General Abdel Fattah el-Sisi must be revelling in the image of an all-powerful oligarch created by the media.
Apparently he reigns over a sprawling economic empire that journalists describe (in now rather cliched terms) as so varied that it covers everything from the production of flat-screen televisions and pasta to refrigerators and cards.
It’s claimed that the army has control over as much as 40% of the Egyptian economy. It owns football grounds and restaurants and provides services such as managing petrol stations.
Some even estimate the military control as much as 80% of manufacturing alone. But then again, that estimate came from FOX News, not the most reliable of sources.
The truth is, the Egyptian military is far from being a well-oiled business machine. In fact, historically, the army have been very bad at making money and its own failures have led it to seek other forms of income. Why else would an army diversify its interests so considerably?
The pitfalls of the military’s weak economic strategy are laid bare in this detailed paper by Stephen H. Gotowicki, a lieutenant colonel in the U.S. Army who worked in the Army’s Foreign Military Studies Office:
In the coming years, Egypt’s military production sector will probably decline. Egypt suffers from low productivity, a lack of adequate funding and a dearth of external markets. Egypt’s largest customer during the 1980s, Iraq, has been removed from the market place as a result of UN sanctions imposed against Iraq for its invasion of Kuwait. Egyptian military products also face increased competition. The cash-strapped Russians are offering highly advanced weapons at bargain prices.
Egypt’s military industries have not promoted import substitution or sustained export earnings. The technological benefit of the armed forces’ military industrial endeavors have proven to be only marginal to Egypt’s economic developments. While Egypt does assemble sophisticated military weapons systems, the facilities to do so are provided by Western businesses on a “turn key” basis.
The Egyptians receive kits for assembly, but the technology involved is closely maintained by the Western partner. Hence, little technology that would allow independent Egyptian development of systems has been received. For Egypt, technology is a conundrum — high technology industrial efforts are a capital intensive endeavor; Egypt has a labor intensive economy with little capital. Finally, it would appear that Egypt’s military industries have done little to enhance its regional power.
In other words, Egypt’s army failed miserably at the one thing they should have been doing well – military production.
The piece goes onto explain how “self-sufficiency would permit a greater measure of Egyptian independence in security matters and should allow the Egyptian military to fight longer without foreign resupply.” Now the refrigerator production and petrol station management makes sense. The army, if anything, is simply trying to keep its head above water.
Contrary to popular belief, General Sisi and his partners do not have a powerful grip on the economy, nor are they savvy businessmen out to expand a flourishing empire. They are interested mostly in protecting the economic interests that allow them to be self-sufficient and not reliant on foreign partners.
It’s a lazy approach to their business and part of the reason why we have seen the army interfere in the transition so much – to manoeuvre Egypt, as much as possible, out of economic decline and shield its factories and production lines.
But still, the military plays no significant role in any of the major Egyptian industries today – oil and gas, steel and cement. The businesses that the military does play a role in would certainly not give them control of over 40% of the economy.
That figure has never really been verified or proven, with only a few rare instances when the military did reveal how much money they make.
At one point just before the January 25th revolution, Businessweek ran an interview with the then minister of military production, Sayed Meshaal, saying the army made about $345 million in revenue from the private sector, a far cry from the billions of dollars they are claimed to generate.
What’s more, the army’s “economic strategy” is riddled with corrupt practices. Mr Meshaal, who served as the minister of military production till 2011, is now being investigated for awarding contracts “above cost”.
In another example of dodgy money management, millions of dollars of profits from military industry exports during the 1980s and 1990s were reportedly returned to the military coffers with no government accounting or taxes (i.e. “off-budget”).
The military are far from being shrewd businessmen. Instead, because of a track record of losing contracts, bad ties to regional powers and dodgy accountancy, the army are relying on selling bottled water and other domestic goods to survive.
Plus, the military’s role in the economy actually stifles free market reform by increasing direct government involvement in the markets.
General Sisi has said nothing about the army’s economic prerogative but we can already deduce what the military is interested in: remaining conservative, keeping policy simple without innovation or anything too radical (such as cutting those precious energy subsidies that the army rely on so much to run their factories at a cut price) and focusing on big, state-run projects (just like Mubarak).
