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The Wrap: Egypt Wheat Stocks Politicised, Libya Allies Gather To Plug Oil Gap

  • EGYPT 

- Unemployment: Arab Spring Not Springing BackNPR 

An interesting podcast from NPR on the problem of unemployment in the Arab Spring, particularly among young Arabs.

The Wall Street Journal economics reporter Sudeep Reddy and Shadi Hamid, director of research at the Brookings Doha Center, discuss why jobless rates are so high in the Arab world, particularly in Tunisia and Egypt, and why political will is so crucial to alleviating unemployment pressures.

I’ve written extensively on this topic and the reasons why Arab youth can’t (and sometimes won’t) find employment. 

- Wheat stocks sufficient until February: Supply MinisterDaily News Egypt 

Another never ending conundrum for Egypt is how to keep up with demand for wheat, especially as dwindling foreign reserves and a falling currency has made imports more costly.

It’s also a topic that is highly politicised. In an attempt to put any concerns about supply to rest, Egypt’s supply minister, Mohamed Abu Shadi, has insisted that the country has enough wheat stocks to last until midway through February 2014. 

The country was forced to import 80,000 tons of wheat to make up for shortages that the interim government say were exacerbated during Mohammed Morsi’s tenure, Abu Shadi said. At the time of Morsi’s ouster, interim officials blamed the Islamist president for mismanaging wheat imports and stopping supplies.

(In reality, Egypt has a long history of addiction to bread subsidies, and one year under Morsi wasn’t going to make the situation much worse than it already was).

Yet, despite the government’s confidence, Egypt is said to still be looking to receive offers of French, Russian, Ukrainian wheatBloomberg has reported.

- Ezz Steel Jumps as Egypt Mulls Punishing Turkish Steel - Bloomberg 

Did you ever expect, in the “New” Egypt, for a senior official in Mubarak’s National Democratic Party to be acquitted of financial crimes after very little investigation? Ahmed Ezz, steel tycoon and head of the Ezz Steel company, was in June acquitted after being charged with monopolising the country’s steel market.

Despite his conflict of interest, and his dodgy links to the old guard, Ezz is back to business and being protected by the interim government. Egyptian officials are considering taking actions against an increase in Turkish imports at low prices to protect local industry. By local industry, I mean Ezz Steel.

Shares in the steel company rose the most in two months and no doubt company officials are delighted.

- A new gas producer in Egypt - Daily News Egypt 

At a time of uncertainty, it is reassuring to find a new company willing to enter the oil and gas industry.

RWE Dea, an international oil and gas company headquartered in Germany, will launch gas production in Egypt, Daily News Egypt reported. The project includes the development of seven gas fields in the Egyptian Nile Delta.

  • LIBYA 

- Saudi, US, Iraq step in to plug Libya oil gap - Wall Street Journal 

Countries around the globe are gathering to protect the oil price at any cost. The WSJ reports:

Saudi Arabia has been pumping oil at its highest level in decades to offset a global shortfall fueled by another hot spot besides Syria: Libya, where unrest has slashed output.

A tumble in Libyan production to depths not seen since a civil war toppled the Gadhafi regime in 2011, combined with fears of a possible U.S.-led military strike against Syria, have sent oil prices sharply higher in recent weeks.

To counter this, soaring Saudi Arabian, US and Iraqi output is helping cushion the blow, OPEC has said. Libya, which holds Africa’s largest oil reserves, has suffered from strikes by armed guards, shutting down most of the country’s terminals.

Output fell to a post-revolution low of 150,000 barrels a day last week.

But while Saudi Arabia is pumping the highest level of oil into the market for decades to offset a global shortfall, the Kingdom is consuming more of its own oil every year and a reliance on costly energy subsidies is making it’s budget more vulnerable.

Still, that niggling worry is not enough for Saudi officials to reduce output, so for now Libya will see its allies rally around it.

- Security update Libya Business news 

For those interested in the minutiae of Libya’s security situation, Libya Business News has a useful weekly update and map of incidents highlighting risk:

Libya Business News
Libya Business News


The Wrap: Egypt Labour Disputes Threaten Recovery, Syria Tries to Close Import Gap

  • EGYPT

- This morning the government statistics agency, CAPMAS, published figures that show annual consumer inflation slowed to 9.7% in August, from 10.3% in July reflecting easing pressure on the currency. The pound has actually been appreciating slowly in the last month but as Rebel Economy has signalled before, that doesn’t mean the currency is strong.

