justice. Finally, we need to improve institutional bases and economic governance in both the public and private sectors.
By providing foreign exchange inflows and unlocking aid commitments, an IMF programme could be part of the stabilisation and recovery process. This requires that the IMF loan be designed to support an Egyptian reform programme that has the backing of the majority of the people and their elected representatives.
How do you expect the sovereign downgrade to affect the Egyptian banking sector?
EL ERIAN: The sovereign rating downgrade could fuel an increase in the risk premiums attached to financial and physical investments in Egypt. The move complicates the economic and monetary risks facing the country by discouraging interest among potential investors. The downgrade is yet another factor contributing to the financial stress on Egypt’s economy.
Given the US and the eurozone debt crisis, what role will emerging markets in the MENA region play in offsetting the slowdown in developed economies?
EL ERIAN: MENA and other emerging market regions face the challenge of reducing their vulnerability to the debt crisis in Europe and sluggish growth in the US. Indeed, the dislocations in the advanced economies undermine global growth, lower international trade and disrupt the cross-border flow of financing. I worry that decoupling could prove too ambitious given the negative risks for the advanced economies should such policies turn out disappointing.
The best word to describe the current dynamics between emerging and developed nations is convergence. If emerging economies were to control their own affairs, they would continue to close the income and wealth gap vis-à-vis advanced countries in a steady and impressive manner. Today, convergence patterns are still apparent within the growing global economy. However, in the event of yet another European crisis, there will still be convergence, but this will be the result of diminishing income and wealth curves, as we witnessed in 2008 and 2009. In this case, the convergence would take place in an impaired global economy.
What factors are important to consider for investing in emerging markets?
EL ERIAN: Generally, emerging markets have remained strong. This is attributed to the improving economic foundations in key developing nations and the rapid expansion and maturation of domestic markets and corporations. As a result, wealth and income convergence with advanced economies will continue, offering a growing set of opportunities for investors.
Differentiation will be key for exploiting these opportunities. Successful investment will require careful country and company selection. This also depends on the ability of investors to allocate funds across the capital structure, from sovereign to corporate, equities to local bonds, as well as currencies for external fixed income.
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