Late one night in November 2010, a plane carrying dozens of Colombian men touched down in this glittering seaside capital [Abu Dhabi]. Whisked through customs by an Emirati intelligence officer, the group boarded an unmarked bus and drove roughly 20 miles to a windswept military complex in the desert sand.
The Colombians had entered the United Arab Emirates posing as construction workers. In fact, they were soldiers for a secret American-led mercenary army being built by Erik Prince, the billionaire founder of Blackwater Worldwide, with $529 million from the oil-soaked sheikdom.
By Mark Mazzetti and Emily B. Hager for The New York Times, Secret Desert Force Set Up by Blackwater, May 2011
For any expatriate who has spent time in the United Arab Emirates, the luxury lifestyle soon gives way to a seedy underworld, which is only a paradise for fugitives on the run.
The UAE, after all, is “an autocracy with the sheen of a progressive, modern state”, according to the New York Times’ reporters who exposed Erik Prince, the founder of Blackwater, and his secret army.
But for the Colombians he recruited for the battalion intended to beef up the UAE’s military presence, Abu Dhabi is the “Arabian Dream” offering a better quality of life.
Prince, who had already been a driving force in the boom in wartime contracting that began after the September 11, 2001, attacks, was hired by the crown prince of Abu Dhabi, Sheikh Mohamed bin Zayed al-Nahyan, to put together a squad of foreign troops for the UAE.
He outsourced critical parts of the UAE’s defense to mercenaries from countries including Colombia and South Africa, in a plan said to have been drafted months before the so-called Arab Spring revolts that many experts believe are unlikely to spread to the UAE. But Iran was a particular concern.
The mercenaries live in a training camp, located on an Emirati base called Zayed Military City:
It is hidden behind concrete walls laced with barbed wire. Photographs show rows of identical yellow temporary buildings, used for barracks and mess halls, and a motor pool, which houses Humvees and fuel trucks.
Secret Desert Force Set Up by Blackwater, May 2011
It does not sound like much, but for these imported soldiers, joining the operation was an opportunity to earn a lot of money and see a new part of the world.
This week, Columbia’s daily newspaper EL TIEMPO, gained exclusive access to some of the Colombian paramilitaries who spoke of the “Arabian Dream” in the UAE.
For the 1,400 Colombian troops in Abu Dhabi, the UAE offers “not just a medal, but a proper paycheck”, according to a translation of the Spanish article.
“Why did we decide to leave? That’s what people ask us. The response is easy: Quality of life,” they [the troops] say.Colombianos en busca del sueño árabe, El Tiempo, February 2013
One officer describes the stark difference in quality of life. In Columbia, he received a bonus of 800,000 pesos ($448.8). In Abu Dhabi, he has a salary of $3,000, receives housing, food and healthcare free. He has also learnt English, and in the evenings, he and his colleagues travel in buses into the city centre, where they can buy food and supplies. They get weekends off.
The long weeks of combat, sleepless nights, patrolling and watching for landmines were left behind, the officers told EL TIEMPO.
Reflex Responses, a company known as R2 and contracted by the UAE government to train and recruit the troops, spends roughly $9 million per month maintaining the battalion, which includes expenditures for employee salaries, ammunition and wages for dozens of domestic workers who cook meals, wash clothes and clean the camp, according to the NYT report.
The Colombians “never wanted for anything”, said Calixto Rincón, a 13-year veteran of Colombia’s National Police force who is now back in Colombia after serving as a mercenary in the UAE.
The UAE and American leaders even arranged to have a chef travel from Colombia to make traditional soups.
“Here, you can’t look at the women like in Colombia, because you can end up in jail,” one officer told EL TIEMPO. “A wrong glance can create offense, which gets reported to the police”.Meanwhile another told the New York Times: “We didn’t have permission to even look through the door. We were only allowed outside for our morning jog, and all we could see was sand everywhere.”
But even this grievance was addressed by the American trainers.
One evening, the NYT reporters wrote, “after months stationed in the desert, [the troops] boarded an unmarked bus and were driven to hotels in central Dubai. There, some R2 executives had arranged for them to spend the evening with prostitutes.”
A number of you may have already read the speech from the US Ambassador to Egypt, Anne Patterson, on Egypt’s political and economic woes.
What she said was not particularly surprising or profound – much of it has already been argued by economists, analysts and journalists. But Ambassador Patterson’s speech eloquently and authoritatively wraps up Egypt’s complex issues in a neat package everyone can understand.
It is difficult to find another example of this from an official outside Egypt, including from Patterson herself.
This time, she clearly spelled out what has gone wrong within the Morsi administration and what must change. Unsurprisingly, that mostly involves addressing economic problems:
The most catastrophic path is for the government and the political leadership of the country – whether in power or in opposition – to avoid decisions, to show no leadership, to ignore the economic situation of the country.
When management of the economy is treated as a by-product of political disputes instead of a core function of political leadership, the business community is left trying to protect itself instead of investing and growing.
So what path should Egypt take? Here are her top three priorities:
As I said, it’s not something we haven’t heard before. However, if we heard this speech from Mohammed Morsi or his prime minister Hisham Qandil, it would be a complete breakthrough.
Quite simply, Ambassador Patterson showed Egypt how to deliver difficult news with the hope for change and reform.
The Morsi administration’s track record for communicating these issues with the public is abysmal. Either the Muslim Brotherhood enrol themselves in some public speech lessons quickly, or they can be more inclusive and relax their tight circle to allow experts with experience to help lead the way to recovery.
Guest post by Isabel Esterman, a Cairo-based journalist. She blogs here.
“If religion makes you more honest, why is it that the most corrupt countries are also the most religious?” asks a writer at Epiphenom, a blog about the science of religion and non-belief.
A few weeks ago, Rebel Economy posted a map illustrating how countries around the world fared in Transparency International’s annual Corruption Perceptions Index.
The graphic becomes even more interesting when paired with a world map that shows how religious different countries are:
What is clear is that when looking at the two maps side by side, countries with the most pious citizens are not the least corrupt; in fact, when you remove communist or formerly communist countries, which have their own complex histories of corruption and state intervention in religion, it’s very nearly the opposite.
More religious countries appear to be more corrupt. (More rigorous examinations also bear out this conclusion, as do studies that look at legislation of religion as well as just personal practice –Heather Marquette at the University of Birmingham gives a good summary of the field.)
This does not mean that religiosity causes corruption – many studies have tried to establish a causal link, with frustratingly ambiguous and contradictory conclusions.
However, it does mean that religious movements or political parties that claim the evils of corruption can be eradicated by making society more religious are engaging in wishful thinking or outright deception.
