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.
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.
Some familiar faces are back (trying) to run Egypt.
In fact, eleven out of 34 cabinet ministers are veterans of Mubarak’s regime.
That was good news for many businessmen considering many of the newcomers have a solid background in economics and finance and are seasoned politicians. A far cry from Morsi’s ministers, who included little-known professors of Islamic finance and loyal Brotherhood allies.
But what most analysts forget is that this is an interim government backed by the military. No matter how many “All Stars” are now in charge of the economic file of Egypt, the cabinet is physically handicapped at making reforms because it is not democratically elected. It will find it difficult to push through serious reforms or get the backing of international lenders until elections take place in February (or so we hope).
The military-led political transition has raised questions over large loans pledged by the International Monetary Fund, the World Bank and the African Development Bank. Bankers say every major institution is re-evaluating its position in Egypt.
Egypt’s new investment minister Ashraf al-Arabi may have signalled there is no need for an IMF loan now, but the reality is that the IMF may be in the driving seat and decided that until elections take place, there cannot be consensus on the $4.8 billion loan.
What is more, is that the optimistic sentiment that the cabinet will solve Egypt’s economy overlooks the tragedy of the situation: the former Islamist president Mohammed Morsi was unable to convince the same people to his government in the last year when they were needed the most.
Of course, that’s a failure on Morsi’s part for running such a shoddy administration, but it’s also a weakness on behalf of some our new cabinet members, who refused an important job because of their political affiliations.
Now, with these highly-rated economists and technocrats in power Egypt’s economy is perilously close to collapse. A year has gone by and Egypt’s budget deficit is costing the nation a whopping $3.2 billion a month, according to Reuters’ calculations.
Despite the Gulf support (which now amounts to more than $20 billion), there is scepticism among foreign investors, as Raza Agha, chief economist for MENA at VTB Capital points out in this important memo:
1. One, a high level of support from the GCC donors is perhaps helping facilitate the exclusion of the Muslim Brotherhood (MB). If the MB were a small group which could be ignored, this would not be such a big problem. But former president Mursi was still polling 30-40% support in the lead-up to his exit. With cash in the bank, the army-backed interim administration seems intent on pushing through the transition, with or without the MB.
2. Secondly, while the large support helps Egypt meet its external financing needs ($19.5 billion over the next 12 months), it also means that the urgency to reform is postponed. Now if Mr Mursi came in facing high expectations, the new government that will take office around March 2014 will have even greater expectations and a fairly exhausted donor community. This implies they may have to reform deeper and quicker than what may have been the case otherwise. Deeper fiscal reforms could well have social consequences, given that inequality, poverty and unemployment have underpinned some of the reasons behind the pro-democracy movement.
The signs so far show that interim cabinet is fully aware of the political consequences of pushing through contentious reforms and is backing away.
After all, what interim government, which has a shelf-life of around 6 months, would make any unpalatable decisions that could lead to a nationwide backlash?
If anything, the cabinet is playing the populist hand (a favourite tactic of Mubarak which ultimately led to his demise) by spending more on areas that really need targeted cuts.
This example speaks volumes: Egypt’s new minister of supplies has pledged to ensure that supplies of a strategic good like wheat do not reach the critically low levels they did during Morsi’s year in office. Mohamed Abu Shadi told Reuters he aims to increase total stocks to between 5 million and 6.5 million tonnes by the end of Egypt’s current fiscal year next June.
Well that’s very gracious of Mr Abu Shadi, but he didn’t mention that Egypt is in the grip of nationwide fuel and bread shortages that are rooted in a mismanaged subsidy system. What about steps to reform to limit wastage, corruption at bakeries and queues outside bread kiosks? Isn’t the subsidy system, which is notorious for being abused, itself a problem?
“Criminals,” he said. That is who is to blame…
The new cabinet may be mentally equipped for reforms, but they are politically very weak and will struggle to do anything meaningful.
The best hope for Egypt is that the new elected president decides to keep some of these interim cabinet members so they can actually make a difference and have the political clout and the votes to re-write laws and communicate deeper reforms to Egyptians.
Ignore the economy at your peril. That is the lesson Arab leaders of transitional countries should learn from the Egyptian military’s removal of Mohammed Morsi from power, but one that continues to fall on deaf ears.
Rather than embrace the economic demands of protesters from across the “Arab Spring” countries in 2011, the new governments of Egypt, Tunisia and Libya have failed to address the key economic problems that brought people out to the streets in the first place.
