Category Archives: Gulf

Why One Foreign Investor Left Egypt

One of the key markers of a thriving economy is whether investors are committed.

For Egypt, attracting investors has remained a point of contention in the last three years – are they or are they not putting money in Egypt?

Marshall Stocker, an American venture capitalist, was among a band of businessmen drawn to Egypt’s transformation from a sleepy Arab socialist country to one that embraced the market.

The 2004 cabinet had cut the top rate of tax, launched a series of special economic zones and encouraged a rush of construction activity. This robust economic expansion plan, led by Hosni Mubarak’s son, Gamal, hit its stride in 2008, when foreign investment reached dizzying heights of $13 billion. Economic growth clocked in at a consistently high 7%.

The global business community applauded Mubarak’s rule as “bold”, “impressive” and “prudent”. On the surface, the country was a haven for investors like Stocker.

But once he had arrived in Cairo to launch his urban redevelopment real estate company, Stocker’s optimism was short-lived and he was forced to shut down his business just a year after it had hit its peak. He subsequently documented his experiences in a memoir published this year, “Don’t Stand Under A Tree When It Rains”

marshallbook

Rebel Economy spoke to him about his experience as a foreign investor during the height of the revolution and why he won’t be investing Egypt again, at least for now.

  • What was your business about? 

A populist government panders to voters by preventing rents from rising. After several years tenants are paying much less rent than they otherwise should and this makes for lost income to the landlord and significantly lessens the value of an apartment building.

We intended to buy 12 large buildings in Cairo, and instead of buying building by building we could buy them all in a week and redevelop them.

Our team started raising money in 2009 for properties that were a particularly illiquid investment with a lock-up of 8 years. But the aftermath of the financial crisis prompted everyone to demand very, very liquid investments.

That meant that even though we solicited lawyers, doctors, colleges – all types of wealthy people,  in the end the people we found to invest were all people we knew and they were all professional investors; people who managed mutual funds, hedge funds, they apparently have a better appreciation of the market liberalisation thesis in Egypt.

We were able to raise money to do that – $50 million of equity – and we started formally in 2010.

  • Why was Egypt a good investment?

I had already advised the President of Yemen and his son on market liberalisation and the positive consequences of liberalising their economy. I always felt that direct investment in this type of liberal environment is where the real excitement is.

Egypt had both boxes checked – a nice liberalisation environment and it had rich opportunities in urban development. Egypt had the single greatest increase in economic freedom in the years leading up to 2008 and 2009, inflation had been brought under control, corporate taxes were halved to 20% and foreigners could own 100% of a business.

What you saw was direct investment increase collectively. And it was relatively easy to set up a business. The General Authority For Investment (GAFI) is a one-stop shop so the whole process of getting a company going was quite easy.

We had another dilemma: whether it is ethical to do business under an autocratic regime and what business are ethical in such environments. Ours was completely voluntary, as in sellers and tenants were free to refuse our offers. That, I thought, was the ultimate measure of ethics.

  • When did the peak come? 

The peak came after the revolution had begun. Post-revolution there were genuine economic stresses and market prices were falling on buildings.

I negotiated inside a building on Mohammed Mahmoud Street that had its windows duct-taped shut.

The cost of the asset was dropping under tenants were under increased economic stress. So paying tenants to leave was easier to do, and redevelopment, another major component of our business, got easier to manage even though imported goods cost were going up as well as labour. The business made sense post-revolution.

  • What was the turning point, when you knew it was time to leave? 

There has been no economic policy post-revolution except to peg the currency. The volatility of the Egyptian foreign currency rate hit an all-time low post-revolution, and that’s absolutely not what should be happening.

In my opinion, economic policy took a backseat. Islamist president Mohammed Morsi had free-market ambitions at the micro level but didn’t show that he understood this at a macro level. So once he was in power, we had started hearing anecdotal evidence that people couldn’t move money out of the country.

GAFI told us this was not the case but we endeavoured to move a modest amount offshore. It took 7 months. 

Luckily, we never had much money onshore but come August 2012, we made the decision that informal capital controls and lack of reliable economic policy meant that we would not be able to continue our business.

