Category Archives: Qatar

Bank of ISIS: How to Bankrupt It

When you think of ISIS, forget the image of balaclava-clad men, with kalashnikovs screaming “Allahu Akbar”. Think of a carefully managed startup that has, like other successful companies, lured international investors, diversified its income and widened its outreach. Just like any startup runs on equity and investment, this terrorist organisation also obtained funds to organise its structure and plan operations.

If ISIS Inc. was headquartered in Silicon Valley, it would be considered one of the top private companies in America. Based on even conservative estimates, last year the group controlled assets in excess of $2 trillion, with an annual income amounting to $2.9 billion, according to Thomson Reuters. That’s more revenue than the retailer J Crew and the household appliance corporation, Conair, earn a year.


Yet, in defeating ISIS, it’s important to dispel short-term solutions, particularly those that fall under the sway of “retribution” such as mass bombing. Sanctions and intense warfare alone won’t work, because ISIS thrives on the failure of Middle Eastern governments. To beat ISIS, governments must first address President Bashar al-Assad’s government in Syria as part of the problem. This is a mess born of the Iraq war and the Syrian civil war, the brutality and sectarianism of which has become a recruiting tool for the Islamic State. “Assad is not a sideshow,” says Emile Hokayem in this report. “He is at the center of this massive dilemma.”

Take ISIS’s authority over oil, for starters. It is by far the most lucrative commodity for the group. It is the “black gold that funds Isis’ black flag” and not only fuels the war machine, but also provides electricity and gives the jihadis critical leverage against their neighbours. Yet, blindly bombing ISIS’s oil reserves could actually help it more than it could hurt it by disrupting the livelihood of those who relied on oil trade. As Hassan Hassan, Chatham House associate fellow, writes:

Airstrikes disrupted this wartime economy and many families, who continued to buy oil from its new owners, ISIS, increasingly found it difficult to find alternative means to survive. This pushed some families to send their sons to join ISIS as the only way to generate a monthly income, according to several individuals living under ISIS.

The depletion of Syria’s ageing oilfields are, alone, containing ISIS to some degree. The group’s need for fuel for military operations also means there’s less to sell in the market.

It’s too late to expect that freezing the assets and halting the sale of weapons to those countries that have supported ISIS will stunt the organisation’s power. The jihadist group has already become immune to international sanctions.

Not only has it infiltrated every aspect of the economy, including the banking system (for example, more than 20 Syrian financial institutions continue to operate in ISIS-held territory, according to Matthew Levitt, director of the Stein Counterterrorism program), it has also been making millions for years simply through a string of illegal activities (think: extortion through illegal taxes, and kidnap and ransom payments, selling sex slaves and plundering of antiquities excavated from ancient palaces and archaeological sites).

So any optimism that ISIS will have financial oversight is short-lived. In fact, “blocking the assets that fill ISIS’ coffers would mean rethinking the world’s economy,” says Italian journalist Roberto Saviano, an impossible feat considering the group has already exploited the underbelly of the financial system.

So how do we bankrupt ISIS, considering all the above?

Forget the strategy that addresses the symptoms not the disease. Indeed, as Emad Mostaque, strategist at Ecstrat tells Rebel Economy:

Our governments guarantee us safety from political violence, so when political violence is introduced into public life, governments typically over react and expend valuable resources fighting a small, hard-to-hit enemy.

This is why the war on terror has been a resounding failure, spending $2 trillion, killing 2 million civilians and seeing the number of enemy recruits going from under 1,000 to over 100,000 in 14 years.

Instead, there should be more focus on a long-term option that addresses grave unemployment (remember, ISIS thrives on the Arab world’s failures to provide to the people and relies on unemployed youths for new recruits). This means providing people with opportunities to enter competitive, labour intensive jobs, within blue-collar industries and prevent the draw to radicalism. It is a strategy for economic reform that critically channels most of the gains to the bottom 80%. The summary of this five-fold plan, by Middle East analyst Nathan Field, is necessary reading for understanding why ISIS continues to recruit and grow stronger.