To put it more bluntly, Islam is not the solution.
(Nor, for that matter, is any other religion. Check out the corruption scores of devoutly Catholic nations.)
Claims that a government ruled by people who fear god and pray every day will automatically be more honest than one run by secularists or atheists fly in the face of empirical evidence.
Australia, whose prime minister is an atheist, is consistently among Transparency International’s highest scorers, as are profoundly non-religious Scandinavian countries; highly religious societies, like Afghanistan and Somalia are at the bottom.
It’s not random chance that societies like Australia or the Scandinavian countries, which combine with low religiosity and low levels of corruption, also have some of the world’s highest standards of living.
Both corruption and religiosity are strongly related to low scores on measures of wellbeing like per capita income and the Human Development Index. Again, proving causation is nearly impossible. But it’s safe to say that countries that are wealthy, have little public corruption, and provide their citizens with high-quality social services like healthcare and education are unlikely to be highly religious.
This presents an interesting conundrum for politicians like the Freedom and Justice Party, who promise voters both good governance and more religion in public and private life. There’s scant evidence that the two goals are compatible.
Realistically speaking, the most likely explanation for the Muslim Brotherhood’s dismal economic record lies in a combination of inexperience and incompetence on the part of the new regime, the deeply entrenched corrupt and corporatist legacy of the old regime, and global economic malaise. Secular governments can of course be corrupt, as those who lived under Mubarak or Putin are well aware.
Nonetheless, the relationship between religiosity and corruption does suggest a fun conspiracy theory to explain why the government seems to consistently make the worst possible choices for the economy: Perhaps the Ikhwan and their Salafist fellow travelers are well aware that a society that is poor, corrupt, uneducated, and unhealthy is also more likely to embrace religious fundamentalism, and this is all part of a phenomenally complex and masterfully subtle master plan.
Is a public finance professor who specialises in Islamic finance really the CV that jumps out at you for Egypt’s critical post of finance minister?
Not really.
But to President Mohammed Morsi, the unknown Cairo University professor El Morsi El Sayed Hegazy was the right choice to replace Mumtaz El Saeed, an advocate of the $4.8 billion International Monetary Fund loan. El Saeed had been one of a few ministers to retain his position since his appointment to Kamal Ganzouri’s interim government in December 2011.
Hegazy, whose political experience appears to have only just started, may find it difficult to reconcile his Islamic finance specialism with the modern economic framework needed to push Egypt out of its economic lull.
In the book The Long Divergence: How Islamic Law Held Back the Middle East, author Timur Kuran argues that the real cause of underdevelopment and economic stagnation in the Middle East is the Sharia, or Islamic law. The author argues that while other countries adapted their philosophies and approach to economy according to modern times, the Middle East was very late in adopting key institutions of modern economy.
The law has not evolved and adjusted to the new world of business and finance. It’s not an impassioned critique of Islamic law but more of a reflection of how Sharia essentially lacks innovation and does not fit in to the 21st Century.
However, there is a catch to the idea as Ziauddun Sardar, who reviewed the book, writes in The Independent:
It is based on the assumption that Western financial institutions, and self-serving corporations, are the best possible model for development. Given the havoc that these institutions have caused in recent times, and the fact that injustice and obscene wealth is integral to their make-up, I think it is an assumption too far.
He adds, though “Kuran’s thesis is contentious; it does provide us with an incentive to reformulate Islamic law. It is an excellent starting-point for a debate long overdue.”
The question(s) I have is: Will Mr Hegazy be open to debate or will his thought process be driven by his boss (Morsi and the Muslim Brotherhood)?
The Morsi administration’s biggest failing has been to lead the Islamists rather than the country. There is no space for such polarization in a modern economic framework. Islamic finance is not going to save Egypt’s economy but can play a part in redefining the country’s aims – a focus on the middle and lower class rather than the rich, and a method of relieving the millions who are suspicious of conventional banks and their high interest rates.
If Egypt’s new finance minister lasts long enough to make any critical decisions, let’s hope he can think past religion to the nation.
A NEW EGYPT
Once upon a time, Mohammed Morsi’s election as President of Egypt invoked nationwide pride, celebration and relief that finally stability might be on its way. Many may not have voted for him, but at least they could rest easy that the military generals were out of power and the democratic process was underway.
“I have no rights, only responsibilities,” Morsi said to cheering crowds chanting, “God is great”.
“If I do not deliver, do not obey me.”
Half a year later and his words have come back to haunt him. The economy has deteriorated so much that even the Central Bank has warned of a critically low level of foreign reserves. People are panicking and rushing to trade their pounds for dollars.
To the detriment of the population, today’s Egypt is not dissimilar to the country ruled under former president Hosni Mubarak. The Morsi administration, like Mubarak’s regime, is struggling to win legitimacy from the people and contradictions on the path ahead have confused the international community.
Mubarak began his presidency in much the same way as Morsi. He won the support of the nation by releasing prominent political prisoners and removing some restrictions on the media.
He also took the step of inviting the country’s most prominent economists to a conference to discuss the deteriorating condition of the Egyptian economy and displayed genuine will for economic reform. (Morsi is soon planning a “National Dialogue” on the economy).
Sadat had left behind a heavy burden of high levels of foreign debt and high inflation. Egypt’s economic structure was askew.
And in Mubarak, who appeared less domineering and egotistical than his predecessor, there was hope in the hearts of Egyptians that change was coming. But it was clear within a year of his inauguration that it was not meant to be. The emergency law was renewed and reforms slowed to a glacial pace.
“Sure enough”, wrote Galal Amin in the introduction of Egypt in the Era of Hosni Mubarak, 1981-2011 “the sky began to darken and little by little we began to despair of any real political or economic change occurring”.
The honeymoon was over and Egypt seemed forever destined to be a “Soft state”, or:
“A state that passes laws but does not enforce them. When the state is weak, taxes are not collected, people are left to break the law, they lose respect for the police, traffic laws are flouted, and security is lax,” wrote Amin.
Arabist John Waterbury saw the soft state as increasingly ingrained into the fabric of Egypt. In The “Soft State” and the Open Door, he wrote:
“Egypt, whether under Nasser or Sadat, has been a soft state. Neither leader felt it was necessary or desirable to sweat significant segments of the citizenry for the sustained savings that might have made relatively autonomous growth possible.”
This sad situation has repeated itself with Mubarak, and now it seems with Morsi.
