Could Egypt’s Instability Cause Trouble for Africa ETFs?

As Egypt began its journey of reform, liberalization in the country has engendered widespread corruption and threatens the stability of the country and related ETFs.

In a recently released Cabinets report about the performance of the Egyptian economy, Egypt’s economy experienced an average 7.2% growth rate the last fiscal year (2007-2008) after 4.5% growth in 2004-2005, according to iStockAnalyst.

The growth in Egypt was attributed to the advancement of Gamal Mubarak in the ruling National Democratic party’s (NDP) and the free-market capitalism he espoused, reports Sora Khorshid for The Guardian. However:

• The neoliberal economic reforms are said to have harmed ordinary citizens while benefiting the well-connected.
• Transparency International ranks Egypt 115 out of 180 countries in the 2008 Corruption Perception Index.
• In a 2007 cabinet poll, 75% Egyptians believe corruption is prevalent, especially between the regime and businessmen.
• Around 20% of Egyptians own 80% of the country’s accumulated wealth. 43% of Egyptians live on less than $2 a day and 28.6% are illiterate.

Labor strikes are now frequently held as a popular sign of anger with the regime. The regime has continued to crack down on the opposition. This unrest could ultimately weigh on not only the Egyptian economy, but its related ETFs. On the plus side, ETFs focused on this region are diversified, thus spreading out the risk among several countries instead of just one.

As a frontier market, Egypt has the potential to be volatile. If this is an area of the world you’re considering, have an exit strategy in place to protect yourself.

• SPDR S&P Emerging Middle East & Africa (GAF): up 29.8% year-to-date; Egypt is 5.6%

• Market Vectors Africa ETF (AFK): up 29.3% year-to-date; Egypt is 14.2%

• Claymore/BNY Mellon Frontier Markets (FRN): up 34.2% year-to-date; Egypt is 15.7%

Max Chen contributed to this article.

Comments

[Thomas Smic...:]

Possibly, Africa itself never going to "stable". Ask any (legitimate) businessperson who has attempted to open up shop there.

The largest industry is corruption, and there is no index for that.

Aug 20 09:56 AM

[Alan Young:]

Corruption--baksheesh--is the oldest institution in the middle east (not counting stoneworks). It makes no sense to call it destabilizing.

Aug 20 11:30 AM

[Graham and ...:]

Egypt is the "headline" country for much of Africa (other than South Africa). So if Egypt sneezes, the rest of the continent catches cold.

Aug 20 01:22 PM