With no real systemic changes being offered, the army has missed an opportunity to save the economy and much to their demise, protect their own economic interests.
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:
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 launched “Egypt 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.
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:
Cutting military aid to Egypt is an arrogant counterproductive action! Do not underestimate the pride of the Egyptian people!
— Naguib Sawiris (@NaguibSawiris) October 11, 2013
But a healthy dose of realism from a few Egypt commentators doused Sawiris’ outburst:
— arabist (@arabist) October 11, 2013
How is US cutting its military aid to #Egypt arrogant? It seems that expecting aid without conditions is far more arrogant.
— Matt Bradley (@MattMcBradley) October 12, 2013
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.
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.
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.
Words, Rudyard Kipling once said, are the most powerful drug used by mankind.
Individuals, companies, political parties and governments will work tirelessly to ensure the right words are transmitted to as many people as possible. Public relations can make or break a nation.
So it’s no surprise Egypt’s propaganda wheel is working overtime. In fact, it’s one of the few features binding the country’s warring sects.
While the military and some non-Islamist factions have branded the Muslim Brotherhood as terrorists and thugs, Brotherhood supporters consider the opposition as “putschists”, who are furthering a fascist agenda.
Slogans and logos now distinguish who is on what side, with each party trying to outdo the other in the hopes of capturing the majority support.
Except the propaganda, unsurprisingly, hasn’t worked. Egypt remains polarised and Egyptians suspicious of each other. Words spoken or written by the military, government officials or Brotherhood spokespeople now all seem to be part of the same political game citizens are no longer involved in.
As the Economist’s Max Rodenbeck highlighted:
At the hands of politicians, the truth can fare poorly in peacetime, too. Yet in Egypt, though the country is not at war, and normal politics is pretty much suspended since the army toppled an increasingly unpopular elected government last month, the truth is taking an unprecedented beating.
Now, Spin Doctors run Egypt.
General Abdel Fattah el-Sisi, who authorised a bloody crackdown on his opponents, has become a hero to some for the military overthrow of Islamist president Mohammed Morsi. His trademark dark glasses and soft-spoken addresses to the nation have won over Egyptians who were desperate for the stability Morsi failed to provide.
His picture, at times flanked by the logo “Egypt Fights Terrorism”, has been plastered on cars, shops and buildings.
“Right now, he could probably win an election at a canter,” Heba Saleh writes in the Financial Times.
Meanwhile, Gehad El-Haddad, the spokesman for the Muslim Brotherhood has been open to the international media, regularly engaging with his followers on Twitter and declaring the military overthrow of Morsi a crime against humanity and a bloody coup.
Muslim Brotherhood supporters, under the “Anti-Coup Alliance” have flooded journalists, diplomats and foreigners with English-language emailed statements daily.
Of course, some of these movements were wildly successful. The uprisings of January 25, 2011 and then again in June 30, 2013 were driven partly by organised PR campaigns, drawing hundreds of thousands to the streets.
Some have been less successful. Tamarod (“Rebel” in Arabic), the Egyptian youth movement that rallied street protests against Morsi, is struggling to retain momentum. Splits are forming within the group and some members have announced their collective resignation.
Black Bloc, more of a fashion fad than a movement, entered the political sphere in January this year, but drew more attention for their all black outfits and balaclavas than their anti-Brotherhood agenda. Months later, the group has lost steam and any of the original excitement they once garnered.
Still, small campaigns come and go. Masmou3 (“Heard” in Arabic) was created in the aftermath of the military overthrow to protest against the military-backed regime and the Brotherhood. Daily protests involved banging on pots and pans during the curfew. But the campaign was short-lived and soon enough, the tweets and Facebook updates stopped.
Egypt has lost its way, and brands, campaigns and movements won’t help. With each campaign, the Brotherhood and the military-backed government included, Egypt becomes more fractured and each party takes away the support of a smaller fraction of the population.
True recovery will come when the PR tools are put down and politicians prove they are civil servants organising along an economic revival.
- US faces substantial losses if Egypt aid halted - Reuters
Finally a story that reflects pragmatic ties between the US and Egypt that go far beyond the politics. Washington has been considering whether to continue its US $1.23 billion in military assistance, but while the aid institutionalises the political links between the two countries, the money at stake is arguably much more costly if this bond was broken.