Egypt’s only hope now is for the president to begin to reform the creaking bureaucracy and ease an unsustainable subsidy regime, while attracting investment and creating new jobs to lessen the blow. It won’t be easy, but it is the burden of a president to do what must be done even if it hurts the reputation of his political party.
That should be the theme of 2013. But the lack of a clear economic vision is worrying, as Nadine Marroushi, a Cairo-based reporter for Bloomberg, and I will explore through themes that cover the long-winded negotiations with the International Monetary Fund, the costly addiction to energy subsidies and the rise of the labour movement.
Happy New Year.
Farah
Editor, Rebel Economy
ECONOMIC GROWTH FORECASTS
Egypt’s government has said it will focus on boosting flagging economic growth to 3.5% this financial year and 4.5% in 2013/2014.
That is a scaled down version of a previous forecast for growth of between 4% to 4.5% for 2012/2013.
The economy, riven with political and economic strife, has struggled to grow as the uprising that toppled Hosni Mubarak in February 2011 chased away tourists and investors.
Still, the economy grew by an annual 2.6% in the third quarter of 2012, President Mohamed Morsi said in a televised speech this week.
In the year that ended June 30, gross domestic product grew by a lacklustre 2.2%, up from 1.8% in the 2010/11 financial year, according to statistics published by the Finance Ministry.
This compares with annual growth rates of 5% and higher before the regime of Hosni Mubarak was overthrown in 2011.
Rebel Economy surveyed seven economists and two financial analysts that on average said the economy would be hard pressed to grow above 2% in the next financial year.
Most have pencilled in growth of between 2% and 2.5% in the next financial year. There are anomalies however in forecasts, with one chief economist at a Cairo-based investment firm saying the nation could experience “significant” growth of 6% or 7% next year if the IMF loan is signed. The agreement would unlock at least $14 billion of financing in other loan packages and would provide the stimulus needed for growth, he said.
All those interviewed agreed that the IMF loan is the cheapest and most effective catalyst for an economic revival. The relatively easy 1.1% interest attached is far more favourable than expensive government bonds and bills the state has sold to try to narrow the deficit. These have been sold at yields as high as 16%. Now, the interest payments on Egyptian government bond yields are increasing at a faster rate than spending on subsidies and wages. Economists say these payments now make up around 15% of government spending.
The heavy burden on banks to buy these securities has also diverted cash that would have been spent in the private sector on narrowing the budget deficit.
Due to the significance of the IMF loan for an economic recovery, Rebel Economy has laid out three potential scenarios based on the negotiations giving some indication of what could happen in the months to come and the impact on elements of the economy including the currency.
THREE SCENARIOS BASED ON IMF LOAN NEGOTIATIONS
SCENARIO 1: IMF loan is passed in early 2013 (Jan or Feb)
The most favourable of all scenarios would see the IMF agreement officially signed in January. Under this scenario, the one month delay would have little impact on Egypt’s economic framework presented to the IMF which includes a package of measures to cut wasteful spending and earn revenue. In a reassuring sign, Egypt’s prime minister Hisham Qandil latest statements indicate that negotiations will resume in January. Qandil told reporters there won’t be any fundamental changes in their economic plan with the IMF.
This would mean that Egypt would immediately have to go ahead with a package of reforms it has proposed to appease the IMF, including tax hikes and subsidy reforms before or as soon as the loan agreement was signed.
These unpopular economic reforms will be difficult to implement two months before the parliamentary elections when the Muslim Brotherhood hopes for significant support. Reforms will be particularly hard to implement because of the president’s slim mandate. Morsi’s decision to rush ahead with a vote on the constitution despite calls from the opposition to delay it left him with a polarised country.
However, if the government implements these reforms in the right way – by communicating the “Hows” and “Whys” – the loan will go some way to relieving pressure on the currency and foreign reserves. The steady depreciation of the pound will be stemmed and the rush to swap pounds to dollars will also ease off as the public sees a light at the end of the tunnel.
Economists at Beltone have forecast an additional drop in reserves to about $14 billion in December, or the equivalent of 2.8 months of imports, well below the “safe” level.
Therefore, an injection of almost $5 billion would instantly provide a buffer to the Central Bank and the budget. More importantly, the IMF loan will act as a catalyst for the release of other loans that are contingent on this agreement being signed. Economists say that this additional support amounts to about $14.5 billion. Finally, a final agreement on the loan would end almost two years of negotiations and would draw a line under the uncertainty that has stopped foreign investors from returning to Egypt. The loan, more symbolic than financially helpful, would signal a new start for the nation.
SCENARIO 2: Loan delayed again, forecast for resuming negotiations
Given that increasing taxes on goods and services is a prerequisite for signing the final agreements on the IMF loan, it is a possibility that the government will attempt to further delay unpopular measures until after the parliamentary elections, which are due around February.
This could initially put pressure on the pound and budget deficit.
With tourism and foreign direct investment down, two of Egypt’s main sources of foreign currency, its ability to continue propping up the pound through foreign reserves will come under further pressure.
The central bank already appears to be letting the pound slip gradually. It not only hit a near eight-year low on December 26, but its value has been declining faster than usual in December. The pound has been stable and traded at around 6 pounds to the dollar for the first half of the year, only to start falling after Egypt signed a preliminary IMF loan agreement in mid-November.
Money to support the budget deficit from the EU and African Development Bank will also continue to be delayed so long as Egypt delays the IMF loan, and investor confidence will continue to be low.
This paves the way for Egypt to receive financial support from other actors, such as the Gulf states or the army — as it has done over the last two years — at least until parliamentary elections.
Though, with the politically charged atmosphere created by the constitution, the reinstatement of Parliament is no guarantee that the government will be any more likely to pass its planned austerity measures.
SCENARIO 3: Loan delayed with no forecast for resuming negotiations
Under this scenario, Egypt’s economy is most fragile. Domestic and foreign investors (individual and institutional – i.e. large companies) are likely to exit the debt markets and swap their pounds for dollars. The government will lose support from international donors who have waited for the IMF loan to pass, and much-need aid will pass by Egypt.
The country’s currency devaluation may be “disorderly”, according to this research note from Capital Economics:
“Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50% or more against the US$. The costs to the economy would be severe.
This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices.”
Higher inflation and a cheaper pound will be hardest for the poorest, who are already struggling in their daily lives. Food will become expensive and meagre salaries will buy less. A “Revolution of the Hungry” could lead to the revival of riots, political instability and public discontent with the Morsi administration.
Investor confidence will also be shaken in the short-term by the uncertainty created regarding Egypt’s economic plan and the government’s ability to get things done. A repeat of January 2011 could see companies scaling back or sitting out the crisis, and foreign direct investment could likely fizzle out.
