The Spillover Effects of the Global Financial Crisis on Economic Activity in Emerging Economies – Investigating the Egyptian Case Using the Financial Stress Index

The global financial crisis of 2007 raised concerns about spillover effects to economic activity in emerging market economies. Economic theory suggests that there are a number of channels through which spillovers of a crisis are transmitted from one economy to another, most importantly the trade channel, the investment channel and the banking sector. This paper quantifies the magnitude of spillover effects of the global financial crisis to economic activity in Egypt through calculating Egypt’s financial stress index (FSI), then fitting it in the VAR analysis to investigate spillovers of financial stress and economic activity of trade partners to economic activity in Egypt. Findings are consistent with economic theory as well as empirical literature in the sense that increased financial stress, lower economic activity in Egypt’s main trade partners along with elevated oil and commodity prices during the global financial crisis imposed adverse spillovers on Egypt’s real GDP growth figures and projections. However, the impact of the slowdown in Egypt’s main trade partners’ economic activity accounted for the largest magnitude and the longest durability of the adverse financial crisis spillovers to the Egyptian economy. The paper, thus, concludes with relevant policy implications.