Analysis: Egypt army faces challenge over workers, subsidies

The Egyptian army, praised for overseeing a mostly peaceful revolution, is running into a storm of wage and subsidy demands overtaking pressure for democracy and piling more burdens on an already teetering economy.

That has already happened in Tunisia, where strikes and protests continue more than a month after citizens ousted their strongman president and galvanized Egypt's opposition forces to do the same with theirs last week.

Violence has flared anew in Tunisia, raising new questions about its stability and leading the government to ask military reservists to report for duty as police skipped work.

In Egypt, pro-democracy marches have subsided for now but thousands of workers in banks, textile and food factories, oil facilities and government offices went on strike this week, emboldened by the overthrow of President Hosni Mubarak.

One thing that led to unrest in Tunisia is that workers can now express themselves and make demands they couldn't make under the previous government, and that may be manifesting itself in Egypt too, said North Africa political risk consultant Geoff Porter. I think Egypt is in for a very tough economic future.

Egypt's financial market remains shut and the tourism industry -- a vital source of hard currency -- faces crisis.

The military called Monday for national solidarity and criticized the strikes.

Risks for Egypt look, if anything, greater than in Tunisia.

Its much larger population is poorer and tourism accounts for a bigger chunk of Egypt's economy -- more than 11 percent of its GDP, making it one of the top sources of foreign revenue.

In the major seaside tourist destinations of Sharm el-Sheikh and Hurghada, hotel occupancy rates plummeted to 11 percent on February 11, the day of Mubarak's fall, from 75 percent on January 25, according to an industry body. It was not aware of layoffs yet.

Two thirds of the population is under 30, an age group that accounts for 90 percent of Egypt's jobless. Officially, around 10 percent of Egyptians are jobless but analysts say the figure is probably much higher when factoring in the under-employed.

Economists say that is partly due to systematic corruption which distorts competition and discourages investment.

Food inflation was already running high before the protests and anecdotal evidence suggests it has soared further, weakening an already brittle social balance.

The issues in Egypt are all the greater given the stresses in the economy, particularly food price inflation which is unsustainably high, said Angus Blair, head of research at investment bank Beltone. Credit Agricole estimated that the crisis was costing the Egyptian economy $310 million every day.

WAGE DEMANDS

Prices of food and drinks, accounting for 44 percent of the basket used to measure inflation, accelerated year-on-year to 18 percent in January, up from 17.2 percent in December. That was before the crisis. Egyptians say prices have risen since then.

The new cabinet has already promised to maintain subsidies and raise some state wages and pensions by 15 percent.

The army might seek to quell labor unrest with more wage hikes and subsidies, cutting funds available for social services and infrastructure projects, analysts said.

Economic liberalization measures could take a back seat, because these steps could threaten state jobs and damage popular support for the military and its own business interests.

That might buy time but will add stress on state finances facing a sharp drop in tax revenue and costlier borrowing.

There is this jubilation and exuberance of Egyptians but the reality is there are more uncertainties than before, said John Sfakianakis, chief economist at Banque Saudi Fransi.

He said the government may be waiting for political tension to ease before reopening Egypt's bourse because if they settle the situation they could save the market from sinking further.

Trading on the Egyptian Exchange was halted after the market lost 69 billion Egyptian pounds ($11.74 billion) of its value over two days. The reopening has been delayed several times.

DEFICIT WARNING

Some investors are still upbeat, given the absence of mass protests after the army dissolved parliament and suspended the constitution, saying it would govern the country for six months or until new elections were held.

But growth will suffer. The government says it could fall to 3.5 or 4 percent in 2010/11, down from a previously forecast 6 percent. J.P. Morgan slashed its 2010/11 growth forecast to 3.1 percent from 6.4 percent after the protests exploded.

We will probably change it again this week and it will be biased to the upside because of the fact the situation has become more or less stable, said Brahim Razgallah, J.P. Morgan's Middle East and North Africa economist. The impact on the economy in Egypt is still not very clear but ... they avoided the worst case scenario and a large hit to sentiment.

Analysts are watching whether strikers heed the army's plea to go back to work Wednesday after a national holiday.

If workers do not and it considers concessions on wages and subsidies, that could further depress Egyptian assets.

Egypt's state debt was already beyond safe levels at 89.5 percent of gross domestic product in mid-2010, the head of the Central Auditing Agency Gawdat el-Malt said this week.

The budget deficit is going to balloon, whether they like it or not, said Sfakianakis.

(Additional reporting by Sara Mikhail; editing by Mark Heinrich)