A particularly talkative senior Pentagon official told Reuters:
“There’s a whole bunch of contracts out there. The bills keep coming in and we’ve got to be able to pay them somehow otherwise we go in default.”
Apparently last year, when the Obama administration decided to continue military aid to Egypt despite its failure to meet pro-democracy goals, US officials cited as one of their reasons the fact that the termination costs could have exceeded $2 billion.
Reserves crept up by $34 million in August to reach $18.91 billion, the Central Bank of Egypt said, reflecting how billions of dollars of cash from Saudi Arabia, the United Arab Emirates and Kuwait was used to defend the currency’s value and pay for imports.
Last month, international reserves jumped $4 billion to $18.88 billion after Gulf countries injected $12 billion in aid. But the minimal increase in foreign reserves this month shows how much of that cash is being used to plug financial gaps.
- Libya has moved into lawlessness and ruin - The Independent
A round-up of how Libya has slumped into its worst economic crisis since the fall of Gaddafi. The key reason is that Libyans are increasingly at the mercy of militias who are dictating the direction of the economy.
But in addition, “one of the many failings of the post-Gaddafi government is its inability to revive the moribund economy,” the author says. “Libya is wholly dependent on its oil and gas revenues and without these may not be able to pay its civil servants.”
This report on Libya’s economy, that Rebel Economy linked to earlier this week, sets out a handful of priorities for the government to avoid falling into economic crisis. One of those is to diversify the economy away from oil.
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.
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.
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.
1) Egypt and Turkey – Bloomberg
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.
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”.
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.
After several months hiatus (and readers saying they are having sleepless nights without it) the daily wrap is back!
I’ll be linking to a handful of the most important economic stories from the transitioning countries of the Arab world, namely Egypt, Syria and Libya, and to a lesser extent Tunisia, Yemen, Jordan and Morocco. (The Gulf is there in the background too, but only because of its connections to these countries).
1) Energy groups rethink commitment to Egypt - Financial Times
This story has become evergreen for Egypt and it seems like every couple of months a new story crops up to remind us that debts to oil companies are not going to disappear anytime soon.
The story repeats much of what has already been reported, mentioning companies owed millions of dollars including BG group, ENI and the Dana Gas. However the premise of the story may be unfounded. Although oil companies may be acting cautiously at the moment, and holding off any expansion plans, it’s very unlikely that these companies will pull out of Egypt altogether. Not only would this prove costly for these companies to pull out their equipment and human resources, but those firms would miss out on costs they are making at the moment. Because, as the FT story says:
Egypt’s oil and gasfields continued to produce as if nothing had happened.
Reading this story made my blood boil.
The government has already introduced some stimulus measures including lowering interest rates (and more controversially printing money, though that’s more rumour than fact). But increasing spending at a time when the budget is reeling from over-expenditure on wasteful subsidies (for both energy and food) masks a difficult truth: the government doesn’t actually want to make any cuts, or raise taxes to keep its own reputation in tact and avoid any public backlash. Essentially, it’s a cowardly move that will mostly benefit the current interim government who has so far been completely ineffective after the killings of hundreds of Egyptians.
And that perception that $12 billion of Gulf money will save Egypt is very naive. That money is not being targeted at the budget. At best it may be used for some investments, but really it will be used to keep the pound afloat and the country’s imports flowing.
Capital Economics, the London-based consultancy elaborates. This is their bottom line:
Egypt’s newly-announced stimulus package stands a chance of boosting the beleaguered economy in the near-term. But with the package being funded by Gulf aid, over the longer-term, it could actually take the country further away from making much-needed reforms to improve the business environment.
3) Energy stocks rise over Syria – Reuters
I will be writing on the economic impacts of US intervention in Syria later but for now, there are some gems hidden in this stock market story. Capital markets have been responding wildly to this. Gulf stock markets suffered record losses. Though it’s not clear that any escalation of the Syrian civil war would have a pronounced effect on Gulf economies, these same countries have been supporting Syrian rebels for some time.
As a result, investor rushed to the safest commodity around (well it was safe until a few months ago when the gold price plunged…). Gold prices rose to three and a half month highs above $1,430 per ounce as Syria tensions raised its appeal as a safe-haven asset.