BG Group Drops Most in 10 months on Egypt Delays - Bloomberg 

Remember that good news yesterday on BP’s gas discovery in Egypt? Well news that another British oil company, BG Group, is suffering project delays in Egypt shows how fragile the country’s energy sector can be.

Here’s an excerpt from the Bloomberg story covering BG’s announcement:

BG Group Plc fell the most in 10 months in London trading after saying project delays in Egypt [and Norway, but cut that bit out here] will curb oil and natural-gas output next year.

The company was the worst performer on the FTSE 100 Index. Political turmoil in Egypt has forced BG to delay its West Delta Deep Marine project, it said today in a statement.

Though this is bad news for BG’s stock, it’s even worse for Egypt which relies on the oil and gas sector as one of the backbones of the economy. The last two and half years have seen Egypt’s debts to oil companies mushroom partly because of costly energy subsidies putting a burden on the government’s finances, and partly because of increased reliance on imports, that has depleted foreign reserves.

That has put many big oil investors in a quandary over whether to continue pouring money into Egypt. Apache, on the of the largest foreign investors in Egypt, has already agreed to sell a 33% interest in its Egypt operations

Dismissed trade union members threaten to file complaint with ILO - Egypt Independent 

Meanwhile, discontent is brewing in Egypt’s labour sector, where the new manpower minister Kamal Abu Eita has kicked up a storm by firing members of the Egyptian Federation of Trade Unions, including its head Gebali El-Maraghi.

Media reports suggest the dismissals happened because some members were part of the Muslim Brotherhood and continued to support the former Islamist president Mohammed Morsi. Others say a new amendment to a law meant the board had to be dissolved.

What is clear is that these internal tussles do not bode well for the labour movement, which is a critical element of a transitioning Egypt. 

Qatar agrees to convert $2 billion into Egypt bonds: ReportsAhram Online 

In a sign that Qatar will continue to support Egypt, it has agreed to convert another $2 billion into Egypt bonds, after converting $1 billion into three-year bonds in July, and $2.5 billion into 18-month bonds in May.

The bond purchase is one way of supporting Egypt’s widening budget deficit, which is close to 14% of GDP. With Qatar a strong supporter of the Brotherhood, it looked like it may withdraw aid after the ouster of Morsi, however, it also has close to $8 billion invested in Egypt, and that doesn’t include several corporate deals worth much more. In June of last year, Qatar agreed to back Citadel Capital’s subsidiary, Egyptian Refinery Company in a deal worth $3.7 billion.

  • LIBYA 

- OMV “Halts Libyan Flows” Libya Business News 

Protests in Libya have reportedly forced Austrian oil company, OMV to halt production. A company spokesman told Reuters:

OMV’s production in Libya, which was largely unaffected by the events of the last few weeks, has now been shut in as events have spread to the west of the country … OMV is closely monitoring the situation.

It is estimated that protests has led to a 30% decline in oil production, which is massive for a country that is so reliant on its oil. The government has been forced to import fuel to keep power stations running while queues grow at petrol stations.

Protestors are asking for more pay and calling for greater regional autonomy, which is difficult considering the government’s monopoly over oil.

But there could be some solution at a hearing this week…

Libya Congress to hear proposals on oil deadlockReuters 

The crisis committee tasked with resolving Libya’s oil paralysis will brief the 200-member General National Congress by Wednesday with proposals on how to end the confrontation, Reuters reports.

A solution to the stalemate between the government and tribal mediators is becoming more critical. Last week, Libya’s oil output hit a post-war low of just 150,000 barrels per day compared to its capacity of 1.6 million bpd. 

  • SYRIA 

- Syrian pound depreciates as talk of US strike growsSyria Observer 

Unsurprisingly, this story, translated from Syria’s economic magazine, Iqtissad, indicates that traders expect a “dramatic rise of the US dollar against the pound if the US Congress votes  ’yes’ to military action”.

With indications from Obama this morning that the US could pause any plans for attack on Syria, the pound could see some short-term respite.

A black market dealer said the Dollar could be worth as much as 350 Syrian pounds if Congress agreed to strike. But even without a strike, inflation is still plaguing Syrians who are now spending four times as much on staple goods. Syria’s official inflation rate has continued to increase though it still remains below unofficial estimates.