Instead, they’ve done something much more uninspiring, which is to plaster over the status quo, and present it as a new package.
The result is angrier, more frustrated citizens and Arab economies that are just as unsustainable as those in 2010.
In Tunisia, the country’s chronically high unemployment, high prices and slow economic growth has triggered a touch of nostalgia among some for the reign of Ben Ali. Meanwhile in Libya, despite impressive economic growth numbers, the country continues to face a fragmented political landscape and tribal power struggles, which the IMF says “complicate efforts to reestablish security and the rule of law”, and make for a vulnerable oil price.
Egypt is the most worrying of all.
The huge numbers of people appear to have embraced the military, believing the generals are acting in the national interest. Nothing could be further from the truth.
Successive governments have repeatedly crafted messages intended to tug on the patriotic heartstrings of the people, ignoring the real economic challenges for as long as they can and until someone else takes over.
Islamist president Mohammed Morsi presided over almost two sets of ministers after just one year in power, as political tensions alienated large sections of Egypt and led to mass resignations. And his plans for an “economic Renaissance” were exposed for what they were: a mirage. He did not have any control over the economy and instead, wasted his presidency trying to please his Islamist base.
But in the aftermath of his downfall, egos have quashed rational thinking and a naive optimism that Egypt is now saved by the army has blinded some of the best Egyptian economic thinkers.
PIMCO’s Mohammed El Erian, writing in the Financial Times, talks of the main factors that will drive “Egypt’s eventual recovery” (Rebel Economy’s own comments in square brackets):
First, Egypt has several economic growth, income and employment engines that can be easily restarted once calm is restored. [Egypt isn't going to be "calm" for a long time, and do not convince yourself tourists will think any different]
Second, the country’s internal finances, while messy, are not beyond repair. [He partly means subsidy reform, which no one has been able to touch for 60 years...]
Third, Egypt can alleviate immediate foreign reserve and currency pressures through emergency financing on highly attractive terms. [How convenient! Enter the sugar daddies, Saudi Arabia, the United Arab Emirates and Kuwait. Because pumping billions of dollars into Egypt's coffers really helped last year too.]
Aside from coming across as grossly misinformed about the ability of Egypt’s new interim leaders to tackle problems that would be difficult to implement even without the backdrop of a military-led coup, this type of thinking comes down to plain, old gloating.
And nobody likes someone who dwells on another’s misfortune with smugness.
For example, Egyptian billionaire Naguib Sawiris, whose family is the richest in Egypt, says he will invest in Egypt “like never before”. But this says more about the blurred lines between Egypt’s biggest business empires and the ruling government, than an endorsement for a popular new leader.
The last years of the Mubarak era were marked by increased public resentment against the perceived growing influence of businessmen on government, and not something the new interim administration should repeat.
And take this highly-politicised investor note from Pharos Holding, a Cairo-based brokerage firm, which describes the new prime minister [Hazem el Beblawi], his advisor [Ziad Bahaa El Din], the finance minister [Ahmed Galal] and the planning minister [Ashraf al-Arabi] as the “fantastic four”:
It is day 17 and the light at the end of tunnel is getting brighter, despite sporadic incidences of violence. Egyptians are no longer willing to see their lives put on hold. It has already been put on hold for almost two years and a half.
Now that the final structure of the interim government is almost complete, we view the economic team as significantly more coherent and competent than all the teams appointed post the Jan 2011 revolution.
The fact that they are well-qualified doesn’t overshadow the very real polarisation in Egypt.
How can these economists enact their ideas if the streets are awash with blood and Muslim Brotherhood leaders are locked up without charges? Morsi’s failure was not being able to bring disparate groups together to focus on rebuilding Egypt. What sign is there that a new government will do any better, considering the dramatic exclusion of the Brotherhood and their allies?
In fact, the planning minister, Mr Al Arabi, has already made it clear there is no need for an International Monetary Fund loan now.
That may seem like a very good move, considering Egypt has just received $12 billion in loans, deposits and oil from the Gulf, but that money is sure to run out in a few months, and then Egypt will be asking for more money from its sugar daddies.
Let’s be clear about Mr Al Arabi’s motives. He is playing a political game, and not working in the best interest of the country.
The IMF loan is highly unpopular but one of the few chances Egypt will get to rightside its budget and seriously sort out its deficit by implementing energy subsidy reform, correcting the tax collection system and raising taxes for the middle class and wealthy.
