The Economic Impact Of Egypt

OCEAN CITY — The recent and revolutionary upheavals in Egypt and the Middle East have captured the world’s attention, and they have also caused some concern about global economic fallout. Markets worldwide initially reacted to the turmoil with understandable uncertainty — exchanges dropped and oil prices began to rise. Dramatic political change often leads to market volatility, but the recent events in Egypt do not appear to have changed the fundamentals of the U.S. or world economies.

"Right now, the events in Egypt don’t shake us from our base case, which is that there is potential for growth out there and that this is a good time to be adding to risk," says Joseph Zidle, head of Global Wealth Management Investment Strategy for BofA Merrill Lynch Global Research.

To be sure, the events in Egypt and potential fallout within the region do have the capacity to create a larger global market reaction. According to Merrill Lynch Global Wealth Management’s Investment Management and Guidance (IMG) group, which has been following the Egyptian situation closely, despite the relatively peaceful outcome of the protests so far, the Egyptian Revolution does raise the chance of a tail risk event. Potential tail risks include a spike in oil prices due to a disruption in shipments through Egypt, the spread of unrest to a major oil producer or instability between Israel and its neighbors, raising tension in an unstable region.

What’s more, the political unrest has underlined some of the inherent risks to be found in emerging markets, even as these markets continue to drive economic growth worldwide.

"In the short term, the situation in Egypt has caused some concern," says Turker Hamzaoglu, EEMEA (Eastern Europe Middle East Africa) Economist for BofA Merrill Lynch Global Research, who notes that up until late 2010, Egypt had been benefiting from stability and demographics.

"It was the main convergence story in the region," says Hamzaoglu. "That is to say, it had a wide income gap with its trading partners, a competitive, low-cost production base, preferential access to European, U.S. and Arabian markets and a large, unpenetrated domestic market." He does note, however, that political transition was always a potential problem, especially after their controversial elections in November 2010.

The long-term economic outlook for Egypt could still be strong: "It may benefit this region to open up and introduce some democratization," says Hamzaoglu. But that may take some time: "Even though Hosni Mubarak has stepped down as President, nobody really knows for sure what a future Egyptian government will look like, so we may be in for a long transition period." Furthermore, any Egyptian government coming in will likely have to deal with economic turmoil caused by declining tourism as well as the rising commodity prices that partly fueled the protests — which may mean more subsidies and even more reliance on foreign aid.

One thing is for certain, the situation in Egypt will continue to evolve. To stay informed of the events in the region, and to better understand the economic impact of these developments, we will include updated links to our most recent investment insights, as well as thoughts from other top analysts, as they become available.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)