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.[caption id="attachment_1775" align="aligncenter" width="600"] Via Twitter. Tens of thousands protest in Cairo.[/caption]
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.
Egypt’s state oil company, the Egyptian General Petroleum Corporation, is in big trouble.
It has racked up billions of dollars of debt in the last decade with some estimating its dues to banks and oil companies is as high as $20 billion.
The magnitude of EGPC’s debts is such that it would be rare to find an oil company in Egypt which is not owed money. The growing debt pile highlights the government’s struggle to meet its rising energy bills while trying to keep subsidised prices to avoid public unrest.
This Reuters story describes the problem in a nutshell:
Egypt has been delaying payments to firms producing oil and gas on its territory as it has struggled with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew Hosni Mubarak.
Most oil firms hope to recoup the debts in full, but they acknowledge it could take years. While they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown, the debt situation remains a challenge.
The government’s delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt’s energy security.
But exactly how many companies have been impacted and what kind of money are we really talking about?
The following spreadsheet, acquired by Rebel Economy from an investment bank which has major interests in Egypt’s energy, lists the debts owed to no less than 42 companies for oil and gas exploration.
The spreadsheet shows that while a number of small companies are owed money, several large energy companies have achieved special repayment deals with the government.
Of the companies listed, Italy’s ENI agreed to allow EGPC to delay on a $100 million payment, the UK’s BP agreed to defer $600 million, and BG Group also of the UK, $589.8 million.
The spreadsheet ends January 2012, but it one of the clearest barometers of the scale of EGPC’s debt to oil companies that has been made public. Even this document is seen as portraying a conservative total debt figure of only $3.44 billion when actual debts to oil firms are estimated to be at least $5 billion.
If you want to look at this in more detail, click here.
Yet this is just the tip of the iceberg.
EGPC’s debts to banks, to countries that are lending the country fuel at sometimes preferential rates, and even debts to other ministries (the finance ministry has injected billions of dollars to the electricity ministry) set a frightening precedent for what Egypt is facing today.
With Egypt’s inefficient and costly energy subsidy system at the core, this is yet another example of why the country must take long-term steps to reform the system or be forever in debt to others.
How did Egypt’s economy survive before the revolution considering it was a ticking time bomb?
Why have energy subsidies, which swallow a fifth of the budget, only become a financial burden now?
What has changed?
The following hair-raising chart from London-based economist Ziad Daoud explains all:[caption id="attachment_1692" align="aligncenter" width="640"] Ziad Daoud[/caption]
Egypt’s economy has gone through a three-stage transformation, Daoud explains:
Phase 1: Before the Revolution
Foreign investments either through directly investing in infrastructure projects or buying factories, or financial investments into the Egyptian stock market or government bonds. These investments, up till the revolution that began in early 2011, were sufficient to cover the current account deficit (i.e., when a country’s total imports is greater than the country’s total exports, which can be dangerous if not kept in check).
As a result, the Central Bank of Egypt’s (CBE) reserves remained largely untouched and reached a peak of $36 billion at the end of 2010.
Phase 2: The Revolution
Three things changed after the Revolution.
1) First, despite the rise in remittances, the current account deficit grew larger mainly due to the fall in tourism.
2) Second, direct investments halted to near zero.
3) Third, foreign capital flows into the Egyptian stock and bond markets quickly reversed course and flowed out of the country (the light blue bar in the chart).
The changes put pressure on the pound but the currency was supported by the CBE’s intervention in the foreign exchange market using its international reserves. This meant reserves fell below the minimum safety level—estimated by the CBE to be around $15 billion—in the second half of 2012.
It also meant a change of strategy – the current account deficit and financial account deficit were now being financed by the CBE’s reserves.
Phase 3: After the Revolution
With international reserves all but exhausted, the government—loathed to accept a currency depreciation—started to look for alternative sources of external funding. It was during this phase that it reached a preliminary agreement with the International Monetary Fund (IMF) in November 2012 only to backtrack on the deal.
Instead, the government managed to finance the current account deficit with loans from Turkey, Saudi Arabia, Libya and especially Qatar. Most of these loans are in the form of deposits at the CBE, some of which can already be seen as the dark-grey bar in the chart and more are likely to show up when the CBE publishes the balance of payments figures for the latest quarter. Indeed, thanks to these loans the CBE announced last week that its foreign currency reserves had increased to $16 billion at the end of May.
