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Category Archives: Commodities

The Wrap: Egypt Labour Disputes Threaten Recovery, Syria Tries to Close Import Gap

  • EGYPT

- This morning the government statistics agency, CAPMAS, published figures that show annual consumer inflation slowed to 9.7% in August, from 10.3% in July reflecting easing pressure on the currency. The pound has actually been appreciating slowly in the last month but as Rebel Economy has signalled before, that doesn’t mean the currency is strong.

BG Group Drops Most in 10 months on Egypt Delays - Bloomberg 

Remember that good news yesterday on BP’s gas discovery in Egypt? Well news that another British oil company, BG Group, is suffering project delays in Egypt shows how fragile the country’s energy sector can be.

Here’s an excerpt from the Bloomberg story covering BG’s announcement:

BG Group Plc fell the most in 10 months in London trading after saying project delays in Egypt [and Norway, but cut that bit out here] will curb oil and natural-gas output next year.

The company was the worst performer on the FTSE 100 Index. Political turmoil in Egypt has forced BG to delay its West Delta Deep Marine project, it said today in a statement.

Though this is bad news for BG’s stock, it’s even worse for Egypt which relies on the oil and gas sector as one of the backbones of the economy. The last two and half years have seen Egypt’s debts to oil companies mushroom partly because of costly energy subsidies putting a burden on the government’s finances, and partly because of increased reliance on imports, that has depleted foreign reserves.

That has put many big oil investors in a quandary over whether to continue pouring money into Egypt. Apache, on the of the largest foreign investors in Egypt, has already agreed to sell a 33% interest in its Egypt operations

Dismissed trade union members threaten to file complaint with ILO - Egypt Independent 

Meanwhile, discontent is brewing in Egypt’s labour sector, where the new manpower minister Kamal Abu Eita has kicked up a storm by firing members of the Egyptian Federation of Trade Unions, including its head Gebali El-Maraghi.

Media reports suggest the dismissals happened because some members were part of the Muslim Brotherhood and continued to support the former Islamist president Mohammed Morsi. Others say a new amendment to a law meant the board had to be dissolved.

What is clear is that these internal tussles do not bode well for the labour movement, which is a critical element of a transitioning Egypt. 

Qatar agrees to convert $2 billion into Egypt bonds: ReportsAhram Online 

In a sign that Qatar will continue to support Egypt, it has agreed to convert another $2 billion into Egypt bonds, after converting $1 billion into three-year bonds in July, and $2.5 billion into 18-month bonds in May.

The bond purchase is one way of supporting Egypt’s widening budget deficit, which is close to 14% of GDP. With Qatar a strong supporter of the Brotherhood, it looked like it may withdraw aid after the ouster of Morsi, however, it also has close to $8 billion invested in Egypt, and that doesn’t include several corporate deals worth much more. In June of last year, Qatar agreed to back Citadel Capital’s subsidiary, Egyptian Refinery Company in a deal worth $3.7 billion.

  • LIBYA 

- OMV “Halts Libyan Flows” Libya Business News 

Protests in Libya have reportedly forced Austrian oil company, OMV to halt production. A company spokesman told Reuters:

OMV’s production in Libya, which was largely unaffected by the events of the last few weeks, has now been shut in as events have spread to the west of the country … OMV is closely monitoring the situation.

It is estimated that protests has led to a 30% decline in oil production, which is massive for a country that is so reliant on its oil. The government has been forced to import fuel to keep power stations running while queues grow at petrol stations.

Protestors are asking for more pay and calling for greater regional autonomy, which is difficult considering the government’s monopoly over oil.

But there could be some solution at a hearing this week…

Libya Congress to hear proposals on oil deadlockReuters 

The crisis committee tasked with resolving Libya’s oil paralysis will brief the 200-member General National Congress by Wednesday with proposals on how to end the confrontation, Reuters reports.

A solution to the stalemate between the government and tribal mediators is becoming more critical. Last week, Libya’s oil output hit a post-war low of just 150,000 barrels per day compared to its capacity of 1.6 million bpd. 

  • SYRIA 

- Syrian pound depreciates as talk of US strike growsSyria Observer 

Unsurprisingly, this story, translated from Syria’s economic magazine, Iqtissad, indicates that traders expect a “dramatic rise of the US dollar against the pound if the US Congress votes  ’yes’ to military action”.

