Massive Protests to Test Egypt Again

Yousef Gamal El Din | CNBC

Egypt is bracing for massive demonstrations on Sunday, in the most serious threat to the nation's tenuous stability since the ousting of its former president, over two years ago.

Protesters, angry at the way the Muslim Brotherhood-led government under President Mohamed Mursi has managed the country's affairs, will call for Mursi's removal.

"With the macroeconomic situation worsening, due to the poor competencies of decision-makers, we expect some degree of violence, although it is difficult to predict to what degree," Angus Blair, founder of the Signet Institute, a Cairo-based think tank, told CNBC.

Shadi Hamid, director of research at the Brookings Doha Center, agreed that clashes would be violent.

"The protests are going to be massive. You are going to have significant violence in certain areas of the country," Hamid said.

Late Wednesday, confrontations between both camps in the city of Mansoura already killed two people and injured more than 200.

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As anxiety mounts, the capital has been hit by acute fuel shortages and recurring power outages, leading to traffic jams stretching for miles through Cairo's dilapidated streets. Citizens, fearing the worst, are scrambling to stock up on cash and food supplies.

Meanwhile, the army has deployed tanks and armoured personnel carriers in various parts of the city and soldiers have set up blockades.

"The only scenario through which Mursi can be ousted is through a total collapse of order that provokes military intervention. I don't think that's likely, even if it did, it would be an utter disaster for the country," Hamid said.

In what turned out to be a last-minute warning, Mursi delivered a 2.5-hour televised address on Wednesday, making it clear he would not allow "enemies" to destroy Egypt's nascent democratic experiment.

"The enemies of Egypt have not spared effort in trying to sabotage the democratic experience," he told a crowd of supporters as well as members of his cabinet and the army.

Economy Very Weak

The Egyptian economy is in tatters, with vital drivers of growth subdued due to the political crossfire. Food prices have risen, tourist arrivals are sporadic, and foreign direct investment is a trickle of what it was before the Arab Spring.

"My main worry is energy supply shortages, resulting mainly from EGPC [Egyptian General Petroleum Corporation, the country's national oil company]'s liquidity woes, dwindling forex reserves and Egyptian Pound depreciation," Allen Sandeep, director of research at Naeem Holding, told CNBC.

The Egyptian Pound was trading at 7.01 against the U.S. dollar on Wednesday, a record low for the currency, which has lost 9.3 percent so far this year. Capital controls on foreign currency withdrawals and transfers are still in place.

The government is also facing growing borrowing costs, and a deal with the International Monetary Fund for a proposed $4.8 billion loan does not appear to be near.

However, Sandeep was unconcerned about a further fall-off in the Egyptian stock index (the EGX), which infamously shut its doors for two months in 2011.

"The EGX has already corrected by more than 15 percent these last few weeks, and trades at a forward price-earnings ratio of 8.5 times. With most of the stocks trading at such attractive multiples, downside risks are not a lot in my opinion," he said.