In the end, there’s many things to be done:

  • Focus on resolving the Syria crisis as a whole and life after the Assad regime

  • Get the region to think differently about jobs for youths to help stem the flow of disenfranchised young people to ISIS

  • Targeted attacks against ISIS to limit their growth, and other sanctions

  • Cyber war on the ISIS propaganda machine to mitigate their message

There’s also a radical option, more in line with the rebel fighters of Libya. Train Syrian refugees in Turkey and other parts of Europe in the art of sabotage and send them back in as the Resistance. The most embarrassing problem for ISIS is their own “people” striking back at them. Bankrupting ISIS, a terror group which has further reach than any group before it, can only happen if the entire structure collapses, and that starts from within.

The New Sinai

It is a dangerous time for Egypt. The latest reports to come out from Western governments blaming the crash on a bomb have shown Egypt’s worst fears may be true – the country has experienced one of its worst terrorist attacks. Now, the most likely scenario emerging is that a bomb was smuggled aboard the plane and exploded midflight, despite security and a relatively modern airport at Sharm El Sheikh. 

At first, the death of 224 people in the plane crash was seen by the Egyptian government as a tragic accident, and at the very least a dent on the economy.

Egyptian officials’ vehemently denied any terrorist link, dismissing claims by a militant group linked to the Islamic State who said that they brought down the plane. In fact, their initial assessment was of no foul play, according to someone close to the Egyptian intelligence services who spoke with Rebel Economy earlier today, and they were especially certain that the plane wasn’t hit by a missile.

Yet, just a few days later, the same officials, with a growing sense of confusion, prompted an investigation into the flight, and began to survey the fuselage and other materials onboard, according to the same source. Egypt continues to outwardly deny any terrorist involvement.

However, one of the most lethal groups in the region are now within shooting distance of two of Egypt’s most important economic lifelines and foreign currency earners: the Suez Canal and Sharm El Sheikh, one of the last remaining tourist destinations considered an oasis away from the turmoil elsewhere in the country.

And despite Egyptian officials and political analysts insisting for so long that extremist groups in North Sinai, where the ISIS affiliate is hiding out, didn’t likely have access to surface-to-air missiles that could take down a commercial airliner flying at 30,000 feet, the worst case scenario – an onboard bomb – has occurred. Not only does this demonstrated that ISIS are getting more sophisticated, and bypassing controls and borders, but that the government had no clue it was happening.

After all, it’s not easy to get a bomb on a plane in 2015.

Sinai has always been a study of contrasts: in the south, it’s full of tourists, luxury resorts, scuba diving, and lots of foreigners. The north is shockingly different – rundown cities, outlaws and Islamic extremists hiding in the desert and in mountain encampments. But now, what’s worrying is the influence of ISIS in Sinai and their proximity to big targets. Up till now, ISIS’s ambitions were limited by their geography. The classic ISIS in Syria are a scary phenomenon, but they have had limited access to Western targets.

The Sinai contingent is like a pick and mix of targets for militant group. It’s physically close to Jordan, Israel and mainland Egypt – all of which have a lot of westerners coming through, including attractive targets for a group seeking to make a bigger name for itself on the world stage. What’s more, Sinai is somewhat lawless, and its coastlines are under-policed.

It is a very dangerous place for ISIS to have a foothold, and could turn the fortune of the country around within months.

Egypt The Mirage

A collection of “inspiring” quotes from some of Egypt’s biggest international investors have been making the rounds on social media:

“Advice: Stop whining. The future will come down to the private sector. … This is a democracy with an enormous amount of legitimacy. I know what an illegitimate government looks like and smells like.” —Timothy Collins, CEO, Ripplewood Advisors

“You don’t commit to a $12 billion investment unless you believe in what is going on in the country.” —Bob Dudley, Group CEO, BP

“Everyone decides on which risks he’ll bite into, and in Egypt, I’ll bite into any risk, any day.” —Emaar Chairman Mohamed Alabbar

“I wish we had as many opportunities in Europe as we have in Egypt” —Joe Kaeser, President and CEO, Siemens

Rebel Economy cannot verify whether these are real quotes or made-up by people who got a bit too much sun in Sharm.