The business was still excellent. Profits were higher because asset prices dropped and those are the operational risks we were willing to take, but at the end of the project, if you can’t move your money out of the country, woe is the investor who makes the investment.

  • Would you invest in Egypt again? 

I have no money left in Egypt. Would I pursue a direct investment strategy that has a decreasing level of economic freedom? No, absolutely not. I wouldn’t go back.

  • What do you forecast for Egypt’s economy? 

The government has a blank cheque from a number of Gulf states but there is a credit limit and the risk is that this credit limit is reached before sound economic policy is enunciated and deployed.

And in the absence of policy, I have to believe that the money is going to run out first.

The Egyptian government visiting Gamal Abdel Nasser’s tomb also signals a certain level of respect toward his thinking but also of his socialist economic policies, which I don’t agree with. Those type of activities should not be ignored.

Stocker has published a memoir of his experience in Cairo. “Don’t Stand Under A Tree When It Rains” exposes the dilemmas of investing during the Egyptian uprising and provides advice on working in a foreign country. 



Is the worst over for Egypt’s economy?

Could Egypt’s economy be on the road to recovery?

Some indicators suggest this might be the case. According to Reuters:

Egyptian business activity shrank for the 13th month in a row in October but at a much slower rate, suggesting the economy may be improving after months of renewed political turmoil.

The seasonally adjusted HSBC Egypt Purchasing Managers Index [PMI – which is an indicator of the economic health of the manufacturing sector] for the non-oil private sector rose to 49.5 points in October, up from 44.7 points in September and moving closer to the 50 mark separating growth from contraction.

In other words, readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

This handy graph from Capital Economics shows what’s been happening with Egypt’s PMI:

EgyptPMI

Economists at Capital Economics say that “at face value, the rise in the Egyptian PMI would suggest that, following several months of disruption to  activity caused by July’s “second revolution”, the economy is starting to recover.

But that’s really all it is, “face value”, because below the surface, Egypt’s economic problems remain a menacing backdrop to any political tensions that unfold and a reminder that no leader can succeed without acknowledging that difficult decisions need to be made.

The reliance on Gulf money has cornered Egypt into spending a lot of political capital without reaping the benefits of economic reform, economist Anthony Skinner writes in the Financial Times:

Unlike the much-maligned and ultimately rejected IMF Stand-By Arrangement, the lenient terms of Gulf aid mean that Egypt is not hamstrung by conditionality; at least not directly. A square in Luxor has already been named after King Abdullah of Saudi Arabia in recognition of his generosity. Some Egyptians part-jokingly fret that the pyramids will be next.

The trial of former Islamist president Mohammed Morsi this week was partially brought about because of Mr Morsi’s failure to address mammoth problems in the country: joblessness, rising inflation and untenable subsidies that are costing more than the country can manage.

Once the inexperienced Muslim Brotherhood was out of the way, supporters of the coup expected the caretaker government to act immediately by expediting structural reforms necessary to relieve pressure on the deficit and free up the economy.

However, the theatrics of Egyptian politics has detracted from any serious issues.

The trial of Mr Morsi has became more about the power struggle between the army and the Brotherhood rather than the charges that were brought against him.  The army’s petty grudge against comedian Bassem Youssef has busied the minds of Egyptians, rather than the creeping xenophobia driven partly by populist nationalism.

And God forbid if a politician were to attempt to bring up the notion of “compromise”, because he will likely be branded a traitor for giving in to the opposition.

The Egyptian government has come up with a $3.2 billion “stimulus package” that is unrealistic, in that the plan is based on spending as much as possible while simultaneously ignoring that the country cannot have a healthy, streamlined economy unless cuts are made and taxes are overhauled and collected properly.

It has also launchedEgypt 2022”, which in economics we call a complete joke.

Other than omitting the glaring detail of how the government plans to finance this multi-billion dollar investment plan, there is no discussion of how the interim government will achieve its ambitious growth rate targets. Instead, ministers have said the plan “focuses on building a strong and disciplined economy based on social justice, characterised by diversity and openness to the outside world.”

This isn’t a Miss World contest, and we’re not asking for world peace or prosperity. Egyptians are impatient and are wondering when vague rhetoric will translate into solid, targeted actions.