The government will most likely try to press ahead with austerity measures, even without the prospect of signing an IMF loan agreement to get the budget under control, though pressure from political opposition forces will make it difficult to enact these reforms.
As Reuters reports, by “fast-tracking the constitution to a referendum that the opposition said was divisive, he [Morsi] may have squandered any chance of building a consensus on tax rises and spending cuts that are essential to rein in a crushing budget deficit.”
It is likely that with no agenda for resuming negotiations with the IMF, Egypt would have to go back to the drawing board and alter its macro-economic plan to accommodate the changing fiscal situation. Government officials say this could happen even when Egypt resumes negotiations with the IMF in January.
KEY CHALLENGES
Aside from the task of securing the IMF loan, Egypt faces a multitude of other significant challenges. Rebel Economy broke these down into a few major themes: the labour movement, tax reform, energy subsidies and the rule of law.
The Labour Movement
Egypt has experienced an increase in labour action since the outbreak of the revolution. Protests have forced factories and companies to shut down, which has shaken investor confidence and highlighted the need for more effective laws that govern employer-employee relations.
“There have been more strikes than ever before,” says Joel Benin, an academic who has written extensively on Egypt’s labour movement. There were 1,400 strikes and forms of collection action in 2011 alone, compared with no more than 800 in any previous decade, Benin estimated.
The main demand has been for the implementation of a minimum wage (ranging between 1,200 and 1,500 Egyptian pounds), better working conditions and recognition of Egypt’s newly formed independent unions.
A draft labour law, introduced by Ahmed el-Borai, the former labour minister, allowed unions to organise for the first time beyond the parameters of the government-controlled Egyptian Trade Union Federation. But there have been delays in fully enforcing the law, leaving workers in legal limbo, the Financial Times reported.
In 2013 the Shura Council, which now has legislative powers, or the lower house of Parliament, if re-elected as planned, could re-visit this.
Strikes have been increasingly effective. In three of the most recent strikes, at DP World’s Ain Sokhna port (a private company), Eastern Tobacco and Arab Polvara (both public), demands were eventually either fully or partially met.
The key challenge for employers, especially in the private sector, will be accepting that even if they spend a bit more on workers by implementing a minimum wage, the labour force in Egypt is still much cheaper than its regional competitors in Turkey, Morocco and Tunisia, and certainly Europe.
The government will need to introduce a labour law that satisfies workers’, unions’ and employers’ needs. It shouldn’t try to dominate the labour union movement and should avoid criminalising protests or responding with any heavy-handed measures, which would be counter-productive in the unrest it ensues.
Energy Subsidies
After years of debate, cutting one of Egypt’s biggest bills has become essential to balancing the nation’s financial books.
The government spends about 20% of its budget on keeping fuel prices down for the general public in a subsidy system that benefits the richest rather than the neediest. Now, Egypt is one of the worst offenders for energy subsidies in the world on par with Russia and China. And because its domestic consumption is rapidly growing, Egypt winds up using its share of production locally rather than earning much-needed revenue from exports. That means it buys expensive fuel from abroad and sells it at a discounted price domestically.
The country has shifted from being a net exporter to a net importer of oil over the past decade. This month Egypt’s petroleum ministry admitted it had also switched to a net importer of gas from a net exporter. The consequences of such an unsustainable practice are immense.
On a domestic level, fuel is so cheap that almost everyone uses their car to get around and congestion and pollution are normal. In addition, the government spends more on energy subsidies that health and education combined so the social impact is enormous. More worrying still is the rising (external) debt pile. The nation sells its fuel at a much cheaper price than it buys it so inevitably debts to international and domestic energy companies and banks grow.
Bankers that have interests in energy have told Rebel Economy repeatedly that energy subsidies are at the crux of Egypt’s wider problems. Reserves have been depleted not only to support the pound but to keep importing petroleum products to keep up with demand. The Central Bank released a statement this week saying it had spent $14 billion since the beginning of 2011 on imports of petroleum products and foodstuffs. Undoubtedly, this was to plug a shortage in the market.
So what can be done? What is clear is that everyone now regards energy subsidies as a drain on the budget and politicians acknowledge that reforms have to be made. But not much has come of the countless promises to enforce reforms including a coupon system that would better regulate subsidies and fuel price hikes that would instil a healthy aversion to buying gallons of fuel. So far, the Morsi administration has shown it is too weak to implement difficult reforms for fear of riots and a backlash. With two months before the parliamentary elections, it appears that Morsi must choose between temporary popularity by retaining the status quo of these plentiful fuel subsidies, or steer the nation out of its crisis and show a strong hand.
Tax Reform
The fact that Morsi couldn’t implement a hike in sales tax on alcohol in a country that is mostly dry shows what an uphill struggle his government faces in carrying out tax reform.
The government recently announced a package of tax hikes on goods and services, ranging from cigarettes and mobile phone calls to electricity bills and real estate. Within hours, the reforms were delayed amid calls for “societal dialogue” by members of the opposition and media. The delay was also seen as an attempt to win the popular vote at a politically sensitive time when Egyptians were set to vote on the constitution.
The move had more severe impacts, however. Egypt had to postpone the signing of the IMF agreement partly because tax reforms are a crucial part of the economic reform programme presented to the Fund. Without these tax hikes, it is unlikely the IMF would have agreed to disburse $4.8 billion.
Raising taxes is necessary to shore up finances and plug a budget deficit that reached 11% of GDP in the fiscal year that ended June 2012, and is projected to exceed 10% by June 2013.
But Morsi and his aides have yet to gain broad support on the matter with members of the opposition, a task that is necessary but hard to imagine given their poor track record in consensus building with non-Islamists.
Other tax measures, such as reforming the 20% income tax on wages whether rich or poor, as well as addressing corporation tax and broadening the tax base, are to be taken up by the next Parliament.
Rule of Law
There is an ongoing concern about respect for the rule of law in Egypt, which is critical to address before returning to stability. For example, the people blocking Tahrir Square believe the government is illegitimate so they illegally block traffic. Police, too, haven’t won back respect from the people, so they are unable to enforce the law sometimes.
As for the new constitution, though it spells out the new parameters for the rule of law, many people believe those parameters are incorrect. Max Rodenbeck spelled out the key flaws in this Economist report. The new constitution could give “Morsi’s party, the Muslim Brotherhood, a grip on power not unlike that enjoyed by Mubarak”, he writes.
