Arab economies have become addicted to “unearned income streams” including fuel exports, foreign aid, and remittances. This fragile social contract has led countries across the Middle East and North Africa to increase subsidies on fuel and food at times of social unrest.
This is their “original sin” and is fast becoming a liability, say economists Adeel Malik and Bassem Awadallah in this important paper for the World Development journal recently made available to the public.
“External revenues—whether derived from oil, aid, or remittances—profoundly shape the region’s political economy” which only serves to “stiﬂe economic and political incentives, turning economies away from production to patronage”.
So as a result, on a per capita basis, the Middle East and North Africa received the highest overseas development assistance in 2008 ($73 compared to $49 in sub-Saharan Africa), the paper says. North Africa has consistently been the largest recipient of net aid per capita since 1960s (see table). These aid ﬂows are largely driven by geo-political considerations.
The authors point out that despite the differences in cultures, economies and geographies across the Middle East and North Africa (Algeria to Syria for example), there are “at least ﬁve common denominators that cut across commonly recognized conceptual boundaries—for example, whether an Arab state is a monarchy or a republic, labor-scarce or labor abundant, resource-rich or resource-poor”. One of these is the dependance on exports and aid. They spell out the other connecting factors:
First, all across the Arab world both economic and political power is concentrated in the hands of a few.
Second, the typical Arab state can be characterized as a security state; its coercive apparatus is both ﬁerce and extensive.
Third, the broad contours of demographic change and the resulting youth bulges are fairly common across the region.
Fourth, Arab countries are mostly centralized states with a dominant public sector and, with few exceptions, weak private enterprise.
So what went wrong?
Malik and Awadallah go back to the Ottoman empire where centralized bureaucratic rule worked hard to prevent the emergence of autonomous social groups, and therefore valuable and profitable connections across the region and a strong private sector:
The Arab world has inherited an unfavorable and divisive legacy. The roots of a weak private sector run deep in history. Merchants were politically weak under the Ottomans.
A robust private sector was more feared than favored. When business thrived, it remained eﬀectively in the hands of foreign merchants and local minorities. This was politically expedient: foreign merchants beneﬁted from the economic privileges granted by rulers, but
seldom challenged their authority.
The break-up of the Ottoman Empire into a multitude of independent states created new political boundaries, but, over time, these became permanent economic boundaries.
The consequence of this divide meant that when globalisation was unavoidable, Arab economies did not integrate with one another but only with global structures of trade and finance. It’s no surprise then that trade agreements in the Mena region are well below the global average.
The key concluding questions is: can the region harness its natural geographic strengths to build a future based on trade and production, or does it fall back on the geography of rents and patronage? Access to the coast, Europe and a large labour force are attractive opportunities that emerging markets would jump at. So why has the Arab world failed to integrate?
Revolutions across the region are an “apt reminder that the prevailing model has reach its expiry date”, they say.
“This model built on oil and aid fortunes—and a leviathan state—is fast becoming a liability.”
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.
A growing outcry over corrupt governments forced several Arab leaders from office last year.
But as the dust has settled it has become apparent that levels of bribery, abuse of power and secret dealings continue to ravage societies around the world.
Transparency International’s Corruption Perceptions Index 2012 shows how:[caption id="attachment_1008" align="aligncenter" width="580"] Corruption Perceptions Index 2012[/caption]
Afghanistan clings for a second year to the bottom rung of the index as the most corrupt country in the world, joint with Somalia and North Korea. In these countries the lack of accountable leadership and effective public institutions underscore the need to take a much stronger stance against corruption, Transparency International says.
Though Egypt escapes the extreme end of the corruption list, it still stands at a dismal 118 on the ranking of 174 countries, showing the North African nation still has a long way to go before eradicating an opaque practice seen as a “dirty tax” that mostly affects the poor and the vulnerable. Like many of the countries featured on the index, Egypt’s ranking has worsened from 112 in 2011.
Among the Arab world’s worst offenders is Sudan, which ranks at 173 (out of 174), Iraq at 169, Libya at 160 and Yemen at 156.
On the other end of the scale, Denmark, New Zealand and Finland share joint first place for the second year in a row.