From Washington, With A Slap

News that Washington will suspend a sizeable chunk of military aid to Egypt was met with little more than a shrug from Egypt watchers and analysts who said the decision was unsurprising.

The move to trim part of the $1.3 billion in military aid to Egypt had been in question since the US issued a warning in July when the military ousted Islamist president Mohammed Morsi.

For many, it was all talk not action.

“I don’t see it as any more than a symbolic slap on the wrist,” H. A. Hellyer, an associate fellow at the Royal United Services Institute, told Global Post.

In the short run, as this Associated Press editorial argues, “the suspension of hundreds of millions of dollars in aid will have little effect on Egypt’s military and its ability to defend itself. The cutoff probably will not do much damage to most of the companies with contracts to build such weapons.”

Indeed, a report by Al Jazeera revealed that US military aid has flowed as normal to the Egyptian cities of Damietta and Alexandria since the coup began, despite warnings.

Some also said the slap on the wrist decision avoids the real debate at the heart of the aid.  Jonathan Guyer of the Cairo Review explains:

If we agree that American assistance doesn’t do much, then why continue it? The basis of this gargantuan military aid package is the 1979 peace accord between Egypt and Israel; that should be the topic under discussion rather than the idea of “leverage” in the abstract.

If Washington is going to cut aid, it must carry out the policy change with a bang, not a whimper. 

On the flip side, for supporters of the military-backed overthrow, the announcement inflamed tempers. Naguib Sawiris, the politician and billionaire who has never been short on opinions, started a Twitter row:

But a healthy dose of realism from a few Egypt commentators doused Sawiris’ outburst:

For all the discussion of symbolism and how much impact the aid cuts will make on Egypt, the US undeniably has a significant amount of fire power in the Middle East. The decision to suspend some aid, in and of itself, is a big deal that will influence other major donors in their attitude toward Egypt. 

Aside from Gulf aid (and I’ve been clear about why that’s not a great idea in the long-run here and here) Cairo has pretty much lost the confidence of every major donor. Washington’s announcement is a nail in the coffin for the European Union, the World Bank and the African Development Bank who have been closely monitoring developments.

Of course, the US is just one of many countries and institutions that provide military and financial assistance to Egypt, as the chart compiled by the Center for Global Development shows below. Even though, taken as a whole, European bilateral aid plus EU assistance is double that of the United States, the US is still the single largest contributor and has huge voting power at other international organisations such as the International Monetary Fund, where the country’s quota on the board is the largest. The US can stop Egypt getting the help it needs when it undoubtedly asks for it in a few years, if not earlier. 

aidto egypt

Whether Egypt likes it or not, even a symbolic decision is damaging to Cairo’s ever-withering reputation in the eyes of the international community. 

The only saving grace is that those in Egypt’s government realise how detrimental the US decision is to its chances of securing other aid and make moves to speed up the election process and be rid of the the military’s undemocratic rule.

But somehow, with condemnations of the US coming fast and steady from all parts of the administration, that looks very unlikely.

Instead, as Cairo isolates itself more and more it further drives itself into the power-hungry hands of the Gulf. 



Egypt left vulnerable after Qatari snub

It was bound to happen sooner or later.

Egypt has returned to Qatar the $2 billion the Gulf state deposited in Egypt’s central bank after negotiations to convert the money into three-year bonds failed.

Though this represents only a quarter of the total funds Qatar has lent or given to Egypt, the decision to return the money symbolises the increasingly strained ties between Cairo and Doha following the ouster of Islamist president Mohammed Morsi in July.

Qatar had been a strong supporter of the Muslim Brotherhood’s Morsi and his departure raised questions of whether Egypt would have to repay any of the total $8 billion in Qatar deposits and loans. Official reports suggest Egypt couldn’t reach a deal with Qatar and decided to repay the deposit rather than convert the $2 billion into bonds.

But in reality, perhaps Qatar was asking for a higher interest rate than Egypt was prepared to pay. Or maybe Qatar simply wanted its money back.

Either way, Egypt has been left in a vulnerable position.

