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Investors welcome el-Sisi as Egypt's new president takes office

By John Defterios, CNN
updated 12:34 PM EDT, Mon June 9, 2014
STORY HIGHLIGHTS
  • Stock markets rallied as Abdel Fattah el-Sisi assumed Egypt's presidency
  • Move to military rule seen as path to stability and predictability that investors in Egypt are craving for
  • El-Sisi has to deal with high unemployment, inflation and a budget deficit

Editor's note: Read a version of this story in Arabic.

(CNN) -- Former military leader Abdel Fattah el-Sisi took the oath of president Sunday and was greeted by a stock market rally of 4.7%.

This move to military rule is seen as a path to stability and predictability that investors are craving for -- the EGX-30 is up over 75% in the past 12 months and a whopping 137% since the low point at the end of 2011.

But make no doubt about it, the country's former military chief has a steep hill to climb to get Egypt's economy back on track. Unemployment, the budget deficit and inflation are currently running between 11-13%, making it difficult for el-Sisi to maneuver.

READ: New president vows to 'correct the mistakes of the past'

The president and his new cabinet will need to push forward with structural and tax reforms to attract foreign direct investment. He has hired external consultants to advise on jump-starting growth, which closed out the 4th quarter of 2013 with a meager expansion of just under 1.5%.

Ex-military chief now Egypt's president
Who can fix Egypt's economy?

Alia Moubayed, Director of MENA Research for Barclays said on a recent visit to the Middle East that "investors are worried about the ability of having a president and government that will be able to build consensus around reforms."

Companies want to be able to tap the region's most populous country of 85 million consumers, but according to Moubayed they worry those efforts may be "further interrupted by political volatility and instability."

Monetary insurance

There are a trio of countries that have stepped in to provide a monetary insurance policy for Egypt. They have been so active since the ouster of former President Mohamed Morsi that they are now referred to as the GCC-3 (Gulf Cooperation Council) or G-3. Saudi Arabia, Kuwait and the UAE share two common traits: A disdain for the Muslim Brotherhood (and its affiliates in the Gulf) and vast oil surplus funds to try and solve political challenges.

Together they have pumped in an initial $12 billion and there is a great deal of talk in the market that they are prepared to do so again if needed. As of the end of April, Egypt's foreign exchange reserves stood at $17.5 billion -- a three-month supply.

They are eager to manage this period of transition to try and provide both the infrastructure and governance for sustainable growth. This year, UAE-based developer Arabtec signed a $40 billion agreement to build low income housing in Egypt, and the government put in another $5 billion to construct wheat silos to reduce wastage of their grain crops.

These governments and their entities, sources say, don't plan to be the lenders of last resort forever and this time they may not have to. Last Thursday, IMF managing director Christine Lagarde talked on the phone with el-Sisi and expressed her organization's commitment to helping the country in its transition period.

The sticking point over the last three years of "on again, off again" talks has been a willingness to bite the bullet on economic reforms. After the Arab Spring chaos, this may be the former military leader's toughest test. He needs to illustrate to his Gulf partners and the IMF he has the mettle to deliver painful reforms and keep Egyptians on his side.

READ: Egypt's new President vows to 'correct the mistakes of the past'

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