- Syria looks to buy 135 thousand tons of rice after August tender closed without a deal Syria News 

Syria’s Foreign Trade Organisation has opened another tender for rice as it struggles to keep up with demand. Sanctions and soaring inflation has hit the country’s economy. 

It needs at least 140,000 tons of rice a year to cover demand, according to the report.

Even as this report came out, Jordan announced that it would cancel agricultural imports to Syria due to the escalating violence.

Radi Tawarneh, Secretary General of the Jordanian Ministry of Agriculture, said Jordan had already made significant losses in its agricultural sector as a result of the Syrian crisis in the range of 80 million Jordanian dinars.

This will deprive Syria of about 180 thousand tons of fruit and vegetables, according to the report. 



The Wrap: Morsi Wealth Investigated, Libya Public Sector Wages Up 20%

  • EGYPT 

Egyptian authorities examine Morsi family wealth - Ahram Online 

The ousted Islamist president is accused of taking advantage of his position, as well as squandering LE2 billion ($285.7 million) during his election campaign. Egypt’s Illicit Gains Authority, the organisation that has thus far failed to follow through on most of its investigations against Mubarak-era politicians and businessmen, is among the entities leading the investigation.

Unfortunately, the IGA along with Public Funds investigator and the half a dozen or so other “investigation committees” have demonstrated that they are driven more by politics rather than a genuine desire to crackdown on illegal transactions and wipe out corruption. Many former officials of the old guard linked to corrupt dealings have got away with dismissals, retrials and prolonged case hearings.

This investigation will probably cost as much as Morsi is thought to be worth. Even so, it is small fry compared to the billions of dollars lost in Egypt’s deep web of corruption. 

BP Egypt announces new gas finding in North Damietta - Egypt Independent 

Finding gas is different to developing it. At the moment, it is costing energy companies more to retrieve oil and gas because the oil ministry is behind on payments to companies like BP.

It’s possible that even if this gas was developed, BP would sell it off to a third party, depriving Egypt of much-needed gas. 

Global Competitiveness Ranking 2013-14 - Egypt comes 115th - World Bank 

It’s no surprise Egypt is among the least competitive countries in the world considering the difficulty in doing business right now (and it was difficult before the revolution!).

Egypt’s competitiveness ranking was worse than Ghana, Bangladesh and Nepal, but it managed to squeeze past Yemen and Pakistan, which isn’t saying much.

But it’s not all bad news….

Is Egypt at risk to a freeze in capital inflows? - Economist 

This useful Economist chart linked to above shows that Egypt is, quite remarkably, not among those emerging markets most at risk of a sudden freeze in capital inflows, unlike Turkey (at Number 1 risk) and Brazil.

That’s probably because foreign direct investment to Egypt has been low for some time, and because of billions of dollars of Gulf funding that has somewhat kept the current account deficit at the same level. Plus Egypt’s external debt hasn’t skyrocketed as much as expected (again due to “gifts” from the Gulf and favourable loan terms), meaning the risk of default is lower.

  • LIBYA 

Public sector wages to rise 20% - Libya Herald 

This is part of the Libyan government’s plan to remove the subsidies on commodities, so that individuals can afford higher prices for fuel. But it’s also an attempt to crackdown on employees with multiple salaries in public sector positions.

Now that may look positive at the outset, but ultimately, spending more on salaries to cut salaries doesn’t make much sense. In a way, this is really a way to appease citizens, at a time of a lot of strikes, by handing out more cash. But, as we have seen in other Arab countries going through transition, people will not settle for money until long-term problems are solved.

The government should for instance focus on diversifying the economy and creating jobs away from oil.



The Wrap: US indebted to Egypt, Libya Lawless and In Economic Ruin

  • EGYPT 

US faces substantial losses if Egypt aid halted - Reuters 

Finally a story that reflects pragmatic ties between the US and Egypt that go far beyond the politics. Washington has been considering whether to continue its US $1.23 billion in military assistance, but while the aid institutionalises the political links between the two countries, the money at stake is arguably much more costly if this bond was broken.

A particularly talkative senior Pentagon official told Reuters:

“There’s a whole bunch of contracts out there. The bills keep coming in and we’ve got to be able to pay them somehow otherwise we go in default.”

Apparently last year, when the Obama administration decided to continue military aid to Egypt despite its failure to meet pro-democracy goals, US officials cited as one of their reasons the fact that the termination costs could have exceeded $2 billion. 