The somewhat unpopular new constitution and a government still trying to win legitimacy from people means there is a rule of law crisis in Egypt. As Haitham Tabei writes in EgyptSource:
“Solutions must be found to the [rule of law] crisis, outside the current framework of religious institutions and inept security forces, and must depend instead on a state of citizenship, which guarantees the safety and protection of all its citizens regardless of religion.”
MAIN DRIVERS OF GROWTH
These challenges, though significant, are not impossible. Egypt’s geostrategic position on the crossroads of Europe and Africa, its large population and favourable tax conditions are all drivers of growth and mean the nation will continue to attract companies that want to tap the retail market, quickly. European banks, hit by the Eurozone crisis have had to offload assets in Egypt but these assets have caught the attention of Gulf banks, despite the political instability.
Société Générale has agreed to sell its majority stake in NSGB, its Egyptian subsidiary, to Qatar National Bank for $2 billion. BNP Paribas seeks bids for the sale of its Egyptian retail arm, which is expected to generate between $400 million and $500 million. Last year, Standard Chartered came close to acquiring the Egyptian assets of Greece’s Piraeus Bank.
Other merger and acquisition activity in the retail market is likely to continue in 2013. We are already seeing signs of this happening with Dubai’s Majid Al Futtaim in talks with Egypt’s Mansour Group, owned by billionaire Mohammed Mansour, to buy its supermarket business in a deal valued at $200 million to $300 million.
Enacting a law that would allow issuance of Islamic bonds, or sukuk, is also seen as one driver for investment growth next year, economists say. A sukuk law has been mooted for several years but only taken more seriously after the revolution when Islamist parties have lobbied harder for Islamic financing. Globally, $109 billion worth of sukuk were issued in the first nine months of 2012, up 69% from a year earlier, with the rise driven primarily by Malaysia and Gulf governments, according to research by Zawya. Egypt is yet to tap into this lucrative market.
Above all, economists say another driver of economic growth will be resolving investment disputes post-revolution. Egypt’s biggest companies, especially those in the property sector, have faced legal challenges because of Mubarak-era contracts. More recently contracts in some of the industrial sectors, including goldminer Centamin have been under the microscope. Some of these cases are rushed through with little valid evidence and are eventually overturned. A more accurate and thorough approach to investment cases will pave the way for a better corporate structure.
A BROADER VIEW OF ECONOMIC GROWTH
The great mistake of the Mubarak regime was not seeing its role as broader than just increasing growth. Their policies led to a revived economy, but the profits only stayed with a small elite and did not make an impact on the vast majority.
Economic policy is not just about making some numbers go up and others go down. That is why the definitions are so important. Gamal Mubarak’s cabinet of technocrats lacked the vision to redefine the aspirations of the government.
And that is one area where the Brotherhood’s Renaissance Project team are right. Khaled AlQazzaz, an advisor to Morsi on “integrated development”, explained during a conference earlier this year that the government was planning to change the metrics it uses to evaluate successes and failures. That means they are proposing a new way of looking at how the government improves the lives of Egyptians.
It will no longer just be about the GDP rate and number of teachers to pupils. It will be about whether the lives of Egyptians is improving or not, analyzed through a new set of performance indicators. This way all policies can be directed toward the right solution. The answer isn’t always in more teachers, but changing the curriculum. It’s not about number of hospitals, but about the health of Egyptians.
In New York City, the police department radically changed they way they approached crime by targeting the crime rate itself rather than police officers’ response time to a scene.
New York just reported its lowest number of murders for decades.
The government should go even further and establish an independent ministry to be in charge of the portfolio, so Egyptians know that the numbers aren’t being fudged to make the president look good.
It should also give the opposition movement something to think about. Are their policies just better technical tricks to balance the books or do they have a vision for Egypt that is broader than “neoliberalism without corruption”? This should be the basis of all political platforms: how will you grow the economy and how will you measure the impacts? The answer to those twin questions would give people a good idea of why they should or shouldn’t vote for them.
CONCLUSION
With little of its own money to spend, Egypt will be forced in 2013 to implement belt-tightening measures on stomachs that are already hungry.
The cries for “bread, freedom and social justice” continue to echo in protests that have not ceased since the 2011 uprising.
But austerity measures are difficult enough to implement in a country with political stability let alone one that is as polarised as Egypt. Strict reforms will undoubtedly stoke further unrest in the year ahead.
It does not help that the government consistently fails to consult the public about its plans in a transparent manner, or when it puts out decisions only to backtrack hours later. Transparency is crucial.
State institutions also contradict themselves in the information they put out, and state media is biased, all of which creates a climate of uncertainty and mistrust in government.
It is now or never for Morsi.
He has two paths to choose from: retaining the status quo or leading the country out of the crisis with a strong hand, clear communication and a promise to soften the blow for the most vulnerable. He has the power to implement reforms that will begin to change the lives of millions of people who are suffering from decades of neglect.
Can Morsi make the first, difficult steps of change not seen in the country for decades? Will he be strong and bold enough to lead the country out of its economic, social and political malaise? 2013 will be the test.
With help from Bradley Hope, The National newspaper’s Cairo bureau chief.
Egyptian President Mohammed Morsi has proved to be a recalcitrant negotiator with the opposition movement in Egypt over the past month, raising questions about the sudden move toward magnanimity in his speech Wednesday night where he appealed for calm and national dialogue.
Politically, he may be trying to seal the issue of the constitution once and for all through some compromises. (It passed with slim approval by 63.8 per cent of voters and only about a third of registered voters took part in the referendum).
But a bigger concern for the president and his Islamist supporters is the economy. The reputation of the Muslim Brotherhood’s new political power is on the line. The last thing the group wants is to be the stewards of a full-blown economic crisis, something that could tarnish their reputation and electoral viability in years to come. If Egypt remains unstable, foreign donors will be wary of lending, investors will wait on the sidelines and tourists will stay away.
In the short-term, the Egyptian pound has moved to centre-stage. It hit a near eight-year low on December 26, dropping to LE6.175 per dollar. It has slowly declined over the past two years from about LE5.7.
Monetary policy and impacts of a currency devaluation – which many are predicting as imminent – can be bewildering, so Rebel Economy has prepared this explainer.
Let’s start from the beginning. What is a currency devaluation?
The textbook definition of a currency devaluation, according to Investopedia, is:
A deliberate downward adjustment to a country’s official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country’s government (i.e central bank) can alter the official value of the currency. Contrast to “revaluation”.
A devaluation is a policy decision by the government, as opposed to a depreciation, which happens when a free-floating currency reacts to market forces.