Egypt is once again on the precipice of signing the IMF loan, saying a deal would be agreed by the end of this month. This could mark the Fourth Phase of Egypt’s economic transition, but as the government’s top advisor Essam El Haddad, complains to the Financial Times that it’s all the IMF’s fault, maybe we shouldn’t hold our breath…
While the economic impact of the revolution was not one that could easily be managed, the decisions to steer the country in the right direction could have been different.
Because, what does the above tell you?
It shows that every single cabinet elected after the fall of Hosni Mubarak, every prime minister and even the Supreme Council of the Armed Forces which coveted its role as a military caretaker government before President Morsi was elected in June 2012, have turned Egypt from an economy suffering because of its unstructured, inefficient welfare system, to an economy that is surviving on welfare – loans from others.
Isn’t it ironic, don’t you think?
First comes love,
Then comes marriage,
Then comes bickering over money.
Qatar and Egypt are turning out to be a predictable couple.
Qatar, the sugar daddy in the relationship, has provided more money to Egypt than any other Arab ally. With $8 billion in loans, grants and deposits, it is by far the biggest financial backer of the Islamist-led government.
As a bonus, it’s also thrown in gas supplies to cover any shortages over the summer period.
This gives the Qataris power and easy access to the Arab world’s most populous country, even if Qatar’s Prime Minister Sheikh Hamad bin Jassim al-Thani insists that Qatar “did not ask for anything in return”.
Meanwhile, the aid strengthens Egypt, the damsel in distress, in her time of need.
But the relationship is doomed to fail.
Egypt is asking for more for less, while Qatar is not getting much in return as it sees that its cash is merely sustaining a costly budget that needs restructuring and allowing Egypt to delay its economic plans.
So the tables have turned. Qatar, previously quiet on its demands, is asking for 5% interest on $3 billion of bonds it wants to buy from Egypt.
This is not a generous deal and is in line with normal market rates (for instance, look in comparison at the $4.8 billion loan from the International Monetary Fund and the meagre 1.1% rate attached).
What’s more, if Egypt goes to the debt markets to raise more money for its deficit, it will likely pay more than 5%. The yield on the Egyptian government’s $1 billion of benchmark 5.75 percent dollar-denominated bonds is around 7.1% in secondary markets, for example.
Egypt should consider Qatar a temporary donor, and one that is not looking out for its best interests.
It would be best served to expend its time negotiating energy contracts with Qatar because this is where Egypt is mostly struggling (energy subsidies are a huge weight on the budget and the inefficient system has led to fuel shortages that threaten livelihoods, cause nationwide electricity blackouts and miles-long queues for diesel).
Agreeing preferential rates on energy contracts with countries including Qatar, Libya and Iraq would be a huge boon for Egypt which spends almost two billion dollars every couple of months buying fuel, on top of the normal allocated amount in the budget.
Focusing on cash to buy Egypt’s debt and prop up its reserves is expensive and will only have to be re-paid later.
Egypt has the advantage with its Arab allies, who want a slice of Egypt more than it wants a slice of them. It’s time Egypt negotiated with this in mind.
When the deal between Egyptian investment bank EFG Hermes and Qatar’s QInvest fell apart yesterday, some in the banking industry were not surprised blaming Egypt’s stagnant business environment.
“Since when did the regulator approve anything after the revolution?” lamented one banker.
The Cairo and Doha-based banks said a planned joint venture had ended after they reached a 12-month deadline without approval from the Egyptian regulator, the Egyptian Financial Services Authority. The two sides had received approval from countries including Saudi Arabia, the United Arab Emirates, Qatar, and Jordan.
It was seen as the latest casualty of Egypt’s struggling economy after January 2011. But there is more to the story than meets the eye.
EFG Hermes’ top two executives, Hassan Heikal and Yasser El Mallawany are under investigation for alleged insider trading. They are among nine, including the two sons of former president Hosni Mubarak, alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May.
EFG’s CEOs and the other defendants deny the charges. The case is ongoing.
EFG spokespeople insisted there was no link between the delays in approving the joint venture and the investigations into the CEOs. But this is very difficult to believe when history shows that if any company is hit with any allegations of financial misconduct the heads of the company are usually the first to go.
The fact that Mr Heikal and Mr El Mallawany did not resign, despite investigations into a previous transaction, is likely to have put a dampener on the deal.
The CEOs reputation was no longer intact, innocent or not. Both are rumoured to have had close relationships to the former regime, especially Gamal Mubarak, within and outside the bank.