“Governments need to integrate anti-corruption actions into all public decision-making. Priorities include better rules on lobbying and political financing, making public spending and contracting more transparent and making public bodies more accountable to people,” said Huguette Labelle, the Chair of Transparency International.
“After a year of focus on corruption, we expect governments to take a tougher stance against the abuse of power.”
A vital, underreported topic explored by Shahrzad Mohtadi, in the Bulletin of Atomic Scientists, uncovers how climate change contributed to Syria’s bloody uprising.
From 1900 until 2005, there were six droughts of significance in Syria.
The seventh lasted from 2006 to 2010, an astounding four seasons, writes Mohtadi.
The Syrian drought has displaced more than 1.5 million people; entire families of agricultural workers and small-scale farmers moved from the country’s breadbasket region in the northeast to urban peripheries of the south. The drought tipped the scale of an unbalanced agricultural system that was already feeling the weight of policy mismanagement and unsustainable environmental practices. Decades of poorly planned agricultural policies now haunt Syria’s al-Assad regime.
Mohtadi writes of years of ignored warnings under Bashar Al Assad father, Hafez, and the culmination of a prolonged drought this year.
So, add climate change to the list of regional issues that, post-revolution, have become unbearable for populations across the Middle East and Africa.
Northern Iraq and Jordan suffered from the same drought that struck Syria. Egypt is threatened by rising sea levels in the Delta and use of the Nile by Ethiopia upstream, and Yemen is also in the grip of a severe water shortage, writes Robin Mills in The National.
The solution? Mills offers his point of view:
More stable Middle East governments need to be taking tangible steps to reduce their greenhouse gas emissions, and playing a constructive role at this November’s climate conference in Doha.
The region should be investing in climate resilience: research in dry-land agriculture and drought-resistant crops; coordinating transnational water rights; improving irrigation and water storage; reducing water waste and subsidies; alleviating poverty and managing internal migration.
Syria could also get help from water-rich Turkey, which has become a close ally after years of frosty relations.
But it may be too late to save the abandoned dry, cracked villages that millions of people have deserted.
Egyptian prime minister Hisham Qandil has said the country needs 267 billion pounds ($43.7 billion) in investment, as officials prepare to secure a $4.8 billion loan from the International Monetary Fund.
Local reports also cited Qandil as stressing that the IMF has not asked Egypt to devalue the Egyptian pound as a condition for granting the loan. The country’s economic program is “purely Egyptian without interference from any foreign party,” an Egypt Independent article said yesterday.
Aside from pointing out the obvious (that Egypt is in fact reaching out to “foreign parties” to meet its deficit gap) it is the wrong game to play to continue to appease the public with vague nationalism while simultaneously doing the exact opposite.
In the last four months, Qatar, Saudi Arabia and the Jeddah-based Islamic Development Bank have pledged more than $5 billion to help Egypt stave off a balance of payments crisis. The US this week said it was close to agreeing to write off $1 billion of debt. This has provided impetus to the local stock market which rose 2% on Tuesday to its highest level since June 2011.
It shows some indication that the government’s efforts to bolster the economy is successful.
The good news just keeps coming. Energy giant BP is to invest $11 billion in a natural gas project in Egypt, Zawya Dow Jones reported, quoting the State Information Service website.
The project is huge, and when it is completed in four or five years, it is expected to produce 40% of Egypt’s natural gas output. That is significant considering the country is struggling to meet domestic demand because of gas shortages. That was the main reason behind the electricity black-outs this summer (most electricity power plants are operated with natural gas).
Egypt’s former culture minister Farouk Hosni, once a candidate for the top job at the United Nations cultural agency UNESCO, is to stand trial on charges of making illicit gains, an official said on Tuesday.
International donors on Tuesday pledged $6.4bn of aid to help Yemen navigate its rocky political transition at a conference organised by the Friends of Yemen in Riyadh. It is the latest of such “Arab Spring” bailouts and far more than anything we’ve seen in neighbouring countries.
Al-Sayyed Hamed, a lawyer and member of the freedoms committee at the Lawyers Syndicate, has filed a suit with the Attorney General accusing former President Hosni Mubarak and other officials of killing Egyptians through the importation of spoiled wheat.