With indications from Obama this morning that the US could pause any plans for attack on Syria, the pound could see some short-term respite.

A black market dealer said the Dollar could be worth as much as 350 Syrian pounds if Congress agreed to strike. But even without a strike, inflation is still plaguing Syrians who are now spending four times as much on staple goods. Syria’s official inflation rate has continued to increase though it still remains below unofficial estimates.

- Syria looks to buy 135 thousand tons of rice after August tender closed without a deal Syria News 

Syria’s Foreign Trade Organisation has opened another tender for rice as it struggles to keep up with demand. Sanctions and soaring inflation has hit the country’s economy. 

It needs at least 140,000 tons of rice a year to cover demand, according to the report.

Even as this report came out, Jordan announced that it would cancel agricultural imports to Syria due to the escalating violence.

Radi Tawarneh, Secretary General of the Jordanian Ministry of Agriculture, said Jordan had already made significant losses in its agricultural sector as a result of the Syrian crisis in the range of 80 million Jordanian dinars.

This will deprive Syria of about 180 thousand tons of fruit and vegetables, according to the report. 



The Return Of Egypt’s Elite

Those who were punished under Mohammed Morsi are getting their own back.

The chief executive of Egypt’s biggest construction company, Orascom Construction Industries, has signalled that the firm is “currently exploring its legal options” with regards to the $1 billion (EGP7.1 billion) tax settlement it agreed in April with the Morsi administration.

If the decision is overturned, it would be a symbolic victory for the business tycoons who have laid low since the end of the Mubarak era.

The signs are clear. Others who faced trial for more serious charges, including steel tycoon Ahmed Ezz, have been released and will likely live in luxury as they await retrial. Egypt’s prosecutor general has frozen an investigation panel sponsored by Morsi to probe crimes committed during the January 25 revolution and its aftermath.

And as the 85-year-old Mubarak was himself released from jail last month, the prospect of a return of the old guard has become all too real.

So what’s the background to the OCI case?

Nassef Sawiris, the head of OCI, was for much of this year entangled in a tax case with the former Islamist government, which claimed Orascom evaded taxes worth $2.1 billion after the sale of its cement business to French firm Lafarge in 2007.

OCI denied any wrongdoing. The government responded by placing a travel ban on both Nassef Sawiris and his father Onsi.

In April, the company finally agreed to repay $1 billion over a five-year period.

The Sawiris family struggled with the Islamist government, and Naguib Sawiris, Nassef’s brother, admitted he backed one of the biggest rebellions against Morsi, the Tamarod movement.

So what could happen now? 

With the change of government, OCI looks like it is trying to reverse the tax decision. After all, why would the company stick to a settlement that was made with a government the Sawiris family consider as totally illegitimate?

Nassef Sawiris, clearly very happy about the removal of Morsi, blamed the former Islamist government for everything from the stagnant tourism sector to the lack of investment. Now the interim government “must learn from the failures of the previous government,” he told me just days after Morsi was overthrown.

While there is no doubt that after just one year in office, Morsi did nothing to prevent a looming economic collapse, businessmen like Sawiris have seized an opportunity to blame Morsi for much more than he is responsible for.

Ultimately, it doesn’t matter whether Morsi is wholly to blame or note or even whether OCI really evaded taxes or not. What is clear is that Morsi is powerless and under the purview of the military, while others in the opposition are rising again.

So if other ongoing court cases and deals done under Mohammed Morsi are anything to go by, it’s likely OCI won’t have to pay a penny.

The ease at which these decisions could be reversed sets a dangerous precedent for the return of a powerful elite, who are able to influence politics as much as they do business. 



The Wrap: Cairo Bomb Shows Stability Elusive, Libya Oil Production Down 30%

  • EGYPT 

Egypt’s Brotherhood under legal threat as bomb hits central Cairo - Reuters 

Nothing has damaged Egypt’s economy more than the threat to security and stability. The perception of risk is enough to derail an entire economy and it will continue to keep investors away. The killings of hundreds of innocent civilians in a bloody crackdown a few weeks ago only compounded this perception and made it reality.

