Egypt shrugs off slowdown but faces inflation risk

By Will Rasmussen

CAIRO (Reuters) - At Cairo's largest shopping mall, Egyptians watch films from La-Z-Boy reclining chairs, shop for Escada handbags and sip coffees at Starbucks.

Betting this is just the beginning of a spending boom, Gulf Arab and European companies are pouring money into the most populous Arab country, despite a global credit crisis and a slowdown in Europe, its main export market.

However, business analysts warn rising inflation could eventually curb consumer spending, stall reforms that have excited investors and anger the poor majority who have not yet seen the benefits of buoyant growth.

Gulf Arab petrodollars, cuts in taxes and duties and a surging stock market have unleashed consumer optimism among the wealthier sectors of Egyptian society.

"When you've been in a bad state and things get a bit better, it feels great," said Sherif Idris, 41, while shopping at a glass-paneled mall overlooking the Nile.

The Canadian-Egyptian, who moved back to Cairo a year ago to work for a private equity firm, said lower classes had yet to feel much benefit.

"Things could be ten times better than they are now."

Spending on consumer goods is still limited to a small but growing middle class in a country where the United Nations says about one-fifth of the population of roughly 75 million lives on less than $1 per day, and most people do not have bank accounts.

"Because of the new government, you can feel the change in the economy," says Elhamy El-Kerdany, general manager of Citystars mall, opened in 2004 with funding from Saudi investors. "This is having a parallel impact on consumer spending."

Some analysts say inflation, which reached an 11-month high in the year to February at 12.1 percent, has not yet noticeably slowed spending in an economy that last year grew at 7.1 percent, the fastest rate in at least two decades.

"Consumer spending has much farther to run despite the high inflation," said Angus Blair, head of research at the Cairo-based investment bank Beltone Financial.

"There is enormous momentum because of the growth in the economy and the tax cuts."

Government officials have said Egypt is on track to match last year's growth, with foreign investment outweighing any negative effects from a global slowdown.

"If the government remains committed to reforms, you will see this growth continue," said Mary Nicola, Middle East economist at Standard Chartered Bank.

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