The effect of IMF-mandated reforms is not to make Egyptians poorer, but give the government room to spend its revenues in the right place. Healthcare and education are being neglected so that Egyptians, rich and poor, can have cheap fuel. Cutting that subsidy will hurt but it will also make life better for Egyptian children who face the very real prospect of no jobs when they graduate from substandard universities and high schools.
Some economists argue that Egypt may need to negotiate a larger loan now given its fiscal needs.
It’s also politically advantageous for the interim government to hold off on any contentious talks until elections in February. Why would the temporary government do anything to push through reforms if they have the option of passing the buck?
And what happens when people rise up against another government that fails to improve daily life? Will they call for the military to rid Egypt of the same government they ushered in?
The outright refusal of an IMF loan sets a worrying precedent for economic recovery in Egypt. Mubarak, too, was not keen on the IMF loan, and instead appeased the masses by pouring money into the public sector and systemic reforms.
It’s becoming increasingly clear that Mubarak-style economic policies are likely to return, minus the big businessmen of the past like Ahmed Ezz. That might be good for the Sawiris’ of Egypt, but it won’t be for the ordinary Egyptian. Mubarak’s neo-liberal policies helped increase gross domestic product to $145 billion but only widened the gap between rich and poor.
Some are relying on the idea that the trained economists appointed to a technocratic government will have a methodological approach to the economy, without politics playing a role. But this is very hard to believe.
As Avi Asher-Schapiro writes in the Jacobin blog:
Technocrats, of course, are not above or outside of ideology and they do not operate apart from politics. They preside over a system that distributes resources and divides political power. By their very nature technocrats are antithetical to revolutionary politics; they grease the gears of the machines that revolutionaries seek to dismantle.
The developments of the last fortnight are emblematic of Egypt’s struggle to impose any alternative economic plan.
With the budget deficit expected to hit 12% and economic growth still stagnant, jobs are hard to come by and the country is turning to the Gulf for a “quick-fix” to its energy and hard currency shortages.
Instead of just accepting whoever is made minister, prime minister and president, Egyptians (including high-profile members of the business community) should hold the interim government to account.
Mr Beblawi and his team should be grilled for answers and a plan, not adorned with praise.
That’s the short answer. Here’s the long one:
I’m afraid Egypt still has a long way to go before we never experience a power cut or experience gas shortages again.
The country’s fuel shortages seemed to have miraculously disappeared, just as Islamist president, Mohammed Morsi was overthrown. There were no gas lines and suddenly no electricity cuts:
“We went to sleep one night, woke up the next day, and the crisis was gone,” Ahmed Nabawi, a gas station manager told the New York Times.
Supporters of the interim government predictably seized on this saying the “improvements in recent days were a reflection of Mr. Morsi’s incompetence, not a conspiracy,” according to the NYT story. While the former president is guilty of a lackadaisical approach to the economy, there is little truth in this. It looks more like severe wishful thinking shared by Morsi’s opponents after his ouster.
First of all, there have in fact been power cuts and long queues for gas since Morsi’s ouster. I experienced a power cut myself yesterday and I’m lucky enough to live in the quite pleasant island of Zamalek. Journalists who travelled to the Upper Egypt city of Beni Seuf in recent days also witnessed extended queues for gas at petrol stations there.
The second point, a technical but very important one, is that much of the gas used in cars is actually refined locally. It is not imported from other countries, so any explanation that has attributed the queues to fill up gas tanks to the wider economic downturn is inaccurate. Egypt imports gas and other types of energy products for factories, businesses and power stations, not for cars.
Thirdly, for those conspiracy theorists out there, it is very likely that the Gulf money to Egypt was part of quite a substantial reward arrangement. Therefore, the removal of Morsi would have seen the $12 billion (which includes a hefty supply of badly needed oil products) from Saudi Arabia, the United Arab Emirates and Kuwait funnelled through a few days earlier than it had been announced, lessening pressure on demand for energy locally.
Fourthly, the simplest answer is usually the right one.
Did anyone consider the fact that as millions of Egyptians took to the streets, very few people were actually at home or at work using electricity or filling up their cars? It is rational to expect that with business pretty much at a standstill on the anniversary of Mohammed Morsi’s presidency, the demand on domestic energy was actually quite low, meaning we were in a comfortable position for the days leading up and after his ouster. Electricity-generating power stations are by and large run with natural gas, and with demand much lower for that week, it’s likely the capacity would not have been overcome as it has in the past.