The fear that a jihadist and extremist element may have been borne out of the military coup is materialising. An attack on a police station in central Cairo and plans for new mass protests by the Brotherhood on Tuesday shows how elusive stability is.

Though a state of emergency and a curfew has to some extent successfully shrunk the number and intensity of protests, the interim government has yet to show that it is in control (and not the army).

Egypt boosts Suez security as foiled attack shows risksBloomberg

Security problems this week at the Suez Canal the waterway which handles about 8% of world trade, is among the only areas in Egypt that highlights just how damaging the new threats that are emerging after Islamist president Mohammed Morsi’s ouster.  

Half our petroleum products are gifts from Arab countries, says authority –  Egypt Independent 

This would be funny if it wasn’t so damaging for Egypt’s deficit and the wider economy. The head of the state oil company, the Egyptian General Petroleum Corporation, admitted that 50% of the petroleum products that the authority needs to import come in the form of gifts from Arab countries as part of the aid they provide to help the Egyptian economy.

I’ve said it before and will say it again: Rather than depend on the GCC for plugging a gap that will always reappear, Egypt should try to renegotiate real investment from these countries and seek technical expertise on how to restructure energy subsidies. The welfare on energy is the biggest drain on the budget and will continue to be so until the price of fuel is raised for those who can afford it.

Speaking of which:

UAE to shower Egypt with additional $2 billionAhram Online 

  • SYRIA 

Syrian government backtracks on plans to charge customers for plastic bags for bread- Syria News (Arabic)

Probably wise considering Syrians are struggling to buy bread in the first place. The government was going to charge consumers 4 Syrian pounds a bag after bakeries and manufacturing plants financial losses mounted.

The price of most products has increased as the currency depreciates against the dollar.

Tenders for food commodities fail to draw interestReuters 

Syria has cancelled two tenders for food commodities in recent weeksReuters has reported, threatening food supplies to the population.

  • LIBYA 

Libya imports fuel to keep power onWorld Bulletin 

Libya has begun importing diesel and fuel oil to keep power plants operating after protests closed most of the gas fields in its eastern region which usually supply them, the World Bulletin reports.

Analysts told me last week that protests around oil fields have caused a 30% drop in production this year, a massive amount for a country that owes its post-revolution revival on oil.

In the meantime:

Libya and Malta agree oil deal, will collaborate on explorationLibya Herald 

Under the agreement, Libya will supply energy products to Malta at preferential rates. That will include crude and refined oil, jet fuel and LPG, the Libya Herald reports. In return, Malta will be aid Libya in transport and civil aviation.

However, the agreement won’t be in place until Libya resumes normal production. Considering the country is struggling with its own oil exports and supply (Oil exports are down to 160,000 barrels a day), this doesn’t seem like it will happen for some time.

And another critical part of the arrangement is for Libyan oil and gas workers to learn English in Malta.



Economic Impact of US Intervention in Syria

As the world awaits the decision of whether the US will intervene in Syria’s bloody civil war, the price that country is paying is growing day by day.

Hundreds of thousands of people have been slaughtered and cities that were once cultural capitals have been annihilated. Inflation is at triple digits, GDP has literally halved and the jobless rate has quintupled.

But the key question today, and the one that President Barack Obama has brought to US Congress, is whether military-led intervention will serve as an overdue punishment and warning to Bashar Al Assad and his regime, or whether it will simply deal a final blow to the country as the Syrian regime’s allies retaliate aggressively at the expense of innocent civilians.

While it is the humanitarian cost that is the number one consideration here, the economy, even in its current state, is still a lifeline for thousands of Syrians. The global economic impact of an escalation of the civil war is also a factor that is being mulled because of the ripple effect on global markets.

Based on interviews with half a dozen senior economists focused on Syria, Rebel Economy has put together a list of the key economic impacts of US military-led intervention in Syria:

Higher Oil Prices

Although Syria is not a major oil producer, many expect the oil price to spike, mainly because Western intervention in Syria is likely to lead to a bigger regional conflict involving major oil producers and two strong allies to the Assad regime, Iran and Russia.

More than two years into Syria’s civil war, Assad is settling his bills for Russian arms orders to try to shore up ties with his most powerful ally, this Reuters investigation reveals.

Oil prices have already hit an 18-month high, but if the civil war escalates with military strikes the oil price is expected to spike further, playing havoc with global markets as the cost of production soars.