The website of Qatar-based satellite news network Al Jazeera was apparently hacked on Tuesday by Syrian government loyalists for what they said was the television channel’s support for the “armed terrorist groups and spreading lies and fabricated news”.
After this string of hacking incidents in both Saudi Arabia’s Aramco and Qatar’s RasGas, I asked a person in the know (an internet entrepreneur and CEO of internet security company) if something similar could happen in Egypt.
Egypt’s hacker community is mostly entrepreneurial, and the bigger companies (Vodafone, TEData, Damas, etc) have fairly modern IT infrastructure, so the probability of some spectacular attack due to corporate espionage or kiddie hackers is low.
Egypt is a bit different in that it doesn’t have a large globally competitive industrial monopoly to target by foreign entities, and the local fringe groups who are opposed to the post-revolution rule of law, large corporations, etc do not have the technical prowess to do anything of the sort.
Stuff of interest:
Turkey’s gold sales to Iran extended a record streak in July, the WSJ reported. It’s an odd mix, and especially so because usually Turkey exports most of its gold to Germany.
“The redirection of exports to the Middle East and away from Europe is a trick that few other countries have managed to pull off. Therefore, Turkey looks good in a world where most countries are struggling,” said Nigel Rendell, senior analyst at Medley Global Advisors in London in the WSJ story.
The Economist’s global debt clock is a great project the magazine has run for quite some time. Compare and contrast total debt of different countries. Try the US and Egypt for one stark comparison that might make you think twice about Egypt’s economic problems…
Saudi Aramco, the world’s biggest oil producer, has resumed operating its main internal computer networks after a virus infected about 30,000 of its workstations in mid-August, the company said on Sunday. It raises questions about how well equipped the region is to handle sophisticated cyber attacks, as Rebel Economy pointed out recently.
But the political dimensions behind this attack became apparent when an English-language posting by a group called the “Cutting Sword of Justice,” claimed the group had launched the attack to destroy 30,000 computers at Saudi Aramco.
It said the company was the main source of income for the Saudi government, which it blamed for “crimes and atrocities” in several countries, including Syria and Bahrain, Reuters said. Saudi Arabia sent troops into Bahrain last year to back the Gulf state’s Sunni Muslim rulers against Shi’ite-led protesters. Riyadh is also supporting Sunni rebels against the Syrian regime of President Bashar al-Assad.
But these issues have been brushed aside, allowing the Kingdom to do what it does best: spend ludicrously large amounts of money,
KSA said it is preparing plans to build a metro system in its second largest city Jeddah, a project that would cost around 35 billion riyals ($9.3 billion), a deputy mayor of the city said yesterday.
Saudi Arabia, helped by big budget surpluses on the back of high oil prices, is spending over $400 billion in the five years to 2013 to upgrade its infrastructure.
Egypt’s government will no longer subsidize energy for new cement factories, including 14 factories for which licenses have already been issued, according to the industry and trade minister. Follows similar decision for the steel industry earlier this year.
Egyptian families spend 5% of income on education, government statistics show.
Yemen’s anti-corruption body has said it would ask the country’s parliament to cancel a deal with DP World because the Dubai-based operator had failed to fulfill its obligations in running the Aden container port.
The United Arab Emirates’ Dodsal Group has won an estimated $450 million contract to build two pipelines from a gas processing plant south west of Abu Dhabi to industrial users to the north east of the capital.
Saudi Telecom Company’s chief executive of international operations, Ghassan Hasbani, said today he has resigned from the company. On the same day, fixed-line operator Saudi’s Etihad Atheeb Telecommunication Company, said Monday its chief executive has resigned (via Zawya Dow Jones).
The board of Arab Bank, Jordan’s largest lender, has elected Sabih al-Masri to take over at the helm of the bank after the resignation of Abdel Hamid Shoman this month in a dispute over the chairman’s power.
Biggest business news from Egypt and the region:
Results season: Emaar predicts market recovery as profit jumps, Du reports 57.1% jump in profit before royalties, Aluminium Bahrain, fourth biggest smelter in the world, said second quarter profit almost halved