Despite the $12 billion in support from Saudi Arabia, Kuwait and the United Arab Emirates that the government keeps boasting about, the breakdown of this bond deal shows that Egypt cannot rely on the Gulf to solve its problems.

The truth is that multi billion dollar support came because the Brotherhood were eradicated from the political scene, not because Gulf states are particularly bothered about seeing an economic recovery. But here’s the dilemma: the international community have openly stated they want an “inclusive political solution” that does not abandon the Islamists.

So how will Egypt reconcile the needs of international donors (such as the International Monetary Fund, African Development Bank and World Bank who can help implement essential reforms but need the Muslim Brotherhood on board), along with requirements of the Gulf states (who have provided a helpful but unsustainable safety net)?

Egypt has so far taken the easy road by refusing to make any real budget cuts and instead announced an unrealistic stimulus package that it can’t afford.

The Qatari deal breaker signals that the government is weak and its backers are dwindling. Now is the time for Egypt to reconsider how to make the most of the Gulf while the support lasts.



How the Arab Spring Shook Up Oil Markets

Among the first reactors to the Arab Spring back in January 2011 were the oil markets. The oil price, already volatile in the aftermath of the global financial crisis, became even more unstable as concerns that the oil supply would be choked off if the political problems of the Middle East affected global oil production.

Now, the world is dependant on a few Gulf countries, namely Saudi Arabia, to fill the supply gap. But should the Arab Spring countries, the majority of whom are not big oil producers, be a primary concern for unstable oil markets? Indeed, sometimes the oil market can be wrong, like it was on Egypt. Sometimes the oil market can prepare for the worst case scenario as it did on Syria.

Rebel Economy asked Justin Dargin, an energy and Middle East scholar at the University of Oxford, to break down the misconceptions we have about the oil market and its relation to Arab countries in transition.

dargin

Dargin has advised some of the largest oil companies in the world and worked in the legal department at the Organization of Petroleum Exporting Countries also advising on multilateral initiatives.

  • The oil market has been at one of its most unstable points since World War Two. Many have linked the risks from the countries of the Arab Spring to this tumultuous period. Is this a fair assumption?

There was a chain reaction in the global economy. After the protests began in Tunisia and spread to other MENA countries, for a period of time, investors speculated that the instability would reach the major oil producing Arab countries. The trepidation that the major Arab oil producing countries were at risk for sustained political unrest caused the global oil market to react.

But, what is problematic for the global economy is not elevated oil prices, per se, rather it is that the oil market is much more volatile because of the tenuous political situation in the MENA region. Additionally, the Arab Spring began at an already delicate time for the global economy that was still reeling from the global financial crisis.

Much of the fluctuation in the global oil market is driven by what is known as the “fear premium.”

The fear premium is basically a rise in the price of a commodity, such as oil, that is based on the expectation that a certain event will happen that would significantly impact the market in a negative way. This relates to the Arab Spring as there was a fear that several events could potentially happen. Global investors speculated that in the beginning months of the Arab Spring, there could be oil production disruption in the oil producing Gulf countries.

There was also the fear that perhaps several important sea-lanes and canals, such as the Strait of Hormuz or the Suez Canal, could be blocked. Furthermore, a bit later on during the Arab Spring, terrorism fears grew and it was thought that the regional power vacuum could encourage militant groups to launch attacks on MENA energy infrastructure.

While these fears have largely subsided (although not completely), the international price of oil still remains extremely unstable because of this uncertainty.

So when we examine global energy price instability because of political instability in the MENA region, we must realize that this is “political risk” premium that keeps oil prices artificially high.

The oil market fundamentals are relatively sound at the moment, with increased oil and natural gas production occurring in North America due to the shale oil production boom and increased production in Iraq and other areas around the world.

Nonetheless, when we assess the actual impact of the Arab Spring, the oil producing country of note that had notable disruption was Libya. And, when viewed in context, Libya supplies a minor amount of the global oil supply, while Syria, Egypt, Yemen and other Arab countries that had their own “Arab Springs” are not major oil producers of any note.

The fear premium is based on the fear that the major oil producing Arab countries of Algeria and the Gulf (and perhaps Iraq) will have their production disrupted which would significantly reduce available oil on the market.