- Egypt foreign currency reserves inch up to $18.91 billionAhram 

Reserves crept up by $34 million in August to reach $18.91 billion, the Central Bank of Egypt said, reflecting how billions of dollars of cash from Saudi Arabia, the United Arab Emirates and Kuwait was used to defend the currency’s value and pay for imports.

Last month, international reserves jumped $4 billion to $18.88 billion after Gulf countries injected $12 billion in aid. But the minimal increase in foreign reserves this month shows how much of that cash is being used to plug financial gaps. 

  • LIBYA 

- Libya has moved into lawlessness and ruin - The Independent 

A round-up of how Libya has slumped into its worst economic crisis since the fall of Gaddafi. The key reason is that Libyans are increasingly at the mercy of militias who are dictating the direction of the economy.

But in addition, “one of the many failings of the post-Gaddafi government is its inability to revive the moribund economy,” the author says. “Libya is wholly dependent on its oil and gas revenues and without these may not be able to pay its civil servants.”

This report on Libya’s economy, that Rebel Economy linked to earlier this week, sets out a handful of priorities for the government to avoid falling into economic crisis. One of those is to diversify the economy away from oil.

 



Making the Most of Gulf Aid to Egypt

Egypt's interim President Adly Mansour meets with UAE's National Security Adviser Sheikh Hazza bin Zayed Al Nahyan: REUTERS
Egypt’s interim President Adly Mansour meets with UAE’s National Security Adviser Sheikh Hazza bin Zayed Al Nahyan: REUTERS

We may not like it, but Egypt desperately needs Gulf money.

So why not change the way the Gulf lends money to Egypt to make it count. It won’t be just about wasting away cash to address a symptom without resolving the underlying problem.  

Indeed, without Gulf aid, the government would have struggled to pay for vital imports and would have fallen far behind on its supply of fuel, prompting nationwide riots and unrest.  The pound would have depreciated rapidly in the absence of sufficient central bank deposits and would have been worth closer to LE7.5 or LE8 to a dollar instead of LE6.89.

Egypt had no-one else to turn to.

International donors, including the likes of the International Monetary Fund, the World Bank and the African Development Fund, had too many strings attached for far less money to make it worth while for Egypt. These organisations also promised a whole lot of interference (or as they call it “technical expertise) into economic policy-making – another unpopular prospect for the foreign-wary Egyptians.

Meanwhile the Gulf was a perfect lender to Egypt. It has acted more like a generous Uncle, pouring money (and petroleum products) into Egypt’s coffers whenever needed and with few questions asked. As long as the Muslim Brotherhood are out, the Saudis are in. 

But beyond throwing money at the problem, the Gulf has done little in the way of long-term restructuring in Egypt. They’re not interested in reforms and overhauling the tax system, but wielding control in the most populous Arab country and leverage over the Brotherhood.

Though the Gulf can afford to keep playing this game, Egypt can’t.

The government has been given too much free rein with more than $12 billion in cash and oil. None of that has gone towards supporting the budget deficit, or towards reforms that will benefit the lives of millions of Egyptians.

Adly Mansour’s government, or more likely the government that follows after elections, should consider making the most of connections with the Gulf by striking deals in infrastructure and energy.

Rather than just taking money to plug holes that will reappear in a few months time, Egypt would do well to get the same money siphoned off into long-term investment projects.

There are many avenues for joint ventures: Egypt’s factories, the bread and butter of the industrial sector, are shutting down because of difficulty securing loans in the credit market.

Low-income residential projects to house thousands of Egyptians living on-top of one another in Cairo has stalled as contractors struggle to find the funds to keep working.

Labour-intensive infrastructure projects, on roads, railways, water and sewage treatment plants, are in desperate need of investment.

Egypt’s interim government boasted about launching a $3.2 billion “economic stimulus plan” yet very little has been said about reinforcing ties with the Gulf, which is surely the easiest way to implement such a “stimulus plan”. The only mention of Gulf investment is a possible agreement with the United Arab Emirates to finance medical projects and 10 wheat silos.

But that is not enough. There should be a full-scale collaboration with Gulf countries, not only to benefit Egypt, but to show the international community that the money is working hard for the nation.



The Wrap: Egypt Factories Shutdown, Syria War Economy Thrives

  • EGYPT 

- Egypt’s central bank held a bumper auction on Wednesday, selling $1.3 billion from its foreign reserves to cover strategic imports such as wheat, meat and cooking oil.  As the country grapples with an economic crisis, the central bank’s foreign currency sales are an attempt to keep the pound strong and reassure the nation that the government can afford basic commodities.