Some oil analysts are estimating that Brent Crude could rise above $120 per barrel as a result of a military strike, while some, including those at Société Générale, see prices climbing to $150 per barrel in the short-term.

A possible spillover into Iraq, OPEC’s second largest producer, would cut the volume of oil from the global market and raise prices. Iraq’s Kirkuk oil pipeline has already been targeted six times in August. This has forced Iraq to cut oil shipments from pipeline by more than half for September.

Foreign Currency Troubles

Pressure on foreign reserves will grow as energy prices rise, especially in countries dependant on imports. Some countries near to Syria are particularly vulnerable to foreign currency pressures, including Lebanon and Jordan whose currency reserves stand at near 10-year lows. This means they could have trouble covering the cost of imports if the conflict in Syria escalates.

And the lower reserves fall, the more currency depreciation is possible and the more pressure on imports.

In Syria, in the days following the US’ announcement of possible military intervention, the Syrian pound has taken a beating on the black market.

Here’s Professor Steve Hanke’s update. He’s a professor of Applied Economics at Johns Hopkins University:

The Syrian pound (SYP) has lost 24.07% of its value against the US dollar in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88%. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term.

Trade Routes Disrupted

Analysts say it’s unlikely for key ports in the Gulf or cargo traffic through the Suez Canal to be disrupted as a result of military intervention, however perception is king.

Even the threat of increased disruption could send insurance rates skyrocketing and delay the passage of goods passing through Lebanon’s Port of Beirut.

Contagion effect

Aside from the impact on the oil markets and the major oil producers tied to Syria, many other countries in the region could see an adverse impact on their economies because of Syrian strife. Turkey for example, already suffering from a hard to manage current account deficit, could see it widen as political instability weakens the lira and raises oil prices.

And of course Israel has threatened aggressive action if attacked by Hezbollah or the Syrian army, which could impact both Lebanon and other countries in the region if the conflict escalated fast.

Overstating the impact?  

Despite all the above pointing to an Armageddon scenario, some still say that an intervention will do no more than dent the Syrian regime.

Samer Abboud, a visiting scholar at the Carnegie Middle East Center and political economist, says the “regime is so boxed in economically and any major economic effects have already occurred – sanctions, the disrupting of production and trade routes, and so on – that the “limited and narrow” strikes will not be as debilitating as we may think”.

For one, though we mentioned above the impact of trade routes, in fact local reports from Lebanon suggest the Port of Beirut is doing much better than expected. The Daily Star reports:

About 2,200 such vehicles enter the port daily, twice the number at the start of the year, and the multicolored containers are stacked five high rather than three. While Lebanon’s growth has suffered during the two-and-a-half-year conflict next door in Syria, port traffic has risen as traders avoid risky overland transit. Domestic demand is also increasing as Lebanon absorbs 1.2 million Syrians fleeing their war-torn country.

Unlike Libya, which had little to no foreign support, Syria has the powers of Iran and Russia behind it arming it and financing the regime. The West’s reluctance and delay to intervene is also ultimately buying more time for the Syrian regime to replenish stocks, move somewhere new and high military assets.

It has also weakened the West against Syria, allowing the regime and its allies to calculate that any intervention will be short and not a major long-term threat, according to Abboud:

Regime allies are unlikely to cease financial and material support in the aftermath of intervention, regardless of whether the regime is perceived to be losing ground on the battlefield. Intervention will only strengthen the commitment and resolve of regime allies and supporters, particularly Iran and Hezbollah. If they can withstand the intervention, then the West’s only major military option will have been confronted.

What is clear is that even though the question of intervention is complicated and mired with complexities, the longer the West waits to decide, the more time the Syrian regime has to retaliate with strength.



Why Egypt’s Pound Isn’t Strengthening

Take a look at this chart, which the Central Bank has been proudly parading this month:

Bloomberg
Bloomberg

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi. 

If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12 billion of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 billion of that has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:

currency3

And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment. 

So the picture isn’t as rosy as the interim government may want you to think.

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

Dcode
Dcode

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash. 



Why Egypt’s Energy Bill Is Higher Than Official Figures Suggest

This guest post is by Stefanie Heerwig, a freelance journalist and researcher at Openoil, a Berlin-based energy consultancy and publishing house. 