There are other “theories” out there that suggest the Army used its own funds to pay for fuel, and “Saved Egypt”. Groups blamed each other.
Some liberals suggested that the Muslim Brotherhood was behind the fuel shortage as an attempt to demobilise the masses and prevent large demonstrations from forming. But others who served under Morsi said there was a conspiracy to create a crisis from the opposition:
“This was preparing for the coup,” said Naser el-Farash, who served as the spokesman for the Ministry of Supply and Internal Trade under Mr. Morsi. “Different circles in the state, from the storage facilities to the cars that transport petrol products to the gas stations, all participated in creating the crisis.”
Forget these hypotheses that are not proved and will probably remain that way.
What is clear is that the country’s addiction to subsidies is still very much a problem, and that this eclipses every single theory on how shortages may or may not have started or ended. Of course, Mohammed Morsi made many mistakes, as detailed here.
But Egypt, has for a long time, bought energy products at international prices, and sold these locally at a severely subsidised price, costing the nation billions of dollars (in fact energy subsidies swallow up to a quarter, and increasingly more, of the budget – more than what is spent on health and education combined).
Not only is this an expensive way of distributing subsidies, but the system is not targeted so effectively everyone gets cheap fuel – and the rich naturally consume more of it, leaving the poor still in need. Add to that, Egypt has actually begun consuming more energy than it is producing, exacerbating the problem. This problem may have been inherited by Morsi, but it is not his fault.
The painful truth is that when a new government convenes, it will be up against the same debilitating problems that Morsi’s administration was having difficulties with. Nasser created subsidies, but neither Sadat nor Mubarak or Morsi would touch them.
Who will dare to be the fact that is associated with these reforms?
Instead of focusing our energy on these pointless theories that are fabricated by those who are greedy for power, the interim government should focus on how to relieve pressure building up as a result of this system soon, before Egypt experiences another bout of shortages which will no doubt be blamed on one unsuspecting group.
That’s a question I put to around a dozen Egyptian businessmen over the weekend, all of whom responded with a resounding “Yes”.
Here’s some snippets of conversations I had with a few of Egypt’s business community over the weekend (some appeared in this story for The National newspaper):
Nassef Sawiris, billionaire and head of Egypt’s biggest listed company, Orascom Construction Industries: The previous government had lost all economic ties with the majority of Arab Gulf governments and tourism has suffered tremendously because of conflicting messages [from the former Islamist administration]. This one of the biggest failures and resulted in a decline in foreign reserves. I hope the new government will be inclusive to all Egyptian political sectors.
Mahmoud Abul Eyoun, former governor of Egypt’s Central Bank: I’m very optimistic. We need a government to set the priorities for solving the internal and external imbalances. Rebulding the confidence among the Egyptian business comminity will create momentum for attracting foreign direct investment and portfolio investment.
Alaa Arafa, chairman of Egyptian clothing conglomerate Arafa Holding: The economic situation will take at least 6 months after the violence stop to show some signs of improvement. Everybody is ready to pay the price of freedom. The army is a great support to the people.
Mohammed Badra, board director at Banque Du Caire (Egypt’s third largest commercial bank): All of us are very happy, because at least we can see a light at the end of the tunnel. I think the army will guard the implementation of the road-map. We are hoping the security situation will improve and tourism returns so that we can have an improvement in the [credit] rating of the country.
For many businessmen, the military-backed political transition gives the country its best opportunity since 2011 to create a technocratic administration that has the expertise to tackle Egypt’s economic problems and lure back investors.
This says more about the failures of former president Mohammed Morsi, who was widely accused of doing nothing to prevent a looming economic collapse, than support for the military.
Still, the unwavering optimism that the military’s actions were good for Egypt’s economy, was astonishing (especially in light of the divisive atmosphere today as a result of the tragic killing of 42 Egyptians).
The early signs look promising: the stock exchange made its biggest gains all year, rising 7.3%, the long queues for fuel seemed to have miraculously disappeared, and the hope that an economist (now slated as London School of Economics-educated Ziad Bahaa El Din) would be made prime minister shook off any doubt that the army was overreaching its role.
In fact, the stock market rose only because of positive sentiment from local traders, while foreign investors sold heavily. Meanwhile, Egypt’s fuel crisis has not gone away and remains a genuine problem, but the panic that drove thousands to fill their tanks has subsided. And the business community is still holding its breath and counting on the army to keep to their strict six- to eight-month timeline for a handover to a civilian government.