But as Patrick Werr, economics reporter at Reuters writes:

Despite the sales and a more expensive dollar, businesses have racked up hundreds of millions in unfulfilled requests for foreign currency, forcing them to turn to a black market that has mushroomed in recent months.

The pound has depreciated on the black market, showing that a strengthening pound on the official market isn’t as accurate as the central bank may want to convey. 

- More than 600 factories have shut down in Egypt in recent months, the country’s trade minister said in an attempt to correct a statement from the minister of manpower Kamal Abu-Eita, who announced a few weeks ago that more than 4,500 factories had closed in Egypt. The latter figure had come from a Centre for Trade Union and Worker Services report released earlier this year, but the methodology was questioned.

The fact that the new trade minister Mounir Fakhry Abdel Nour is trying to downplay the number of closures is not a very good sign, but it’s an even worse signal that he’s questioning the figures of his colleague. 

Either way, even at just 613 factories, that is a big blow to Egypt’s industrial sector, one of the major backbones for the economy. Though the Morsi administration and the caretaker government before that had discussed investing money to re-open factories, nothing ever came to fruition.

Many of these factories are hit by multiple problems including power cuts, strikes, poor security, and difficulty securing loans in credit markets where they are squeezed out by an indebted government.

  • SYRIA 

- Syria’s war economy has created a thriving underground black market, this fascinating Reuters report explains.

As state buyers face growing problems trying to purchase food from foreign suppliers because funds are frozen in bank accounts abroad, middlemen and small companies working with shipping agents are finding ways to do profitable business, operating from neighbouring countries such as Lebanon.

That is even more important at a time when Damascus has had to cancel a number of tenders to buy wheat, sugar and rice. It’s part of a growing shift in the way Syria trades with neighbouring economies, especially rewarding for those willing to take the risk. 

- 400 litres of mazut (or heating oil) are promised for each Syrian citizen as regime insists it has enough fuel to cover domestic demand, Syrian News reports. 

Though Syria doesn’t produce a lot of oil, it relies on imports to keep up with demand. But the war has severed ties with many of its fuel providers including oil traders in the European Union and dramatically impaired the ability to buy fuel because of dwindling reserves. Rolling power cuts and oil shortages now plague Syrians, forcing many to turn to the expensive black market.

Unfortunately, promises by the Assad regime that it will provide more fuel to Syrians are rarely fulfilled.



The Return Of Egypt’s Elite

Those who were punished under Mohammed Morsi are getting their own back.

The chief executive of Egypt’s biggest construction company, Orascom Construction Industries, has signalled that the firm is “currently exploring its legal options” with regards to the $1 billion (EGP7.1 billion) tax settlement it agreed in April with the Morsi administration.

If the decision is overturned, it would be a symbolic victory for the business tycoons who have laid low since the end of the Mubarak era.

The signs are clear. Others who faced trial for more serious charges, including steel tycoon Ahmed Ezz, have been released and will likely live in luxury as they await retrial. Egypt’s prosecutor general has frozen an investigation panel sponsored by Morsi to probe crimes committed during the January 25 revolution and its aftermath.

And as the 85-year-old Mubarak was himself released from jail last month, the prospect of a return of the old guard has become all too real.

So what’s the background to the OCI case?

Nassef Sawiris, the head of OCI, was for much of this year entangled in a tax case with the former Islamist government, which claimed Orascom evaded taxes worth $2.1 billion after the sale of its cement business to French firm Lafarge in 2007.

OCI denied any wrongdoing. The government responded by placing a travel ban on both Nassef Sawiris and his father Onsi.

In April, the company finally agreed to repay $1 billion over a five-year period.

The Sawiris family struggled with the Islamist government, and Naguib Sawiris, Nassef’s brother, admitted he backed one of the biggest rebellions against Morsi, the Tamarod movement.

So what could happen now? 

With the change of government, OCI looks like it is trying to reverse the tax decision. After all, why would the company stick to a settlement that was made with a government the Sawiris family consider as totally illegitimate?

Nassef Sawiris, clearly very happy about the removal of Morsi, blamed the former Islamist government for everything from the stagnant tourism sector to the lack of investment. Now the interim government “must learn from the failures of the previous government,” he told me just days after Morsi was overthrown.

While there is no doubt that after just one year in office, Morsi did nothing to prevent a looming economic collapse, businessmen like Sawiris have seized an opportunity to blame Morsi for much more than he is responsible for.