Egypt’s energy bill, already a whopping $17 billion, is probably much higher than official figures suggest.

The country is losing billions in petrodollars because it isn’t taking advantage of the international market where oil can be sold at much higher prices, nor is it closing up channels that breed corruption and allow hidden subsidy costs to take hold.

Officially, energy subsidies account for 20% of Egypt’s budget, costing the government $17 billion every year, but it is likely the government actually spends much more on subsidies every year.

1. Missing out on “opportunity costs”

If the government would account for the opportunity costs (sometimes also referred to as economic costs) of energy subsidies, it’s subsidy bill would be at least 50% higher than the official figure.

This is the money the Egyptian government loses by not selling fuel at the international market price, but at far cheaper rates.

That means the state-owned oil company, the Egyptian General Petroleum Corporation, provides energy at a cheaper price for the domestic market, when it could be taking advantage of the lucrative international oil market.

The difference between the profit that the EGPC could have made from selling the fuel internationally and the oil it sells domestically at a subsidised price is the “opportunity cost”.

In order to capture this opportunity costs, economists use the so-called price gap approach.

2. Lending between ministries has opened up channels for corruption and hidden subsidy costs

The government has made it almost impossible to track the true costs of energy subsidies.

That’s because of poorly recorded budgets and unnecessarily complex bureaucracy between the oil, electricity and finance ministry.

Samir Radwan, a former Egyptian finance minister explained how this internal bureaucracy works:

“When the EGPC provides fuel to the Ministry of Electricity, its sells it at the subsidised price. The Ministry of Electricity, in turn, collects revenues from electricity sales and pays them to the Ministry of Finance which issues a bond to the Ministry of Electricity.

But the subsidies are recorded as an expenditure at EGPC. It would be more correct, however, if EGPC would sell fuel at the international market price to other entities and then account for the subsidies as a loss.”

Intra-governmental funding has made it even more difficult to track how much subsidies are costing the nation and an “amazing labyrinth of connections between different ministries and different entities of the government,” Radwan says.

This only serves to undermine official figures.

But more worrying still is that the convoluted internal financing mechanism is masking an accumulation of intra-governmental debt. The Ministry of Electricity not only owes money to the EGPC and the Ministry of Finance (according to estimates, the Ministry of Electricity pays about 200 million Egyptian pounds a month to the EGPC), but is also owed funds and debts by other ministries and entities.

The question now is: how will the government undertake any energy subsidy reform, if it is not even able to track its own subsidy records?



Why “Smart” Cards Are Stupid

This guest post is by Stefanie Heerwig, a freelance journalist and researcher at Openoil, a Berlin-based energy consultancy and publishing house. 

As the dust settles after Egypt’s latest wave of fuel shortages, the conspiracy theories about why there was a sudden recovery in fuel supply after Mohammed Morsi’s ouster are also fading away, until the next time there are chronic shortages.

But one thing the interim government won’t be able to forget is how to get over the country’s addiction to energy subsidies, a system which has bred an entire parallel black market.

As much as 20% of subsidised fuel is thought to have been siphoned off through corrupt activities. 

In fact, anecdotal evidence suggests that sometimes smuggling fuel is perfectly legal, highlighting the failure of Egypt’s bureaucracy rather than the energy subsidies.

For example, truck drivers on the agricultural route between Alexandria and Cairo say farmers who need diesel to operate their machinery can easily get hold of a government permit to access larger amounts of subsidised fuel from petrol stations. The only proof the government needs is evidence they own farming machinery. This very unofficial process has encouraged many to sidestep the system, getting more than their fair share of energy products.

This is part of the reason why the “smart” card system, where fuel will be sold through ration cards, will not be enough to reform Egypt’s energy subsidies: simply because legal mechanisms can be so easily circumvented and on such a large scale. 

Incoming Egyptian officials may be depending on the “smart” card scheme to work to ultimately phase out untargeted energy subsidies that favour the rich, and not the poor, but there are some key reasons why the project is unlikely to work. Here are just a handful:

1) The smart card will be an open door for corruption and leakages.

According to the government, the cards will be distributed at post offices, traffic points and branches of the Bank for Development and Agricultural Credit against the presentation of a traffic license (people with vehicles without licenses will get cards from September).

