Investors Cheer Egypt Transition, See Brief Window of Hope

CAIRO—Judging by Egypt's surging market and rebounding currency a day after the military ousted President Mohammed Morsi, investors believe that Cairo's new leadership will shore up confidence in the country's markets and open the way for new economic aid from Arab neighbors.
But Egypt's new leaders—who, as of Thursday, were without a government and a constitution—will have little time to address the problems that have plagued the country since the uprising against Hosni Mubarak more than two years ago.
In the absence of solid word about any new government, investors cheered the relative lack of bloodshed in the handover and welcomed unconfirmed rumors that the interim president would oversee a technocratic government.
Egypt's main main index, the EGX-30, rose 7.3 percent, as the market added more than $3 billion in capitalization. The Egyptian pound strengthened to 7.0264 against the U.S. dollar, after hitting an all-time low of 7.0337 pounds on Wednesday. The cost of insuring Egyptian debt against default also fell.
"I think the market is speaking for itself now," said Ahmed Adel, senior analyst at Naeem Holding, a Cairo-based brokerage firm. "Everyone was expecting a civil war after Mr. Morsi repeatedly announced he wouldn't respond to protesters' demands and would remain in power."
Mr. Morsi's ouster has been welcomed by neighboring oil and gas-rich Gulf countries at odds with the ousted leader's Muslim Brotherhood-led government. Saudi Arabia's King Abdullah was the first to congratulate Egypt's newly inaugurated interim president. The United Arab Emirates reached out with its blessings, saying that it had followed the events in its "sisterly" country of Egypt with "appreciation and satisfaction."
The new leader of Qatar—which had been the main regional benefactor of Mr. Morsi's Muslim Brotherhood-led government—also sent congratulations.
The "very rapid and favorable diplomatic reactions from the U.A.E. and Saudi suggest that they may be much more willing to provide ad hoc financial assistance compared to under the previous Egyptian regime," said Hasnain Malik of Frontier Alpha, an independent research firm in Dubai.
Such support could trigger recovery for the the Egyptian pound and carry trade and influx of foreign direct investment, a note from Pharos Holding, a Cairo-based investment firm, said Thursday.
But several economists said the new government would have several months, at most, to reverse an economic skid dating to Mr. Mubarak's overthrow.
Mr. Morsi's government was criticized by his opponents for failing to reverse that downturn, as rolling unrest hurt the economy and battered tourism and foreign investment inflows. Egypt's unemployment was at 9% before the 2011 uprising that toppled Mr. Mubarak. The country, with a population of more than 80 million people, now has an unemployment rate of 13.2%, a mark that economists expect to hit 14% when 2013 figures are officially calculated.
Mr. Morsi's government also came under domestic criticism for its failure to make the structural changes necessary to unlock a $4.8 billion loan from the International Monetary Fund. Mr. Morsi's government appeared unwilling to restructure Egypt's generous subsidies on food and fuel, which had a wide popular appeal but drained the country's foreign reserves.
But the Arab world's most populous country also risks losing the unlocked aid from the IMF if its new government isn't recognized by the international community.
"There is a vast amount of uncertainty on how the events can develop, even though there are encouraging signs," said William Jackson, emerging markets analyst at London-based Capital Economics. "The armed forces have been reconciliatory and they want to keep the transition smooth and peaceful, they've also been quite keen on protecting the Suez Canal and factories."
After a year in which the Egyptian pound has sharply depreciated, foreign reserves have fallen to $16 billion and the country's sovereign debt has been downgraded to junk status, Egypt needs an intact government in order to repay debt and secure aid from global donors.
"A potential crunch point could come when the government needs to make quite large foreign-currency debt repayments or if it attempts to rein in public spending," said Mr. Jackson.
Egypt, a strategic ally of the U.S., also risks losing $1.55 billion in military and economic aid sent every year from Washington, as U.S. law prohibits its administration from aiding countries where a military is involved in an unconstitutional change in government.
Egypt also risks future unrest, as Mr. Morsi's supporters reiterated Thursday that they will demonstrate to reject what they called a military coup.
Still, many investors, whose caution over the past year was formed by a fear of polarization and sectarian strife, were more optimistic on Thursday.
"The previous government had no experience in running the country, and they didn't know how to make peace with political parties or investors," said Mr. Adel.
Several local investors appeared optimistic as well, saying the Brotherhood had alienated its opposition and scared away able technocrats.
"There were so many qualified politicians and economists who were offered positions and refused because they didn't trust the Muslim Brotherhood's government," said Karim Helal, the chairman of ADI Capital, the Egyptian investment banking arm of Abu Dhabi Islamic Bank. "Egypt has learned from its mistakes in the past two years and there is no way on earth it is going to repeat any of them."
Write to Reem Abdellatif at reem.abdellatif@dowjones.com