Ultimately, it doesn’t matter whether Morsi is wholly to blame or note or even whether OCI really evaded taxes or not. What is clear is that Morsi is powerless and under the purview of the military, while others in the opposition are rising again.

So if other ongoing court cases and deals done under Mohammed Morsi are anything to go by, it’s likely OCI won’t have to pay a penny.

The ease at which these decisions could be reversed sets a dangerous precedent for the return of a powerful elite, who are able to influence politics as much as they do business. 



The Wrap: Cairo Bomb Shows Stability Elusive, Libya Oil Production Down 30%

  • EGYPT 

Egypt’s Brotherhood under legal threat as bomb hits central Cairo - Reuters 

Nothing has damaged Egypt’s economy more than the threat to security and stability. The perception of risk is enough to derail an entire economy and it will continue to keep investors away. The killings of hundreds of innocent civilians in a bloody crackdown a few weeks ago only compounded this perception and made it reality.

The fear that a jihadist and extremist element may have been borne out of the military coup is materialising. An attack on a police station in central Cairo and plans for new mass protests by the Brotherhood on Tuesday shows how elusive stability is.

Though a state of emergency and a curfew has to some extent successfully shrunk the number and intensity of protests, the interim government has yet to show that it is in control (and not the army).

Egypt boosts Suez security as foiled attack shows risksBloomberg

Security problems this week at the Suez Canal the waterway which handles about 8% of world trade, is among the only areas in Egypt that highlights just how damaging the new threats that are emerging after Islamist president Mohammed Morsi’s ouster.  

Half our petroleum products are gifts from Arab countries, says authority –  Egypt Independent 

This would be funny if it wasn’t so damaging for Egypt’s deficit and the wider economy. The head of the state oil company, the Egyptian General Petroleum Corporation, admitted that 50% of the petroleum products that the authority needs to import come in the form of gifts from Arab countries as part of the aid they provide to help the Egyptian economy.

I’ve said it before and will say it again: Rather than depend on the GCC for plugging a gap that will always reappear, Egypt should try to renegotiate real investment from these countries and seek technical expertise on how to restructure energy subsidies. The welfare on energy is the biggest drain on the budget and will continue to be so until the price of fuel is raised for those who can afford it.

Speaking of which:

UAE to shower Egypt with additional $2 billionAhram Online 

  • SYRIA 

Syrian government backtracks on plans to charge customers for plastic bags for bread- Syria News (Arabic)

Probably wise considering Syrians are struggling to buy bread in the first place. The government was going to charge consumers 4 Syrian pounds a bag after bakeries and manufacturing plants financial losses mounted.

The price of most products has increased as the currency depreciates against the dollar.

Tenders for food commodities fail to draw interestReuters 

Syria has cancelled two tenders for food commodities in recent weeksReuters has reported, threatening food supplies to the population.

  • LIBYA 

Libya imports fuel to keep power onWorld Bulletin 

Libya has begun importing diesel and fuel oil to keep power plants operating after protests closed most of the gas fields in its eastern region which usually supply them, the World Bulletin reports.

Analysts told me last week that protests around oil fields have caused a 30% drop in production this year, a massive amount for a country that owes its post-revolution revival on oil.

In the meantime:

Libya and Malta agree oil deal, will collaborate on explorationLibya Herald 

Under the agreement, Libya will supply energy products to Malta at preferential rates. That will include crude and refined oil, jet fuel and LPG, the Libya Herald reports. In return, Malta will be aid Libya in transport and civil aviation.

However, the agreement won’t be in place until Libya resumes normal production. Considering the country is struggling with its own oil exports and supply (Oil exports are down to 160,000 barrels a day), this doesn’t seem like it will happen for some time.

And another critical part of the arrangement is for Libyan oil and gas workers to learn English in Malta.



Economic Impact of US Intervention in Syria

As the world awaits the decision of whether the US will intervene in Syria’s bloody civil war, the price that country is paying is growing day by day.

Hundreds of thousands of people have been slaughtered and cities that were once cultural capitals have been annihilated. Inflation is at triple digits, GDP has literally halved and the jobless rate has quintupled.

But the key question today, and the one that President Barack Obama has brought to US Congress, is whether military-led intervention will serve as an overdue punishment and warning to Bashar Al Assad and his regime, or whether it will simply deal a final blow to the country as the Syrian regime’s allies retaliate aggressively at the expense of innocent civilians.

