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Defterios: Why Egypt's transition from its Arab Spring is so painful

By John Defterios, CNN
January 21, 2013 -- Updated 1500 GMT (2300 HKT)
STORY HIGHLIGHTS
  • To create jobs, Morsy needs to spark foreign direct investment and tourism, writes Defterios
  • Defterios: Egypt's transition after the ouster of Mubarak is a high stakes experiment in democracy
  • "Egypt will never be bankrupt and will not kneel, God willing," Morsy said, as he closed out 2012

Editor's note: John Defterios is CNN's Emerging Markets Editor and anchor of Global Exchange, CNN's prime time business show focused on the emerging and BRIC markets. You can watch it on CNN International at 1600 GMT, Sunday to Thursday.

(CNN) -- It was January 25, 2011 -- day two of the World Economic Forum -- when the brisk winds of change from Tahrir Square swept through the Swiss Alpine village of Davos.

Just a month before, in Tunisia, a vegetable seller triggered the Arab Spring when he doused himself with petrol and lit himself on fire. He had been frustrated by a sheer lack of opportunity, despite headline economic growth that looked promising on paper.

Tunisia, with a population of just over 10 million, is one matter. Egypt is eight times larger, and 40% of its people live on less than $2 a day.

Egypt's uprising and transition after the ouster of Hosni Mubarak is a high stakes experiment in democracy under the leadership of the Muslim Brotherhood's Freedom and Justice Party. The Brotherhood secured power seven months ago, installing Mohammed Morsy the country's president.

Read more: Egyptians approve new constitution, unofficial results show

Gun crimes on the rise in Egypt
Low vote turnout on Egypt's constitution
Egypt opposition's post-referendum plans
Egyptians take to the polls

"Egypt needs to settle down. Egypt is a very major economy for this part of the world," V. Shankar, CEO of the Europe, Middle East, Africa and the Americas for Standard Chartered Bank told me. "It's got not only economic influence but a strong political influence, given its relationship with Israel."

Morsy's December gambit to push through a vote on the country's new constitution in the midst of daily, sometimes violent protests in Tahrir Square and surrounding the presidential palace has spooked investors.

Read more: Egypt to reshuffle 10 Cabinet ministries

The best barometer is the Egyptian pound which has come under a new round of intensive selling, hitting a series of record lows at the start of 2013. Foreign reserves, at roughly $15 billion, are less than half of what they were before the uprising began.

With the constitution passing with nearly two thirds majority, the president remains defiant, telling members of the upper house of parliament that the cradle of culture and history has survived much worse challenges in the past.

"Egypt will never be bankrupt and will not kneel, God willing," Morsy said, as he closed out 2012.

Read more: Morsy praises voters as constitution becomes law

To counteract the fall of the Egyptian pound, his party made a plea to the Egyptian diaspora to repatriate some of the $9 billion earned abroad each year -- especially in the Arabian Gulf states -- in a "For you, Egypt" campaign. This is an effort to dampen the fears of currency traders and investors who are climbing a wall of worry and uncertainty.

Foremost on their minds are double digit unemployment, now at 12%, and a budget deficit that nearly matches that. To create jobs, Morsy needs to spark a new round of foreign direct investment and to rebuild tourism traffic. Both have been in very short supply since the uprising.

Too assuage those who say the president is slow in providing a new economic blueprint and security on the ground, Morsy called for a cabinet shuffle and pushed out the ministers of the economy and the interior.

Months of talks with the International Monetary Fund to secure a $4.8 billion loan were postponed by the government after it became clear that in the midst of protests over the constitution, the tasks to pass higher taxes and remove fuel and food subsidies would be near to impossible.

The IMF talks have restarted this month. Until that loan is secured European Union funding of $6.4 billion, and cash guarantees of another few billion dollars from Arab Gulf states, will remain on the sidelines.

Seeing all the uncertainty that has been presented by the new government, ratings agency Standard & Poor's downgraded Egypt's long-term outlook to "B minus" on the "elevated" risks presented by this transition.

According to the new constitution, parliamentary elections in the main, lower house, must be called two months after that document passed -- so there is a lot of jockeying ahead of a late February vote.

The ultra-conservative Salafist Al Nour party has seen members split off to form their own faction. On the other side of the political spectrum, liberal and secular parties have come together after their drubbing during the constitutional vote.

Robert Malley, director of the Middle East and North Africa for the International Crisis Group, told me the opposition is learning the hard way that "elections do matter" and that hitting the streets in violent protest does not always lead to change.

But Malley said after being an underground movement for three decades, the Muslim Brotherhood also needs to adjust its ways if it wants to succeed in this nascent democracy.

"Those in power will have to learn that even though they had a majority at the ballot box , it does not mean they get to decide everything," he said.

Until that time, according to Middle East analysts, Morsy and his new party will face continued pressure on the streets from those who sparked the Arab Spring and from outside investors who yearn for stability.

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