It’s unclear who is calling the shots here and uncertainty is no good for business.
The only silver-lining to the removal of Morsi is that negotiations with the International Monetary Fund had hit a stumbling block and perhaps, with the Muslim Brotherhood’s political arm, the Freedom and Justice Party out of the way, some progress can be made.
Over all however, Egypt’s economic outlook is much worse than it was a week ago. Credit ratings agency Fitch became the latest to downgrade Egypt, saying political tensions are likely to set back the country’s economic recovery.
Egypt is unlikely to exceed growth of 3% next year, analysts at Fitch say.
It is baffling to see so many high profile businessmen and women describe what is happening as a positive for the country. The military merely seized on an opportunity to overthrow an elected president in a coup (yes, some of you disagree, don’t shoot me) which has created more division than any time under Mohammed Morsi.
For Egypt’s Central Bank, financial donors are always welcome.
Whether it’s Qatar, Saudi Arabia or even controversial international lenders like the International Monetary Fund, if the donation looks and feels like US dollars, Egypt is happy to receive it. Especially at a time when the country is desperate to fund dollar-denominated fuel and wheat imports, but limited foreign currency reserves make it too expensive.
So last night on Egypt’s CBC channel, when TV host Khairy Ramadan called on all Egyptians – the business community, celebrities, Egyptian expatriates and ordinary citizens – to donate to a national fund to help Egypt out of its economic malaise, many Egyptians were happy to take part.
Anyone can deposit money into the “Egypt Fund” using bank account number 306306 (all Egyptian banks are accepting donations).
Within minutes, hundreds of Egyptians were calling to donate money to the cause. Even children donated pocket money.
But one person in particular stole the show. Mohammed Hawas, chief executive of Sahara Group, an engineering company declared that he would donate a whopping $5 billion. (By the way, he was a presidential candidate in 2005, so undoubtedly, a political element is at play here…).
The national fund, trending on Twitter with the hashtag #EgyptFund, has already stirred debate.
For some, it highlighted the patriotic duty of Egyptians at a time of instability. Some said if the donations continue at the same pace, Egypt would have no need to sign a loan from any other country or organisation, including the IMF. Some even went as far to say that Egypt could eventually lend money to the US and not the other way round.
Other viewers were more sceptical. ”I’ll believe it when I see the money with my own eyes,” said one unconvinced Tweep. ”So I should give up my money for the economy even if it doesn’t work?” asked another.
For all the discussion for and against the account, Egyptians should be reminded that this is a tried and tested method. Even under Mohammed Morsi, a “Renaissance Account” was opened encouraging the same donations, for the same cause.
It didn’t work that time (or we would have heard about it) and it is unlikely to work this time.
The account might be a crowd-pleaser rallying positive momentum for Egypt’s economy, but if the country is really serious about improving the economic situation, the interim government needs to move quickly on the formation of a cabinet so that the government can function properly and real reforms can be pushed through.
Some said it was the biggest protest they had ever witnessed in Egypt, even during the demonstrations against Hosni Mubarak, the former president. Indeed, yesterday’s anti-government marches calling for the resignation of President Mohammed Morsi exceeded everyone’s expectations in size and were, until late in the day, peaceful.
Now, protestors, led by the “Tamarod” or “Rebel” grassroots opposition campaign, are putting increased pressure on Morsi to resign.
The Rebel group say they have given the president until 5pm tomorrow to resign, after collecting 22 million signatures from Egyptians, surpassing the 15 million quota they had envisioned.
But are calls for his resignation in the best interests of the country?
That is not to undermine the country’s protests, which yesterday brought the biggest crowds to the streets surpassing even the uprising of January 25, 2011. But despite the ocean of opposition against Morsi, the costs of a sudden handover of power to anyone – the head of the Supreme Constitutional Court (as Tamarod wants), the military (as some have called for) or the head of the Shura Council, the Muslim Brotherhood’s Ahmad Fahmy, (as the constitution requires, if Morsi were to resign) - would likely be enormous and probably lead many more to lose their jobs.
An abrupt departure of the president would send alarm bells to all the major Egypt-watchers: international lenders (the country would kiss goodbye to any chance of an IMF loan until a new president was democratically elected), investors looking at sectors that have been neglected, namely oil and gas, and even Egyptians themselves. Ultimately, replacing the President only delays the country’s transition to democracy.