While it is the humanitarian cost that is the number one consideration here, the economy, even in its current state, is still a lifeline for thousands of Syrians. The global economic impact of an escalation of the civil war is also a factor that is being mulled because of the ripple effect on global markets.

Based on interviews with half a dozen senior economists focused on Syria, Rebel Economy has put together a list of the key economic impacts of US military-led intervention in Syria:

Higher Oil Prices

Although Syria is not a major oil producer, many expect the oil price to spike, mainly because Western intervention in Syria is likely to lead to a bigger regional conflict involving major oil producers and two strong allies to the Assad regime, Iran and Russia.

More than two years into Syria’s civil war, Assad is settling his bills for Russian arms orders to try to shore up ties with his most powerful ally, this Reuters investigation reveals.

Oil prices have already hit an 18-month high, but if the civil war escalates with military strikes the oil price is expected to spike further, playing havoc with global markets as the cost of production soars.

Some oil analysts are estimating that Brent Crude could rise above $120 per barrel as a result of a military strike, while some, including those at Société Générale, see prices climbing to $150 per barrel in the short-term.

A possible spillover into Iraq, OPEC’s second largest producer, would cut the volume of oil from the global market and raise prices. Iraq’s Kirkuk oil pipeline has already been targeted six times in August. This has forced Iraq to cut oil shipments from pipeline by more than half for September.

Foreign Currency Troubles

Pressure on foreign reserves will grow as energy prices rise, especially in countries dependant on imports. Some countries near to Syria are particularly vulnerable to foreign currency pressures, including Lebanon and Jordan whose currency reserves stand at near 10-year lows. This means they could have trouble covering the cost of imports if the conflict in Syria escalates.

And the lower reserves fall, the more currency depreciation is possible and the more pressure on imports.

In Syria, in the days following the US’ announcement of possible military intervention, the Syrian pound has taken a beating on the black market.

Here’s Professor Steve Hanke’s update. He’s a professor of Applied Economics at Johns Hopkins University:

The Syrian pound (SYP) has lost 24.07% of its value against the US dollar in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88%. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term.

Trade Routes Disrupted

Analysts say it’s unlikely for key ports in the Gulf or cargo traffic through the Suez Canal to be disrupted as a result of military intervention, however perception is king.

Even the threat of increased disruption could send insurance rates skyrocketing and delay the passage of goods passing through Lebanon’s Port of Beirut.

Contagion effect

Aside from the impact on the oil markets and the major oil producers tied to Syria, many other countries in the region could see an adverse impact on their economies because of Syrian strife. Turkey for example, already suffering from a hard to manage current account deficit, could see it widen as political instability weakens the lira and raises oil prices.

And of course Israel has threatened aggressive action if attacked by Hezbollah or the Syrian army, which could impact both Lebanon and other countries in the region if the conflict escalated fast.

Overstating the impact?  

Despite all the above pointing to an Armageddon scenario, some still say that an intervention will do no more than dent the Syrian regime.

Samer Abboud, a visiting scholar at the Carnegie Middle East Center and political economist, says the “regime is so boxed in economically and any major economic effects have already occurred – sanctions, the disrupting of production and trade routes, and so on – that the “limited and narrow” strikes will not be as debilitating as we may think”.

For one, though we mentioned above the impact of trade routes, in fact local reports from Lebanon suggest the Port of Beirut is doing much better than expected. The Daily Star reports:

About 2,200 such vehicles enter the port daily, twice the number at the start of the year, and the multicolored containers are stacked five high rather than three. While Lebanon’s growth has suffered during the two-and-a-half-year conflict next door in Syria, port traffic has risen as traders avoid risky overland transit. Domestic demand is also increasing as Lebanon absorbs 1.2 million Syrians fleeing their war-torn country.

Unlike Libya, which had little to no foreign support, Syria has the powers of Iran and Russia behind it arming it and financing the regime. The West’s reluctance and delay to intervene is also ultimately buying more time for the Syrian regime to replenish stocks, move somewhere new and high military assets.

It has also weakened the West against Syria, allowing the regime and its allies to calculate that any intervention will be short and not a major long-term threat, according to Abboud:

Regime allies are unlikely to cease financial and material support in the aftermath of intervention, regardless of whether the regime is perceived to be losing ground on the battlefield. Intervention will only strengthen the commitment and resolve of regime allies and supporters, particularly Iran and Hezbollah. If they can withstand the intervention, then the West’s only major military option will have been confronted.