For some countries, this would be enough to prompt a resignation.
In Spain, for example, a rule of “professional virtue” is used as a prerequisite for those working in the banking industry and can be lost by anyone faced with a criminal record.
If the deal had gone through it would have paved the way for QInvest to buyout 60% of EFG, plug another $250 million into the banking business and give the CEOs a free ride out of their mess and responsibilities for the bank.
Was the head of Egypt’s regulator, Ashraf El Sharkawy, prepared to take this responsibility, knowing it would give the men a free pass?
The Financial Times alludes to this too:
According to a person familiar with the deal: “It fell through because no one in Egypt now wants to make a decision or affix their signatures to a piece of paper.”
Businessmen in Egypt have complained that, since the 2011 revolution which ousted Hosni Mubarak as president, officials have shied away from making big decisions because of fears over possible allegations of corruption.
EFG has turned to Plan B. It will sell “non-core” assets and return most of the cash to shareholders to cut costs by 35%.
In light of the deal falling apart, and another lost business opportunity, perhaps it’s time for Mr Heikal and Mr El Mallawany to do the right thing and step down, taking responsibility for their case until it is resolved.
There are few Egypt’s president can rely on more in these economic hard times than his band of Islamist brothers.
Key financial supporters from Islamist-led governments have come through with cash injections at times of extreme economic hardship, when Mohammed Morsi faced a spike in inflation and subsequent social unrest.
Egypt’s Islamist groupies, including Qatar, Turkey, Saudi Arabia and Libya have all together offered the country $10 billion, partly to boost the Central Bank’s coffers, partly to help with energy imports.
The Gulf state has doubled financial aid to the Egyptian government with an additional $2.5 billion, on top of a previous $2.5 billion in deposits. While the Qatari finance minister has dampened any prospects of further aid in the short-term, this should not be mistaken for the Gulf state backing away from assistance to Egypt. Qatar has put its money where its mouth is, and to shift its focus away from Cairo now after pouring billions of dollars into the country would undermine the Gulf state’s investment decision.
Turkey has deposited $1 billion of the $2 billion aid package it pledged last September. It is aimed at helping Egypt finance infrastructure projects and increase its dwindling foreign currency reserves.
Last year, the Kingdom deposited $1 billion into Egypt’s central bank at a time when Egypt’s reserves plunged 60% from pre-revolution levels. The deposit included $500 million to finance high-priority development projects, $250 million for buying petroleum products and a $200 million grant for small and medium-sized projects and industries. Since then, Saudi Arabia has remained on the sidelines. Tensions are running high between the two countries after the arrest and sentencing of an Egyptian human rights lawyer to 5 years in prison and 300 lashes caused an outcry in Cairo.
Libyan officials this week said they were completing an agreement to deposit $2 billion in Egypt’s Central Bank. The transaction, which has since been denied, is being seen as a quid pro quo agreement involving Egypt’s arrest of several Gaddafi loyalists. What has been confirmed and is worth a similar amount is a transaction that will see Egypt import 900,000 barrels of oil a month from Libya starting in April.
But this generosity, however unwavering, is unsustainable.
As the FT’s Middle East editor Roula Khalaf puts it:
This unconditional assistance has no chance of boosting confidence or putting the economy on a more sustainable track unless accompanied by political commitments.
In fact, propping up the budget this way only serves to artificially cushion the Muslim Brotherhood and allows them to delay an economic reform plan.
Because after all, what’s the point of importing Libyan oil to feed an addiction to energy subsidies? Why support the Central Bank’s reserve pot when the country has struggled to put forward an economic plan that will safeguard future reserves?
This is why other countries have been wary of pouring money into Egypt, and in so doing, unfairly legitimising the Morsi administration at a time of political divisiveness.
Without such budgetary support, the Brotherhood would be forced to be more conciliatory toward opposition groups and find compromises. Otherwise, they risk being voted out of office for failing to stop an economic backslide.
It’s important to differentiate between aid to Egypt and budgetary support for Mohammed Morsi and his government. These are not mutually exclusive.
While Islamist governments such as Qatar and Libya may believe unconditional support will allow the Brotherhood to hold onto power, international donors should not withhold aid to Egypt’s people who are facing the very real possibility of chronic food and fuel shortages. It is possible for donors to provide support toEgypt (for example by investing in key youth programmes and infrastructure projects) without propping up the Brotherhood.
What is clear is that instability in Egypt will not bode well for the region, not for donor countries who need economic and political stability in Cairo.