It is an impressive display of support and a vote of confidence for Egypt, the “democracy.” But as Egypt basks in the financial and political support of the world, as deal after deal is signed, and $138 billion dollars of investment is secured for the country in just a couple of days, the truth behind this high-profile economic conference in Sharm El Sheikh is a little harder to swallow.

The floor-to-ceiling glossy signage declaring, somewhat ambiguously, “Egypt the Future”, ignores the fact that Egypt needs to do a lot more than ask for investment. The tourism industry, which at one point contributed over 10% of GDP, is in a pathetic state: the number of visitors last year was a third below the level of 2010.

But more critically, it is the bones of the country that are creaking. Egypt needs power, proper roads, better and more schools, hospitals and housing. Jobs are scarce and the ones available are low quality and pay below what is considered an internationally acceptable minimum wage.

The population is predicted to grow to 116 million by 2030. Egypt’s president, Abdel Fatah El Sisi, wants to ditch the 1000-year-old Cairo, for a brand-spanking new $45 billion, Dubai-style capital in the desert. But we all know that’s pie in the sky.

So what about all these deals? The Gulf has promised $12 billion to Egypt. The reality is that the country has spent $12 billion several times over in the last three to four years. What is another $12 billion going to do but keep Egypt operating weakly at a unsatisfactory level.

But most importantly, most of the companies investing are ones already in the country (BP, Siemens, ENI, etc), and all these Gulf companies (Masdar, Emaar etc) are merely doing as their government’s tell them – “Keep the Brotherhood out.’

Officials, business people and Egyptians are genuinely excited for the future, there’s no denying judging by the inordinate number of Sisi Selfies, and exclamation marks punctuating lofty ideals about the country. But the multi-billion dollar PR push to showcase the North African nation as a place worth pumping money into betrays the truth, not just because of the country’s inescapable human rights atrocities but because Egypt is lacking the bread (literally) and butter infrastructure it needs to survive.

Sissi said so himself in this bizarre interview with the Washington Post’s Lally Weymouth where he talks about himself in the third person (He said, “Sissi reflects the popular will of Egyptians.”).  He tells Weymouth that the country needs $130 million subsidies to support 90 million people:

Where can we get the money to provide for these needs? Who would come to invest in this country if it is not stable? We have an overwhelming unemployment rate of 13 percent.

So what is his response? More money of course. Another $300 billion to be exact. This economic conference is not The Future, it is a mirage that shines the light away from the population’s plight, where thousands are wrongfully imprisoned and thousands more are still hungry, with no access to basic resources and education.

One person asked on Twitter: Does investing in an economy of a potentially unstable and authoritarian regime make business sense? It’s not business anymore. It’s politics when it comes to the Gulf and it’s cautious agreements, with disclaimers as long as scrolls for the companies involved.

Egypt’s Mafia Fund

A private equity fund launched by Gamal Mubarak managed to reel in millions of dollars of investment from Egypt’s elite, revealing the depths to which political and business connections ran as he began rising in stature in the late 1990s.

According to a document obtained by Rebel Economy, Gamal Mubarak’s $54 million Horus I Fund, created in 1997, attracted some of the country’s most controversial businessmen including steel fugitive tycoon and Mubarak-confidante Hussein Salem, steel magnate Ahmed Ezz, who was acquitted in June after being charged with monopolising the country’s steel market, and the ex-CEO of Egyptian investment bank EFG Hermes, Hassan Heikal. Heikal is a defendant in an insider trading case involving both of the Mubarak sons. His former colleague, Yasser El Mallawany, who is still officially an employee of EFG, is another investor in the Horus Fund.