What is clear is that even though the question of intervention is complicated and mired with complexities, the longer the West waits to decide, the more time the Syrian regime has to retaliate with strength.



The Wrap

1) Egypt and TurkeyBloomberg 

It’s amazing how fickle Egypt’s government can be when it drops an old friend.

Egypt’s new government has made it clear it is not prepared to cooperate with Turkey, an ally and donor of the Muslim Brotherhood. Tensions have grown between the two countries since the army toppled Islamist president Mohammed Morsi and Turkey is suffering for it, with exports dropping as much as 30% since July 3, the day of the coup.

The Federation of the Egyptian Chambers of Commerce this week announced they will suspend all official trade relations with the Turkey after Turkish Prime Minister Recep Tayyip Erdogan described Morsi’s ouster as an “unacceptable military coup”.

But with the volume of trade between the two countries estimated at about $5 billion, excluding tourism and joint investment projects, Egypt will also end up paying a price for its bad diplomacy. 

2) With Brotherhood out, old order shapes Egypt’s future - Reuters 

Not so much an economic story, but one that alludes to the growing influence of Egypt’s “old guard”, symbolically represented by the release of Hosni Mubarak.

The evidence is clear: the army has marshalled support from Egyptians as the country becomes exhausted by two and a half years of turmoil.   Investigations against the January 25 killings and politically corrupt individuals during the Mubarak era have been put on hold. Censorship is back, with propaganda infiltrating most TV channels and even some state-run newspapers calling the January 25 revolution a “setback”.

This story makes very clear that Egypt has turned a worrying corner in the quest for democracy and therefore equality, which is really what the revolution was all about. 

3) Apache Wall Street Journal 

The oil and gas company, Apache has agreed to sell 33% of its Egypt business to China’s Sinopec Group. It will continue to be an operator on the projects.

Though this story may, on first reading, look like Egypt’s oil sector is vulnerable to asset sales because of increasing debt to oil companies and mismanagement on the part of the Egyptian government, it’s not that simple.

The operations are located in the Western Desert, far from any political unrest that would impact exploration. In fact, this transaction reflects more of Apache’s goal to use the proceeds to reduce debt, buy back shares and fund the company’s capital spending.

What it does highlight is the value of Egypt’s oil and gas sector, which will always be attractive to companies, even despite such political risk. 

4) Egyptian government temporarily halts IMF negotiations - Egypt Independent 

This story is misleading for a number of reasons. Egypt didn’t halt IMF negotiations, rather the IMF stopped communicating with Egypt partly because of the way the Brotherhood have been almost banished from not just the political sphere but from daily life in Egypt. Most Brotherhood members are in hiding now.

The story also refers to the Gulf as a kind of saviour that will tackle the deficit, but none of the $12 billion will be used to cut the deficit. It will be used to keep the pound afloat and imports flowing. In other words, it’s a running tap that is wasting cash that could be used more shrewdly.

What about making a deal with Saudi Arabia to invest in projects in Egypt? Wouldn’t that be more helpful than throwing billions of dollars into the Central Bank to support a currency that many consider is overvalued? 

5) Libya oilEconomist 

One of the biggest issues standing in the way of Libya’s economic success is the government’s control over key sectors, especially oil. Now a port that allows the trade of Libyan oil has been shut off and its closure is representative of the power the state wields over the energy sector.

Basically the state believes that a large amount of oil is being “smuggled” out of Egypt. But the party responsible for the potential sale, the Petroleum Facilities Guard, say it is a valid transaction.

The stand-off is part of a bigger political agenda between various factions in Libya, but as this Economist article concludes, if the state-owned “National Oil Company cannot keep its legal monopoly on oil exports it will be taken as yet another sign of the increasing level of political risk in Libya”. 

5) Economic Challenges and Opportunities in Post-Qaddafi Libya

This report, from the Atlantic Council’s Rafik Hariri Center, evaluates the Libyan economy and progress since popular uprisings in February 2011 and the eventual ouster of the Muammar Qaddafi regime.

On the surface, it appears Libya’s economy is back to pre-revolution levels with oil production and GDP at comfortable levels. But this report sets out how the government has failed to come up with a single economic plan. 

In this useful read, three main priorities are laid out for Libya’s government including diversifying the economy away from oil, reducing youth unemployment and modernising the financial system.