While politically his exit may be required by the millions who want him out, economically, the last thing Egypt needs is another period of chaos, uncertainty and confusion. Investors and Egyptians alike are looking for rule of law and order, not another limbo period.
If anything, the parliamentary elections should be brought forward, giving Egyptians a chance to channel their frustration and elect a new parliament that can pass and amend laws.
What is more, history shows that speed is essential for democratic transitions, as Caroline Freund, former chief economist for the Middle East and North Africa at the World Bank writes in this excellent op-ed for Bloomberg:
Countries that democratize rapidly grow faster over the long run by about one percentage point above their pre-transition levels. In contrast, countries that take more than three years to adjust suffer extended weak growth. Years of uncertainty and sometimes unrest leave investors on the sidelines waiting for signs of political and economic stability.
She compares Poland and Romania, where “Poland’s economic success was facilitated by peaceful elections and clear market-oriented reforms” while Romania’s economic transition was “was hijacked by the communists and accompanied by frequent demonstrations”.
Let’s be clear here: the right to protest and challenge the powers that be are vital in a democracy. And the solidarity created through mass demonstrations show the strength of the nation. However, Egypt’s economy is already struggling too much to cope with another political shock.
A new president will have the same challenges as Morsi: he would also need to impose new reforms on Egyptians and he would also be fearful about going through with it. Delaying these reforms now will cost the nation too much.
The best chance for Egypt would be for the president to announce early presidential elections for the end of the year, bowing to the force of the protesters but not sending the country back to square one.
Then, the new president’s first course of action could be to hold parliamentary elections within a few months and create a new committee representing the whole spectrum of Egypt (i.e., not dominated by Islamists) to amend the constitution.
But considering yesterday’s turn-out and Egypt’s political history, this may not be a viable option. Like Mubarak, Morsi is doing everything too little, too late and the people who will suffer the most in the end are the country’s neediest who have already seen their quality of life badly impaired by the instability.
“I have made many mistakes,” conceded Egypt’s President Mohammed Morsi in a major speech last week after just one year in office.
While not elaborating on what exactly went wrong, Morsi will today be haunted by his mismanagement as thousands take part in anti-government demonstrations across the country.
Rebel Economy is glad to shed light on the economic disasters of the last year:
1) The Failure of the Renaissance Project
Even from the start, the president’s “economic plan” was someone else’s plan – a manifesto created by the Muslim Brotherhood’s first choice for president, Khairat el-Shater, until he was disqualified.
Ambitiously called the Renaissance Project, or Al Nahda in Arabic, the 20-year plan trumpeted an Islamist roadmap for Egypt after the revolution in 2011. Morsi latched onto it later, and it became the pillar of the his presidential campaign last June.
The Project envisioned an ambitious transformation of Egypt’s economy that was expected to lead to a gross domestic product of 6.5% or 7% in five years, though how this growth rate would be reached was unclear.
Instead, Egypt has struggled to achieve even half this growth and the project has quickly become more of an incubator for grand ideas than a blueprint proposing specific measures for economic improvement.
Not only has he struggled to keep even the simplest of promises that he had vowed to solve in his first 100 days in office, but the plan has caused rifts between the government, the presidency and even the team behind the Renaissance Project.
2) The Pound’s Fall
Egypt’s domestic currency, the Egyptian pound, has lost over 15% of its value against the dollar during the course of Morsi’s time in office. The Central Bank of Egypt was forced to loosen its grip on the currency towards the end of last year, but many in the banking community criticised the timing of the new measures, saying the Bank should have adopted these measures a year earlier and that the late reaction will hit vulnerable people the hardest.
That is already proving to be the case.
The pound’s drop to around 7 Egyptian pounds to the dollar (and 8 pounds on the black market), from 6 pounds last year, has contributed to a rise in inflation which economists say is on course to reach double digits in the coming months. In May, the country’s annual urban inflation rate climbed to 8.2%, up from 8.1% in April and 7.6% in March, as food prices rise:
The price for a kilogram of chicken is about 33 pounds, or $4.77, placing meat out of reach of the many Egyptians who live under the poverty line of $2 a day. Azza Ahmed, a 55-year-old housewife from Cairo, said she has seen prices of as high as 57 pounds in some stores.