2) In a country where government administration is pure chaos and piles of money and papers are lost among 36 non-computerised ministries, how easy will it be to bribe someone to get more than one smart card or lose consumer information?

3) The ministry of petroleum have reassured Egyptians that they have started to track the movement of fuel from storages to petrol stations via the smart cards, in the first phase of the reform, in an attempt to clamp down on black market dealers and smuggling.

However, deeper investigation shows that the system has only tracked fuel from a single refinery (in Mostorod) to a handful of stations in Cairo and Giza since June. The ministry has admitted that it has not built a database yet which makes it highly unlikely the government is aware of the country’s complex fuel network and how it should work.

This is worrying and it is unclear whether the government is truly aware of the scale of the reform.

4) If officials don’t even have an overview of the distribution mechanism of fuel, how will they manage to distribute smart cards to all vehicle owners in Egypt within a month’s time as promised?

Assuming that every third person over the age of 18 owns a vehicle, this would mean the production and usage of 18 million smart cards, which means a lot of work and organisation ahead.

All in all, this is a logistical nightmare and the body of evidence that shows why Egypt’s proposed reforms won’t work is growing.

It’s time for Egypt to rethink its approach and reinvent energy subsidies.



The Honeymoon Is Over

“Let us savour the moment now, and we’ll worry about the future later,” some Egyptians said yesterday hours after Egypt’s military had ousted the country’s president Mohammed Morsi.

Led by General Abdul-Fattah el-Sisi, the army – backed by the heads of Al Azhar, the Coptic Church and Mohamed ElBaradei - moved swiftly and confidently to suspend the country’s Constitution and create an interim government. Crowds erupted in cheers and screams.

Some say the military was working on behalf of the people of Egypt and that the country’s first democratically elected president had to go. Others say the army’s decision was carefully orchestrated, and cannot be described as anything but a military coup.

But as the jubilant atmosphere of Tahrir Square begins to fade, there is one certainty: Egypt’s economy must be made an absolute priority, or risk repeating this scenario in another 12 months. 

This is really a mirage.  The immediate gratification gained at getting rid of Morsi is at the expense of solving the basic bread and butter problems that helped push Egyptians onto the streets in the first place.

For example, resolving Egypt’s ever-increasing budget deficit, finally getting over a costly addiction to energy subsidies and actively creating jobs for the 1.2 million Egyptians who lost a job under Morsi (and the millions more who have been seeking formal employment).

Whoever takes over the helm inherits these problems and will likely meet a public backlash to any reforms.  The economic challenges have not gone away just because a Muslim Brotherhood leader was booted out.

In fact there are many more questions now lingering:

What of the $4.8 billion loan from the International Monetary Fund? Egypt still desperately needs this but the last time the army was in power (in June 2011), the loan was refused because it was considered too much of a public debt burden. Fast forward two years and you have an intractable crisis made worse by the fact international lenders won’t touch Egypt until this loan is signed.

Also, Egypt currently has no constitution: is it even possible for the IMF to sign a deal with a country with no governing charter?

What of the the billions from vehement Muslim Brotherhood ally Qatar? Will the Gulf state pull out now that the Brothers are gone? As Emad Mostaque, strategist at Noah Capital Markets says:

[There are] big question marks over $8 billion of existing Qatari cash being rolled over in a couple of years [and] $19 billion of pledged foreign direct investment in next 4 years (more than everyone else put together over last five [years])

Egyptians may be celebrating now, but hardship is yet to come for the poorest Egyptians who need immediate reforms, and the price we have paid for accepting the military’s aggressive move will no doubt set the tone for the next few months.



Why The Oil Market Is Wrong On Egypt

This guest post is by Robin Mills, energy strategist and economist. He is the author of “The Myth of the Oil Crisis” and “Capturing Carbon”. 

An unlikely pairing has made it to the headlines this week: international oil markets and Egypt.

The price of US light crude oil has risen above $100 a barrel for the first time since September 2012 while Brent crude oil, the European benchmark, has risen to about $105, apparently on concerns over political turmoil in Egypt.

Energy analysts left, right and centre say there’s risk the unrest in Egypt could spread to other parts of the Middle East impacting oil supply.