  • But the perception that the oil supply could be affected, even if it is incorrect, can still make more impact than real pressures. What is the long-term impact of this on oil markets? 

The oil market is uniquely vulnerable to fluctuation based on fears, whether justifiable or not. This is because most oil exports hail from regions whereby state formation occurred relatively recently and nation-state legitimacy is still being constructed.

Because many of the nation-states in the MENA region are relatively recent creations, political stability is still evolving. The primary perception in most commodity markets especially that of oil, is that the region is prone to wars, coups, terrorism and civil disturbances in ways that can definitively disrupt production of the lifeblood of the global economy.

Ultimately, the long-term impact of investor perception in the oil market, or in other words, the fear premium, is that the oil price will become increasingly divorced from the supply fundamentals thereby leading to a much more volatile market. And, as commodity markets in general become more computerized and investors are able to make split second decisions regarding investments, this problem will be exacerbated.



The Wrap: Egypt Wheat Stocks Politicised, Libya Allies Gather To Plug Oil Gap

  • EGYPT 

Unemployment: Arab Spring Not Springing Back – NPR 

An interesting podcast from NPR on the problem of unemployment in the Arab Spring, particularly among young Arabs.

The Wall Street Journal economics reporter Sudeep Reddy and Shadi Hamid, director of research at the Brookings Doha Center, discuss why jobless rates are so high in the Arab world, particularly in Tunisia and Egypt, and why political will is so crucial to alleviating unemployment pressures.

I’ve written extensively on this topic and the reasons why Arab youth can’t (and sometimes won’t) find employment. 

Wheat stocks sufficient until February: Supply Minister – Daily News Egypt 

Another never ending conundrum for Egypt is how to keep up with demand for wheat, especially as dwindling foreign reserves and a falling currency has made imports more costly.

It’s also a topic that is highly politicised. In an attempt to put any concerns about supply to rest, Egypt’s supply minister, Mohamed Abu Shadi, has insisted that the country has enough wheat stocks to last until midway through February 2014. 

The country was forced to import 80,000 tons of wheat to make up for shortages that the interim government say were exacerbated during Mohammed Morsi’s tenure, Abu Shadi said. At the time of Morsi’s ouster, interim officials blamed the Islamist president for mismanaging wheat imports and stopping supplies.

(In reality, Egypt has a long history of addiction to bread subsidies, and one year under Morsi wasn’t going to make the situation much worse than it already was).

Yet, despite the government’s confidence, Egypt is said to still be looking to receive offers of French, Russian, Ukrainian wheatBloomberg has reported.

Ezz Steel Jumps as Egypt Mulls Punishing Turkish Steel – Bloomberg 

Did you ever expect, in the “New” Egypt, for a senior official in Mubarak’s National Democratic Party to be acquitted of financial crimes after very little investigation? Ahmed Ezz, steel tycoon and head of the Ezz Steel company, was in June acquitted after being charged with monopolising the country’s steel market.

Despite his conflict of interest, and his dodgy links to the old guard, Ezz is back to business and being protected by the interim government. Egyptian officials are considering taking actions against an increase in Turkish imports at low prices to protect local industry. By local industry, I mean Ezz Steel.

Shares in the steel company rose the most in two months and no doubt company officials are delighted.

A new gas producer in Egypt – Daily News Egypt 

At a time of uncertainty, it is reassuring to find a new company willing to enter the oil and gas industry.

RWE Dea, an international oil and gas company headquartered in Germany, will launch gas production in Egypt, Daily News Egypt reported. The project includes the development of seven gas fields in the Egyptian Nile Delta.

  • LIBYA 

Saudi, US, Iraq step in to plug Libya oil gap – Wall Street Journal 

Countries around the globe are gathering to protect the oil price at any cost. The WSJ reports:

Saudi Arabia has been pumping oil at its highest level in decades to offset a global shortfall fueled by another hot spot besides Syria: Libya, where unrest has slashed output.

A tumble in Libyan production to depths not seen since a civil war toppled the Gadhafi regime in 2011, combined with fears of a possible U.S.-led military strike against Syria, have sent oil prices sharply higher in recent weeks.