From the Wall Street Journal
3) No Reform of Energy Subsidies
Another pressure likely to contribute to double digit inflation is rising energy use, especially during Egypt’s hot summer months. Queues at petrol stations are already causing frustration as demand exceeds supply of locally refined gasoline. At the same time, diesel shortages are putting more pressure on the country’s finances, as it pays more to import more. This is undermining confidence in international oil companies, which are owed billions of dollars.
The fear of a public backlash by enacting energy subsidy reforms has so far steered the president and the government away from any dramatic moves, but as queues get longer, inflationary pressures rise, social unrest will become an intractable problem for the government.
As Rebel Economy has argued frequently, until energy subsidies are reformed (one reform strategy outlined here) so that the state is stops giving out cheap fuel to everyone, even those who don’t need it, then these pressures will continue.
4) Rising Jobless Rate
The country’s unemployment rate now stands at 13.2%. It was 8.9% on the eve of Arab Spring, and was hovering at 12.5% about a year ago. At the current rate of joblessness, 63,000 more Egyptians are unemployed than the previous quarter and a staggering 1.2 million (at least) are out of a job compared to the same quarter of 2010, according to the government statistics agency, Capmas.
And even if a few thousand jobs are created every month, the level of disruption from strikes, protests and the general economic downturn (from tourism and foreign investment) means this is unlikely to make a dent in the jobless rate.
But rather than invest in young graduates and the job creation in the private sector (which is so much more efficient than the public sector), the government has taken the easy way out: paying government staff a little more to continue keeping the 6 million employed in the public sector just content enough not to protest.
Economists at London-based Capital Economics say this has had a detrimental impact on the budget deficit:
It appears that the government has resorted to increased spending in an attempt to support the economy and quell civil unrest. Rising public sector salaries and pensions, coupled with ballooning subsidy expenditure, has caused the budget deficit to widen from 11% of GDP when President Morsi assumed office, to over 14% of GDP at present.
That debt position has put Egypt in a risky category. Egyptian credit default swaps, a kind of insurance against debt defaults, have climbed 12.5 basis points to a new record of 887.5 basis points on Thursday, according to the Financial Times:
This means it costs $887,500 a year for five years to insure $10m of Egyptian debt, the fifth highest in the world after surpassing Pakistan this week. Only Argentina, Greece, Venezuela and Cyprus are seen as more at risk of default than Egypt.
5) Drop In Tourism and Foreign Investment
Once major sources of hard-currency income, tourism revenues and foreign direct investment (FDI) have been hit hard. Even though tourist arrivals have picked up to 12 million tourists annually, the numbers are still nowhere near what is now seen as Egypt’s “golden year” for tourism in 2010, when nearly 15 million tourists made their way to Egypt.
Despite denials from the country’s Islamist government that this is the case, heightened political instability, localised protests that have turned violent and rising incidents of sexual harassment has led many embassies to warn about visits to Egypt, especially Cairo.
And while FDI has picked up, climbing to $3.1 billion today, from $1.8 a year ago, the figure is still nowhere near the pre-revolution level of $5.2 billion. Investors have adopted a permanent “Wait-and-see” attitude to Egypt, considering it too important to ignore entirely, but too risky to dive into.
6) No IMF loan deal
Failure to sign a $4.8 billion with the International Monetary Fund is arguably among Morsi’s biggest, and most high-profile, failures.
Negotiations have been ongoing for two years, and the country is still no closer to securing an agreement.
Instead key members of the IMF negotiating team have jumped ship, undermining the credibility of the president and his ability to steer the country away from an economic crisis.
Controversial as the loan is among some Egyptians wary of the previous deals with the Fund, the agreement would give Egypt the international endorsement it desperately needs now for long-term, sustainable investors to come forward from Europe, the US and international banks like the African Development Bank. The IMF’s priority is also right-siding the budget, and so the deal is much more than just money.
So far, Egypt has fallen back on the billions of dollars worth of loans and oil it is getting from Arab allies (namely Qatar). But none of this is for free, despite assertions to the contrary. The tap will not run forever.
Reforms and budgetary changes including reforming energy subsidies and raising taxes are also tied up in the IMF loan.
But so far, Morsi’s approach to the IMF talks sum up his approach to the economy overall: a confused, barely composed afterthought.
The president must prioritise the economy, and to do that means putting the country and important reforms before his own political career. And if there’s one thing we know after Egypt’s revolution in 2011, if a leader is more interested in power than the people he is meant to inspire, he won’t last long.