[caption id="attachment_2059" align="aligncenter" width="640"]Full list of investors who committed to Gamal Mubarak's fund Full list of investors who committed to Gamal Mubarak’s fund[/caption]

The fund, which was operated by EFG Hermes and invested in Egyptian projects and companies, attracted millions of dollars of investment from members of Egypt’s old guard, some of whom have been targeted in corruption cases since the fall of Hosni Mubarak in 2011. Although there is no evidence the fund engaged in corrupt activity, the connections between the people named as investors on the account has never been properly investigated by the Egyptian authorities.

The list of individuals and companies published above raises questions that have so far been left unanswered by Egyptian investigators.

The document, which details how much individuals and companies committed to the fund at the time of launch, also provides a window into the everlasting influence of Mubarak’s old guard and their long-standing ties to Gulf nationals in Saudi Arabia, Kuwait, the United Arab Emirates and Qatar.

It represents the beginning of Gamal Mubarak’s foray into private equity, where his financial interests in the Egyptian economy, from tourism to agriculture to oil, began to grow. The fund was created prior to Gamal’s entry into political life, when he acquired 18% of EFG Hermes Private Equity.

Among the handful of Gulf companies listed is First Arabian Development and Investment Company, run by Hamza al Kholi, a prominent Saudi Arabian businessman, and Yahya Al Yahya, the chief executive director of Gulf International Bank.

The ZAD Global Direct Investments Fund is also a notable appearance on the list. This investment company, founded by Prince Mishaal Al-Saud, second child of the Prince Abdullah bin Turki bin Abdulaziz Al-Saud in Jeddah is a privately controlled investment company, organized, owned, controlled and operated as the investment vehicle for the family of Prince Mishaal  for the purpose of managing the family’s investments.

Some businessmen have used clever ways to hide their investment activity. A company connected to Hussein Salem appears on the document. Clelia Assets Corporation, a Panama registered company, is linked to his name.

Salem fled Egypt in 2011 when he came under fire for tax evasion and his complicity in a corrupt gas deal.

Other controversial names on the list include Mohammed Abou El Enein, the chief executive of Cleopatra Ceramics, a major Middle East ceramics firm that has faced repeated labour strikes.

Abou El Enein, who once called himself “the noblest businessman on Earth”, was at one point under investigation for allegedly violating labour laws. Workers have staged sporadic strikes asking for improved working conditions and higher wages.

The fund is a worrying sign of how little progress Egypt has been made in defeating a tight circle of Egypt’s mafia, some of whom were subject to now forgotten corruption cases.

And now, there is evidence that some of Mubarak-era moguls may make a reappearance on Egypt’s political and business scene. Hussein Salem, who is currently exiled in Spain, has reportedly asked to make a deal with the interim government that would end any court cases against him. He has said he is presenting a new initiative to the interim government which includes funding for the unemployed in the tourism sector, as well as restoration of police stations, churches and mosques.

Hassan Heikal, who resigned from EFG Hermes earlier this year, has indicated that he will be acting in a consultancy basis to the Egyptian government. He has signalled he will offer ideas and launch new initiatives “that offer long-term solutions to Egypt’s fiscal challenges and economic development,” according to a statement he made when he resigned.

But the army has a strategy of its own. It’s interest is in preventing an examination of its own assets and business interests, which not only is likely to affect other investigations but focus on a shift away from Mubarak-era crimes toward the Muslim Brotherhood and the former president Mohammed Morsi.

So as the army continues its assault against the Muslim Brotherhood, journalists and civilians, the more these characters will disappear into the background, leaving them free to operate, uninterrupted.

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”


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:


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.

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. 





The Wrap

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.

2) Egyptian cabinet approves $3.2 billion economic stimulus plan Reuters

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 SyriaReuters

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.


Egypt’s Old Newcomers

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. 

Arab Economies Ignored

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.

[caption id="attachment_1834" align="aligncenter" width="536"]Hazem El Beblawi considered part of high-powered economic team Hazem El Beblawi considered part of high-powered economic team[/caption]

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.