To counter this, soaring Saudi Arabian, US and Iraqi output is helping cushion the blow, OPEC has said. Libya, which holds Africa’s largest oil reserves, has suffered from strikes by armed guards, shutting down most of the country’s terminals.

Output fell to a post-revolution low of 150,000 barrels a day last week.

But while Saudi Arabia is pumping the highest level of oil into the market for decades to offset a global shortfall, the Kingdom is consuming more of its own oil every year and a reliance on costly energy subsidies is making it’s budget more vulnerable.

Still, that niggling worry is not enough for Saudi officials to reduce output, so for now Libya will see its allies rally around it.

Security update – Libya Business news 

For those interested in the minutiae of Libya’s security situation, Libya Business News has a useful weekly update and map of incidents highlighting risk:

[caption id="attachment_1970" align="aligncenter" width="593"]Libya Business News Libya Business News[/caption]


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: Reports – Ahram 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 grows – Syria 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. 



Making the Most of Gulf Aid to Egypt

[caption id="attachment_1953" align="aligncenter" width="450"]Egypt's interim President Adly Mansour meets with UAE's National Security Adviser Sheikh Hazza bin Zayed Al Nahyan: REUTERS Egypt’s interim President Adly Mansour meets with UAE’s National Security Adviser Sheikh Hazza bin Zayed Al Nahyan: REUTERS[/caption]

We may not like it, but Egypt desperately needs Gulf money.

So why not change the way the Gulf lends money to Egypt to make it count. It won’t be just about wasting away cash to address a symptom without resolving the underlying problem.  

Indeed, without Gulf aid, the government would have struggled to pay for vital imports and would have fallen far behind on its supply of fuel, prompting nationwide riots and unrest.  The pound would have depreciated rapidly in the absence of sufficient central bank deposits and would have been worth closer to LE7.5 or LE8 to a dollar instead of LE6.89.

Egypt had no-one else to turn to.

International donors, including the likes of the International Monetary Fund, the World Bank and the African Development Fund, had too many strings attached for far less money to make it worth while for Egypt. These organisations also promised a whole lot of interference (or as they call it “technical expertise) into economic policy-making – another unpopular prospect for the foreign-wary Egyptians.

Meanwhile the Gulf was a perfect lender to Egypt. It has acted more like a generous Uncle, pouring money (and petroleum products) into Egypt’s coffers whenever needed and with few questions asked. As long as the Muslim Brotherhood are out, the Saudis are in. 

But beyond throwing money at the problem, the Gulf has done little in the way of long-term restructuring in Egypt. They’re not interested in reforms and overhauling the tax system, but wielding control in the most populous Arab country and leverage over the Brotherhood.

Though the Gulf can afford to keep playing this game, Egypt can’t.

The government has been given too much free rein with more than $12 billion in cash and oil. None of that has gone towards supporting the budget deficit, or towards reforms that will benefit the lives of millions of Egyptians.

Adly Mansour’s government, or more likely the government that follows after elections, should consider making the most of connections with the Gulf by striking deals in infrastructure and energy.

Rather than just taking money to plug holes that will reappear in a few months time, Egypt would do well to get the same money siphoned off into long-term investment projects.

There are many avenues for joint ventures: Egypt’s factories, the bread and butter of the industrial sector, are shutting down because of difficulty securing loans in the credit market.

Low-income residential projects to house thousands of Egyptians living on-top of one another in Cairo has stalled as contractors struggle to find the funds to keep working.

Labour-intensive infrastructure projects, on roads, railways, water and sewage treatment plants, are in desperate need of investment.

Egypt’s interim government boasted about launching a $3.2 billion “economic stimulus plan” yet very little has been said about reinforcing ties with the Gulf, which is surely the easiest way to implement such a “stimulus plan”. The only mention of Gulf investment is a possible agreement with the United Arab Emirates to finance medical projects and 10 wheat silos.

But that is not enough. There should be a full-scale collaboration with Gulf countries, not only to benefit Egypt, but to show the international community that the money is working hard for the nation.



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 risks – Bloomberg

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 interest – Reuters 

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 exploration – Libya 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.