Although Egypt officially floated the pound in 2003, it has a policy of managing the pound in what is known as a “managed float rate regime”. That means that the currency rate fluctuates, but is ultimately managed by the Central Bank of Egypt through capital controls and trading of foreign currencies.
The Central Bank’s primary tool of supporting the domestic currency is by using the country’s reserves of foreign currency. In short, it has to be willing to meet all of the offers to sell Egyptian pounds at the established rate to keep it at the level it wants.
That means the pound’s nominal exchange rate has remained almost unchanged since 2004.
So, what’s the problem?
The Central Bank cannot carry on using its foreign reserves for much longer.
The Central Bank’s policy has led to a rapid decrease in foreign reserves to just $15.04 billion from $36 billion in late 2010, a dangerously low level that is just enough to cover three months worth of imports.
The two most important sources of foreign currency (which would normally keep foreign reserves replenished), tourism and foreign direct investment, have dried up because of Egypt’s economic crisis.
Tourism revenues have declined by about a third and foreign direct investment was just $2.5 billion in the first half of 2012 versus $4.1 billion in the first half of 2010, according to the UN.
GDP growth has slowed to 2.2%, from annual rates of 5.5% before the revolution, and unemployment has increased to 12.6%.
The Central Bank has not been able to hold off a depreciation and the pressure on the pound from continued political instability has reached crisis point. Egyptians are swapping their pounds for dollars in a process better known as “dollarization”, exacerbating the depreciation of the pound, and meanwhile the Central Bank is struggling to fight against market forces that are pushing the currency down.
Why does Egypt want to protect its currency?
Protecting the currency prevents a scenario where real wages decline. (The actual wage for a professor, for example, would stay the same but he or she would be able to buy less with the salary if the currency depreciated).
A depreciated currency would also lead to a rise in exports (because they would be cheaper for foreign buyers) but a decline in imports (because they would become more expensive for domestic buyers). Finally, inflation would rise more quickly with a cheaper pound. In general, it would lead to a more difficult period for Egyptians, especially for those who are already suffering the most.
Analysts have been predicting for more than a year that Egypt would be forced to devalue the currency when it no longer had enough reserves to prop up the pound. The question, they have said, is only when it would happen.
A forced devaluation can also happen merely due to speculation on the market and the perception that a devaluation is coming. If everyone panics and tries to exchange their pounds for dollars, which is already happening in Egypt to some extent, then the level of foreign reserves will decline even more rapidly.
This can cause a balance of payments crisis, which occurs “when a nation is unable to pay for essential imports and/or service its debt repayments”. Other consequences of a devaluation include an increased cost of borrowing from abroad.
“If reserves are depleted, the government would need to start borrowing to buy commodities, pushing prices higher and demand lower, and risking a currency explosion similar to what happened in 2003. That could lead to stagflation, a period of high inflation and slow growth.”
What impact does the IMF loan have on the currency?
The International Monetary Fund’s $4.8 billion loan package to Egypt would act as an important stimulus for providing more foreign currency to protect the pound, but it has now been delayed by President Morsi.By many accounts, he believed the country was not yet ready for the austerity measures (higher taxes and lower subsidies) that are part of the economic programme created by Egypt to appease the IMF.
Without the IMF loan, a devaluation may be “disorderly”, according to this research note from Capital Economics:
“The key question is whether the necessary devaluation is orderly or disorderly. Failure to secure help from the IMF would make a disorderly devaluation more likely. In this scenario, the pound could overshoot, falling by perhaps 50% or more against the US$. The costs to the economy would be severe.
This is likely to lead to a spike in inflation, sharp hikes in interest rates, a potential banking crisis and rapid fall in asset prices.”
The IMF is not the only potential saviour for Egypt’s economy. It is supported by the US and Qatar, among others, who could also step in to support the government in the event of a dire crisis.
Benefits/Disadvantages of controlled devaluation:
Many economists have also called for Egypt to initiate a devaluation to restore balance in the economy and make Egypt more competitive globally.
A devaluation can help reduce the trade deficit because exports typically rise. Right-siding the economy could also ease the need to keep borrowing money to plug gaps in the budget.
The IMF is a lumbering, technical organization, but a good insight into their thinking in unusually clear terms can be found in their lessons for teenagers. It is important to note that many development economists have sharply criticised the IMF because its solutions have made the situation worse in developing countries. Joseph Stiglitz famously said the IMF “was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community”.
“A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation.
First, devaluation makes the country’s exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.
Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country’s economy and hurt the country’s ability to secure foreign investment.
Another possible consequence is a round of successive devaluations. For instance, trading partners may become concerned that a devaluation might negatively affect their own export industries. Neighboring countries might devalue their own currencies to offset the effects of their trading partner’s devaluation.”
From The IMF In Action: How Can the IMF Help In Time of Crisis?
The worst consequence for Egypt is the prospect of rising inflation. Egypt is a food importing country, so the cost of feeding a family would inevitably increase. This is what political figures mean when they talk of the coming “Revolution of the Hungry”. Many families in poor areas of Egypt are already hard-pressed to afford the unavoidable private education and healthcare costs as well as basic necessities.
A family in Saft el Laban, a poor neighbourhood in Giza, explains in detail how quickly a month’s wages disappear. Said Abdel Hameid, who is married with three children, earns 1,500 pounds a month through two jobs, but most of it is gone within a few days:
“About 500 pounds a month goes paying of his debt for household goods: two fans, an old television and a battered tabletop. Another 25 pounds is paid for a natural gas connection – a rarity for many – that will be amortised over seven years. That does not include the cost of gas used, which averages another 10 pounds a month.
Then comes education costs. The public school system is so dysfunctional that nearly every family in Egypt, poor and rich, pays for private lessons in a bid to improve their children’s’ chances at getting a job. The school of Mr Abdel Hameid’s daughter, Sama, 7, requires 100 pounds a month for after-school lessons. Another 150 pounds is paid for other private lessons from teachers.
Rent for their flat, which consists of two small bedrooms and a living room, is 250 pounds.
That leaves the Abdel Hameid family with about 465 pounds to get through the month. It is barely enough to put basic food on the table. At 5 pounds a kilo, tomatoes are a luxury. To keep up with hungry mouths, the only option is to buy macaroni and rice in bulk. Foul, a boiled bean dish, is a mainstay of their cuisine.”
His income does not include the cost of healthcare, which is supposed to be free in Egypt but the system is so dysfunctional that nearly everyone shells out for private treatment if someone is really sick. The Abdel Hameid family can only pay for medicine if the whole family bands together to raise enough money.
