the Succession And Stability Question
     Times remain hard as we head towards the end of the year. The economic slowdown is of particular
     concern given the unemployment rate and relatively tense domestic political situation. The global
     economic situation shows some signs of improvement – we have upgraded our forecast for US
     GDP growth in 2009, from -3.3% to -3.0% – with the recovery in financial markets now being mir-
     rored by the economic data. With this being an externally driven slowdown for Egypt, this is good
     news. However, there are still some pretty gloomy figures coming out, and as elections get nearer  
     – and unemployment rises – political stability will be threatened too.
     On the political front, Egypt’s internal stability remains somewhat precarious, and the unrest wit-
     nessed in Iran following the disputed presidential election in June will have made the government
     nervous. Although Egyptians have not managed to mobilise against the government, we believe
     that there is a lot of popular dissatisfaction with its perceived undemocratic approach and friendly
     relations with the US and Israel. One more election considered to be unfair could spark similar levels  
     of protest (although the failed attempts of the Iranian opposition protestors will have disheartened
     sympathisers abroad). We expect the government to keep spending generously to counter the  
     effects of rising unemployment and the economic slowdown, in order to ensure a smooth election
     process in 2012 (or sooner).
     Economically, we are focusing on fiscal policy and investment climate this quarter, with our growth  
     forecast for 2009 unchanged (at 3.%) and that for 2010 up slightly at 2.%. We see the govern-
     ment spending generously and borrowing domestically to finance this expansion in a time of lower  
     employment and consumer confidence, and as such it will be some time before private-sector lend-
     ing picks up again. Banks will continue to prefer safe-haven government debt (which, in any case,  
     will be increasing in supply). In addition, we think the decline in inflation has been disappointing,  
     and expect only limited downside in interest rates.
     The business environment will continue to be affected by political and economic developments:
     the government does seem to remain broadly pro-investment and pro-reform for now, but it could
     crowd the private sector out over the coming years, as it issues larger volumes of low-risk debt and  
     props up growth through infrastructure spending. In addition, privatisation appears to be well and
     truly on hold. However, there have been a number of positive developments lately: among other
     moves, the Egyptian Stock Exchange (EGX) will launch the Egyptian Investor Relations Society  
     (EIRS) in July 2009 as a means of improving transparency and disclosure between companies  
     and investors.