The Wrap

1) Egypt and TurkeyBloomberg 

It’s amazing how fickle Egypt’s government can be when it drops an old friend.

Egypt’s new government has made it clear it is not prepared to cooperate with Turkey, an ally and donor of the Muslim Brotherhood. Tensions have grown between the two countries since the army toppled Islamist president Mohammed Morsi and Turkey is suffering for it, with exports dropping as much as 30% since July 3, the day of the coup.

The Federation of the Egyptian Chambers of Commerce this week announced they will suspend all official trade relations with the Turkey after Turkish Prime Minister Recep Tayyip Erdogan described Morsi’s ouster as an “unacceptable military coup”.

But with the volume of trade between the two countries estimated at about $5 billion, excluding tourism and joint investment projects, Egypt will also end up paying a price for its bad diplomacy. 

2) With Brotherhood out, old order shapes Egypt’s future – Reuters 

Not so much an economic story, but one that alludes to the growing influence of Egypt’s “old guard”, symbolically represented by the release of Hosni Mubarak.

The evidence is clear: the army has marshalled support from Egyptians as the country becomes exhausted by two and a half years of turmoil.   Investigations against the January 25 killings and politically corrupt individuals during the Mubarak era have been put on hold. Censorship is back, with propaganda infiltrating most TV channels and even some state-run newspapers calling the January 25 revolution a “setback”.

This story makes very clear that Egypt has turned a worrying corner in the quest for democracy and therefore equality, which is really what the revolution was all about. 

3) Apache – Wall Street Journal 

The oil and gas company, Apache has agreed to sell 33% of its Egypt business to China’s Sinopec Group. It will continue to be an operator on the projects.

Though this story may, on first reading, look like Egypt’s oil sector is vulnerable to asset sales because of increasing debt to oil companies and mismanagement on the part of the Egyptian government, it’s not that simple.

The operations are located in the Western Desert, far from any political unrest that would impact exploration. In fact, this transaction reflects more of Apache’s goal to use the proceeds to reduce debt, buy back shares and fund the company’s capital spending.

What it does highlight is the value of Egypt’s oil and gas sector, which will always be attractive to companies, even despite such political risk. 

4) Egyptian government temporarily halts IMF negotiations – Egypt Independent 

This story is misleading for a number of reasons. Egypt didn’t halt IMF negotiations, rather the IMF stopped communicating with Egypt partly because of the way the Brotherhood have been almost banished from not just the political sphere but from daily life in Egypt. Most Brotherhood members are in hiding now.

The story also refers to the Gulf as a kind of saviour that will tackle the deficit, but none of the $12 billion will be used to cut the deficit. It will be used to keep the pound afloat and imports flowing. In other words, it’s a running tap that is wasting cash that could be used more shrewdly.

What about making a deal with Saudi Arabia to invest in projects in Egypt? Wouldn’t that be more helpful than throwing billions of dollars into the Central Bank to support a currency that many consider is overvalued? 

5) Libya oil – Economist 

One of the biggest issues standing in the way of Libya’s economic success is the government’s control over key sectors, especially oil. Now a port that allows the trade of Libyan oil has been shut off and its closure is representative of the power the state wields over the energy sector.

Basically the state believes that a large amount of oil is being “smuggled” out of Egypt. But the party responsible for the potential sale, the Petroleum Facilities Guard, say it is a valid transaction.

The stand-off is part of a bigger political agenda between various factions in Libya, but as this Economist article concludes, if the state-owned “National Oil Company cannot keep its legal monopoly on oil exports it will be taken as yet another sign of the increasing level of political risk in Libya”. 

5) Economic Challenges and Opportunities in Post-Qaddafi Libya

This report, from the Atlantic Council’s Rafik Hariri Center, evaluates the Libyan economy and progress since popular uprisings in February 2011 and the eventual ouster of the Muammar Qaddafi regime.

On the surface, it appears Libya’s economy is back to pre-revolution levels with oil production and GDP at comfortable levels. But this report sets out how the government has failed to come up with a single economic plan. 

In this useful read, three main priorities are laid out for Libya’s government including diversifying the economy away from oil, reducing youth unemployment and modernising the financial system.