Looking Ahead
No matter what happens in Egypt – an abrupt devaluation, a government-managed devaluation or a continuation of the same Central Bank policy of backstopping the pound – the impacts will be most heavily felt in Egypt’s most vulnerable population. The government has done a poor job of explaining their economic plan for the future (if they have one) and without this, there will be no buy-in from the population, especially if they are afraid of an even worse form of poverty than they already endure. A devaluation is by no means a strategy by itself.
The government must prove that it will take other measures to soften any impacts and get Egypt’s economy growing again. “Renaissance”, which Morsi called for in his speech on Wednesday, is only a word.
Egyptian private equity outfit, Citadel Capital, has appointed petroleum industry veteran, Mohamed Shoeb, as Managing Director of its energy division.
It is the latest sign of how Citadel is quietly moving toward filling a gap in the energy market which is likely to be left after a reform of the country’s energy subsidies.
Shoeb is the former head of the state-run gas company, Egyptian Natural Gas Holding Company (EGAS), and prior to that was the vice Chairman for operations at the state oil company, Egyptian General Petroleum Corporation (EGPC).
The problems attached to both companies do not reflect kindly on Shoeb; EGAS was at the centre of a politically controversial cancellation of a gas contract to Israel, while EGPC is facing a potential bail-out from Egypt’s banks because of a mounting debt pile to foreign oil companies and banks for energy exploration.
However, the former EGAS head brings experience and knowledge of the nation’s state energy industry (and its specific challenges) that would be hard to find elsewhere. Importantly, he has deep connections in the sector that will come in very useful for Citadel at a time when its most high-profile investments are in the energy market. These include:
- a $3.7 billion financing package for the Egyptian Refining Company project
- A joint venture with Qatari investors to import liquefied natural gas into Egypt from mid-2013
UPDATE - This morning Citadel Capital sent a statement saying it had sold one of its investments, in a further sign that the private equity firm is focusing its strategy around five sectors including energy and transportation.
Its portfolio company National Petroleum Company Egypt Ltd. sold National Petroleum Company Shukheir Marine Ltd. to Sea Dragon Holding Ltd., a subsidiary of Canada’s Sea Dragon Energy.
“This transaction is the first of a number that will see us exit non-core portfolio and platform companies as part of our transformation over the coming three years into an investment company,” said Citadel Chairman Ahmed Heikal.
◊◊◊
A spat between EGPC and Centamin’s Sukari goldmine appears to be almost resolved after customs authorities on Sunday allowed an export shipment of 1,600 kilograms of gold to the Netherlands, Egypt Independent reports.
Shipment had been halted by Egyptian customs because the petroleum and finance ministries had said Centamin owed the authorities back-dated payments for fuel. Centamin denied this and said its payments were up to date.
Josef El Raghy, chairman of Centamin, has faced labour strikes and fuel shortages that have forced the firm to halt production twice this year.
It’s a stark reminder of both a highly bureaucratic state where the lack of a signature can halt valuable exports that could shut a company down, and how fuel shortages at EGPC have the potential to trickle into important industries across Egypt.
◊◊◊
One clear characteristic of the Morsi administration’s economic programme is its resemblance to Mubarak-era projects. The following is no exception. Egypt Independent reports:
Prime Minister Hesham Qandil has tasked the agriculture, irrigation, electricity and investment ministries to begin implementing a project the government hopes will reclaim and cultivate a million new acres of farmable land over four years
Land would be sold to private companies for a small fee under the BOT scheme, granting them use anywhere between 20 to 25 years. Products used by private companies in the production of renewable energy sources would not be subject to taxes or customs duties.
There’s one aspect of Egypt’s business climate that will keep attracting buyers despite the uncertainty and political turmoil – that is the nation’s 83 million consumers; a goldmine for a business that wants to gain a strong foothold in the Middle East quickly.
For European banks that have been hit by the Eurozone crisis, restructuring plans are underway, and that means offloading assets it can’t afford.
French bank Societe Generale is the latest to sell its Egyptian unit. Yesterday afternoon it agreed to sell its Egyptian asset (NSGB) to Qatar National Bank as part of a larger restructuring plan for about $2 billion. A hefty sum considering most economists are putting a black mark against Egypt.
There’s more acquisitions on the way. BNP Paribas is seeking bids for the sale of its Egyptian retail arm, which is expected to generate between $400 million and $500m, and last year Standard Chartered came close to acquiring the Egyptian assets of Greece’s Piraeus Bank.
QNB didn’t over pay, says Emad Mostaque, strategist at investment bank Religare Noah in an emailed note this morning. But that’s good news, he explains:
Soc Gen agreed to sell their 77% stake in NSGB to QNB at 35.54 EGP for $1.97bn, valuing NSGB at $2.7bn.
This is well below the close price of 39.35 EGP, but in line with the 6 month average price. The acquisition at this price is clearly positive for our Top Pick QNB, who will take the lead in the funding of the $20bn of FDI in Egypt promised by Qatar.
It shows continued conservatism from Qatar on not overpaying for acquisitions by its national champions, something we have recently been a bit worried about.
◊◊◊
Elsewhere the news isn’t as rosy for Egypt. Gold miner Centamin has said it would would suspend operations at its only producing mine, located in Egypt, due to a short-fall in working capital and the inadequate availability of diesel at the mine.
The company said fuel supplies to the gold mine had reached critical levels.
The problem started because apparently Centamin owes about $65 million for diesel supplied from the Egyptian government between Dec 2009 and Jan 2010. Egypt said it wouldn’t supply additional diesel until the payment was made. Centamin says the claims are “illegal”.
EGPC has had a multitude of disasters related to the country’s expensive energy subsidy system. Debts are rising to international/local oil companies and banks and high-ranking executives in the energy sector say EGPC is about to be bailed out by the state-run bank National Bank of Egypt.
In the meantime, Centamin was hit with a court case in October which declared its rights to operate the Sukari mine as illegal. It subsequently suspended gold exports pending a ruling.
Today, the company said it had obtained clearances to start exports again but it was still waiting for prior approval by the Minister of Finance.
“This approval has been urgently sought, but has not yet been forthcoming,” Centamin said.
A combination of mismanagement (on its own part for not paying for fuel, but also on the part of the Egyptian government for not approving exports) and bureaucracy has left Centamin unable to sell its gold. It’s situations like these that worry foreign investors.
Shares in Centamin are down almost by half since late October.
◊◊◊
“Yemen is Egypt on drugs”, said one tweet yesterday as news emerged that the IMF had urged Yemen to make drastic changes to its energy subsidies which account for 8% of GDP and benefit mostly the richest.
