Tuesday, February 01, 2011

Crisis in Egypt spurs fears of impact on global economy

By Neil Irwin
Washington Post Staff Writer
Monday, January 31, 2011; 4:02 PM

Political turbulence in Egypt is casting a pall on global financial markets and creating new risks for the shaky world economy in the months ahead.

Higher prices for oil and food, a problem intensified by the Egyptian uprising, could cause further unrest in the Muslim world. Analysts also are concerned that movement could be restricted through the Suez Canal, controlled by Egypt and a crucial link in world trade.

The price of oil rose to $91.54 a barrel by midday Monday, the second day of steep increases that have pushed the price up from $85.64 at Thursday's close. Stocks fell in many of the world's developing nations - including some geographically distant from Egypt - on fears that the unrest could spread and that some emerging markets are riskier than investors had previously acknowledged. The Jakarta Composite Index, measuring the stock market in Indonesia, the largest Muslim country by population, was down 2.25 percent.

Egypt has a relatively small economy, with an economic output on par with that of Alabama. And it is not even a particularly large oil exporter, accounting for less than two-tenths of 1 percent of U.S. oil imports. Tunisia, where the ruling regime was ousted in January amid protests, is even smaller in raw economic terms.

But the latest events in Egypt, which have put the future of President Hosni Mubarak's long-standing regime in doubt, as well as the Tunisian uprising, have caused tremors of worry that other autocratic regimes in the Arab world could come under threat. Some analysts fear that uprisings in those countries, such as Algeria and even Saudi Arabia, could disrupt oil supplies.

"There's not a huge risk to oil supplies from Egypt directly, but that could change if dissent spreads to other oil-exporting nations," said Rachel Ziemba, a senior analyst with Roubini Global Economics. "The big issue is that the economic grievances present in Egypt are there across the Middle East. Will they spark unrest in the same way? It's hard to predict."

There are other dangers to the world economy, as well. As energy prices have risen, the costs of wheat, rice and other agricultural commodities have spiked on the expectation of hoarding in case of further turmoil. High prices for food and fuel are a key driver of the protests in Egypt and Tunisia. The jump in prices on global markets could help spark protests and uprisings in other nations ruled by dictators.

In addition, the Suez Canal, which is a vital shipping route between Asia and Europe, moves 8 percent of global trade. Goods have continued to flow without interruption through the canal, and analysts are generally confident that the artery would remain open even if Mubarak is deposed. But any disruption could cause major delays as ships would need to curve around the southern tip of Africa to connect Europe with East Asia.

The Egyptian military "is aware of the importance of ensuring the smooth operation of the Suez Canal, which is not only a vital source of Egypt's foreign currency receipts, but also ensures the supply/movement of crude oil," said Ashraf Laidi, chief market strategist of CMC Markets in London, in a report.

More broadly, the crisis in Egypt has led global investors to question a basic premise - that there is little risk of political turmoil in even relatively poor nations. The lowering of perceived risk in emerging countries has been a key development in the world economy since the recent financial crisis. Investors have lowered borrowing costs for major economies such as China, as well as "frontier" markets, such as Ghana, said Todd Moss, a vice president at the Center for Global Development.

"Now you have Tunisia, and Egypt, and everybody is going to be a bit jittery. People will think twice. Stability can be a real mirage, as we have seen," he said.

That sentiment has helped fuel a stunning run-up in stock prices and foreign investment during the past decade.

"What's going on in Egypt has again reminded us that the world economy is not out of the woods and that things we do not anticipate can have a significant negative effect on global markets and risk sentiment," said analyst Ziemba.

Staff writer Howard Schneider contributed to this report.

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