But there is no truth in this.  Oil markets are usually jumpy over perceived geopolitical risk, even when there is no logical connection to any realistic supply disruption. 

Most importantly, Egypt is not a major oil exporter – in fact, it is a net importer of about 90,000 barrels per day (bpd). Fears that Egyptian turmoil will spread to neighbouring countries could only be rooted in an ignorance of the region and a lack of awareness of the past two and a half years.

Some of the increase in oil prices may be driven by fears for the Suez Canal.  But this is actually not such a vital waterway for oil – nothing like the celebrated Strait of Hormuz, which carries some 17 million bpd of crude oil.

In contrast, the Suez Canal transited a measly net of about 100,000 bpd (see the table below for details) in the first three months of this year.

robinoil

What’s more, the Suez Canal is even less significant for oil transport than Egypt’s Sumed pipeline, which runs from Ain Soukhna on the Red Sea, crosses the Nile south of Cairo and terminates at Sidi Kerir near Alexandria on the Mediterranean.

It carries crude oil from south to north, and transported 1.7 million bpd of oil in 2011, up from 1.1 Mpbd in 2010.

If anything, liquefied natural gas (LNG) transit through Suez is more significant on a net basis, mostly running south-north (probably largely representing Qatari supplies to Europe).

A disruption in Suez, which seems unlikely, would have much more significant implications for world trade generally, than for oil specifically.

The bottom line is that more worrying for oil markets should be the disruption of Libyan production, now below 1 million bpd due to strikes and protests, and the continuing crisis in Iraq, a major oil producer. Yesterday, in continuing insecurity, two cars bombs exploded in the southern oil city of Basra, which had been relatively secure.

Iraqi oil exports in June were at a 15-month low due to pipeline sabotage, technical problems and bad weather at southern loading ports.

The real reason there has been a relative gain of US oil prices over European prices is clearly not because of Middle Eastern events, but due to other domestic developments including new pipelines that will open up once landlocked crude supplies in Oklahoma.

On the other hand, negative factors seem to be overlooked – the reduced probability of conflict with Iran after the election of pragmatist president Hassan Rouhani, and weak Chinese economic data.

As often happens, with a collection of data pointing in opposite directions, the oil market has chosen the most dramatic, if the least relevant, to respond to.



Egypt’s Biggest Oil Debts

Egypt’s state oil company, the Egyptian General Petroleum Corporation, is in big trouble. 

It has racked up billions of dollars of debt in the last decade with some estimating its dues to banks and oil companies is as high as $20 billion.

The magnitude of EGPC’s debts is such that it would be rare to find an oil company in Egypt which is not owed money.  The growing debt pile highlights the government’s struggle to meet its rising energy bills while trying to keep subsidised prices to avoid public unrest.

This Reuters story describes the problem in a nutshell:

Egypt has been delaying payments to firms producing oil and gas on its territory as it has struggled with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew Hosni Mubarak.

Most oil firms hope to recoup the debts in full, but they acknowledge it could take years. While they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown, the debt situation remains a challenge.

The government’s delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt’s energy security.

But exactly how many companies have been impacted and what kind of money are we really talking about?

The following spreadsheet, acquired by Rebel Economy from an investment bank which has major interests in Egypt’s energy, lists the debts owed to no less than 42 companies for oil and gas exploration.

The spreadsheet shows that while a number of small companies are owed money, several large energy companies have achieved special repayment deals with the government.

Of the companies listed, Italy’s ENI agreed to allow EGPC to delay on a $100 million payment, the UK’s BP agreed to defer $600 million, and BG Group also of the UK, $589.8 million.

The spreadsheet ends January 2012, but it one of the clearest barometers of the scale of EGPC’s debt to oil companies that has been made public. Even this document is seen as portraying a conservative total debt figure of only $3.44 billion when actual debts to oil firms are estimated to be at least $5 billion.


If you want to look at this in more detail, click here.

Yet this is just the tip of the iceberg.

EGPC’s debts to banks, to countries that are lending the country fuel at sometimes preferential rates, and even debts to other ministries (the finance ministry has injected billions of dollars to the electricity ministry) set a frightening precedent for what Egypt is facing today.

With Egypt’s inefficient and costly energy subsidy system at the core, this is yet another example of why the country must take long-term steps to reform the system or be forever in debt to others.