The international bank did not hold back in its criticism of Yemen, whose energy subsidy system is appalling:
This large untargeted subsidy benefits the richest segments of the population disproportionately. Furthermore, the lower prices lead to substantial inefficiencies and smuggling, and contribute to environmental deterioration.
To further improve governance and transparency, the authorities are encouraged to further adjust these prices and launch other reforms to increase efficiency in the energy sector, while broadening the social safety net and increasing compensation for the poor through well-targeted cash transfers.
Egypt’s energy subsidies actually account for close to 10% of GDP, so perhaps it’s Egypt that’s on drugs.
◊◊◊
If you have lived in the Gulf, this is a story that is glaringly obvious.
Some guys from Booz & Company, the consultancy firm, write in this FT article that “for the past four decades, the Gulf Cooperation Council states have shown remarkable economic growth, yet they are still challenged by a volatility they need to eradicate if they are to diversify away from oil and become powerhouse emerging economies.”
Surprise, surprise. The GCC states make a lot of money and don’t know how to spend it.
One of the many reasons the authors give for this “volatility” is the high proportion of people employed in unproductive, but highly-paid public sector jobs. Booz & Company give some interesting recommendations including enforcing value added taxes, and creating opportunities for collaboration as a block instead of outright competition.
Sounds a little too optimistic for the GCC where rivalry extends from city to city, let alone state to state.
These are the five best stories on the repercussions of Egypt’s delay of a $4.8 billion loan from the International Monetary Fund:
1. The Wall Street Journal’s report uncovers rifts and miscommunication between the presidency and the prime minister’s team. An interview with Abdallah Shehatta, a former IMF fiscal policy analyst and the chairman of the economic committee in the Brotherhood’s Freedom and Justice Party revealed that confusion over the tax decree which was subsequently postponed “stemmed from cracks in the delegation of executive power”.
Mr. Morsi’s prime minister announced the decision without consulting the presidency, he said, forcing Mr. Morsi to reverse the decision hours later.
2. Bloomberg’s summary of events illustrates Morsi as a man focused on defusing a resurgent protest movement rather than the economy. Most importantly, the inability to implement vital reforms including additional taxes shows a weakness in the Egyptian government, analysts told Bloomberg reporters:
Even if an IMF deal does go through, Mursi’s U-turn on taxes suggests it will be hard for his government to stay on the program, said Raza Agha, chief regional economist for VTB Capital Plc in London. IMF loans typically set conditions for the disbursement of each tranche of cash.
Achieving “targets and reform measures in the current political environment will be extremely difficult,” Agha said. “This could well threaten the program itself.”
3. The IMF loan is inherently linked to other loans to Egypt. The African Development Bank has been the first to say its $500 million loan is contingent on the country’s negotiations with the IMF, Bloomberg reported. This situation also applies to other loans from the European Union.
4. Egypt’s finance minister Mumtaz al Saeed told Reuters:
”Of course the delay will have some economic impact, but we are discussing necessary measures [to address that] during the coming period,” he said. “I am optimistic … everything will be well, God willing.”
Doesn’t fill you with confidence.
5. Finally, the Financial Times’ report offers a glimpse of what could happen in the next round of negotiations:
Analysts say that when Egypt goes back to the Fund it will have to renegotiate the terms of the deal because its macroeconomic outlook will have changed.
“The agreement was based on particular targets to be met before going to the IMF board and plans for meeting other targets in the future,” said Alia Moubayed, senior economist at Barclays. “Given the worsening economic and investment climate, achieving these targets is not any more feasible, so they will have to set new ones.”
The loan, which is likely to be delayed by (at least) a month, is a catalyst for economic reform in Egypt and a vote of confidence for foreign investors.
Egypt’s decision to delay on its best chance of recovering from a balance of payments crisis is also likely to be putting pressure on Morsi’s most loyal supporters.
The president’s backing of some high-ranking Muslim Brotherhood officials is not necessarily contingent on his reaction to protests, or even getting a new constitution, but on setting down the economic pillars of recovery such as the IMF loan.
These Brotherhood advisors and businessmen are the main channel of communication to the secular and business community in Egypt and abroad. But as Morsi turns his back on loan negotiations, the loyalists may be questioning his motives and simultaneously attempting to smooth over ties with foreign investors and diplomats keen to see Egypt back to business. That could be straining the relationship between Morsi and his advisors, as he focuses on political motivations ahead of the referendum on Saturday, when Egyptians vote on the draft constitution.
It is, after all, very rare for a nation to postpone a deal with the IMF so soon after it has made a public announcement.
That begs the question of whether the delay was really the Egypt government’s decision or whether the IMF was actually unwilling to lend at such time of political crisis.
In the context of Egypt’s protests last night and renewed political turmoil, it is important not to forget the economic implications.
After all, the economy is where we see the clearest consequences of nearly two years of instability – foreign reserves have more than halved since December 2010 to $15.4 billion, the balance of payments deficit is at $518.7 million in the third quarter of 2012/13, and tourism revenues are depressingly low despite government efforts to boost earnings to 2010 levels.
The question for many politicians desperate to see some success is how quickly will Egypt’s economy recover? To shed some light on the varied perspectives out there in the market, here are two conflicting views from analysts who keep a close eye on Egypt and its balance sheet:
Peter Garnry, equity strategist at SAXO BANK
Garnry reckons Egypt’s economy is still a long way from recovery.
“It is impossible to say when will this be over. In Europe the crisis was expected to be over in one year, and now we are into the fourth year into the crisis… Egypt’s economy will likely take a long time [to rebound],” Zawya Dow Jones reported him as saying.
He also notes that it’s not advisable for the Egyptian government to devalue the currency directly via regulations, or indirectly via printing more money.
This “distorts the economy. It doesn’t solve the problem, as you don’t change structurally the things that are wrong in the economy,” adding “it is best to leave it up to the market to adjust the [Egyptian] pound’s value.”
Then there’s the more bullish view, from the ever optimistic Emad Mostaque.
Emad Mostaque, strategist at RELIGARE NOAH
Egypt is open and functional today and we must look at these protests in proportion to their actual size and disruption on the economy.
All the complaining over the constitution is also overdone, we don’t even have one in the UK and the most liberal/ideal one I’ve seen is in North Korea. What matters is who gets elected and if those elections are fair.
Onto markets, we would expect more weakness into the weekend with more marches tomorrow, although foreign buying has finally started as investors look to the medium term picture with elections being pushed through and some very tactical Arab (Qatari?) buying supporting the market.
The real economy will be ok (minus some points on tourism but plus lots on foreign aid).
