Middle East economists and analysts have tried and often failed to answer Egypt’s million dollar question: Will the country’s economy collapse and, if so, when?
Finally, someone has crunched the numbers to give us an answer.
London-based economist Ziad Daoud pored over Central Bank data and reckons the scare-mongering (of which the media is to blame of course…) of Egypt’s imminent economic collapse is largely unwarranted.
Egypt needs to raise $11.7 billion in the next 12 months, according to International Monetary Fund estimates.
First comes love,
Then comes marriage,
Then comes bickering over money.
Qatar and Egypt are turning out to be a predictable couple.
Qatar, the sugar daddy in the relationship, has provided more money to Egypt than any other Arab ally. With $8 billion in loans, grants and deposits, it is by far the biggest financial backer of the Islamist-led government.
As a bonus, it’s also thrown in gas supplies to cover any shortages over the summer period.
This gives the Qataris power and easy access to the Arab world’s most populous country, even if Qatar’s Prime Minister Sheikh Hamad bin Jassim al-Thani insists that Qatar “did not ask for anything in return”.
Meanwhile, the aid strengthens Egypt, the damsel in distress, in her time of need.
But the relationship is doomed to fail.
Egypt is asking for more for less, while Qatar is not getting much in return as it sees that its cash is merely sustaining a costly budget that needs restructuring and allowing Egypt to delay its economic plans.
So the tables have turned. Qatar, previously quiet on its demands, is asking for 5% interest on $3 billion of bonds it wants to buy from Egypt.
This is not a generous deal and is in line with normal market rates (for instance, look in comparison at the $4.8 billion loan from the International Monetary Fund and the meagre 1.1% rate attached).
What’s more, if Egypt goes to the debt markets to raise more money for its deficit, it will likely pay more than 5%. The yield on the Egyptian government’s $1 billion of benchmark 5.75 percent dollar-denominated bonds is around 7.1% in secondary markets, for example.
Egypt should consider Qatar a temporary donor, and one that is not looking out for its best interests.
It would be best served to expend its time negotiating energy contracts with Qatar because this is where Egypt is mostly struggling (energy subsidies are a huge weight on the budget and the inefficient system has led to fuel shortages that threaten livelihoods, cause nationwide electricity blackouts and miles-long queues for diesel).
Agreeing preferential rates on energy contracts with countries including Qatar, Libya and Iraq would be a huge boon for Egypt which spends almost two billion dollars every couple of months buying fuel, on top of the normal allocated amount in the budget.
Focusing on cash to buy Egypt’s debt and prop up its reserves is expensive and will only have to be re-paid later.
Egypt has the advantage with its Arab allies, who want a slice of Egypt more than it wants a slice of them. It’s time Egypt negotiated with this in mind.
Egypt Economy Near Collapse.
Egypt on the Brink.
Egypt Going to the Dogs.
Egypt’s Financial Armageddon.
Those are just a small selection of headlines used in the past few months.
Egypt’s economy, it’s fair to say, is close to financial ruin. The government’s reluctance to change its spending habits, or raise money (by raising taxes even just marginally for the middle and upper class), has left the country in economic paralysis.
The lack of a decent economic reform plan has stalled negotiations with the IMF for a $4.8 billion loan, undermining the credibility of the Morsi administration, and prompted investors to stay away.
But what is worse is that all the government’s mistakes have been so high-profile, and embarrassing, for Egypt.
Even behind closed doors within government, officials have begun blaming each other of complacency.
What are the disasters in the making that are hastening the speed of an economic fallout?
This number has become ubiquitous with the fast decline of Egypt’s economy. International reserves have dropped more than 60% since the beginning of the revolution, falling from $36 billion at the end of 2010 to $13.4 billion in March.
The Central Bank used billions of dollars to prop up the value of the Egyptian pound (even though many investors saw it as overvalued and still do – hence the black market).
Here’s the problems:
1) Cash injections have come in from Qatar, Turkey and to a lesser extent Saudi Arabia, helping Egypt keep its coffers fairly full. But this is not sustainable.
The “Gulf tap” is not infinite and could be turned off at any point.
Plus, money from the Gulf to keep plugging reserves, that in turn helps to pay off debts that keep rising, is just like burning money. What’s the point of investing in a country that uses money to pay off a cycle of debts rather than for investing in restructuring and reforms?
2) The other problem with the dangerously low level of reserves, is that it leaves Egypt highly vulnerable to any currency/commodity price crash.
Exhibit A: Last week the price of gold crashed, falling from a high of $1,900 an ounce at one point to less than $1,400 an ounce.
Egypt, which before the revolution, would not have been phased by this drop, this time felt the impact.
The country lost $500 million worth of currency reserves from the gold rout, Pharos Holding, Cairo-based brokerage firm said a few days ago. That’s because Egypt has around 75 tonnes of gold, so if the commodity crashes, so does its value for the Central Bank.
3) The less hard currency Egypt has, the less money it has to fund fuel and wheat imports, the more shortages and blackouts, and the higher the risk of social unrest (more here on the energy crisis and related debt problems). As just one indicator, the US has warned Egypt that it is overestimating the size of its upcoming domestic wheat crop in a sign that pressures are mounting on the country’s depleted foreign currency reserves.
While reserves have lingered at around $13 billion to $15 billion in the last six months, this is not a situation Egypt wants to be in. If reserves drop further, it could find itself struggling to control a parallel black market where the pound is trading at 8 or 9 pounds to the dollar.
The statistics say it all, and even those numbers don’t depict the true state of unemployment in Egypt (because they ignore the huge informal market that churns along quietly alongside legal business).
Egypt’s jobless rate stood at 12.7% in 2012, up from 12% in 2011 and 9% in 2010, according to figures from the country’s statistics agency. Even that annual figure is tame in comparison to the latest quarterly figure that showed the unemployment rate was 13% in the latest quarter of 2012.
The startling figure, however, is that of the total unemployed, almost 77% (up from 74% just a few months ago) are between the ages of 15 and 29.
The fact that most Egyptians who are unemployed are in this age bracket is extremely dangerous for the Morsi administration, which has consistently failed to get critics and the opposition on side.
Some international lenders are making small moves to help with funding small businesses and offering advice to burgeoning entrepreneurs. But more work needs to be done. The president and the government need to convince international players that they are working for the good of Egypt, not for their own political wins.
Without a doubt, as the number of people out of work ticks higher, so will resentment and anger and that can only mean a repeat of January 25, 2011.
Unsurprisingly, Egypt announced today it will exceed its budget deficit target this year because frankly all the delays in enacting spending cuts have all but evaporated.
The deficit may reach 11.5% to 11.7% of economic output in the year that ends in June compared with 10.4% targeted earlier, Egypt’s finance minister El-Morsi Hegazi said.
The government wants to reduce the gap in the 2013 to 2014 fiscal year to 9.6 percent of gross domestic product, according to a draft budget he presented.
In the meantime, Egypt’s credit rating has been lowered to junk or near-junk status by the three largest ratings agencies: Moody’s, Standard & Poor’s and Fitch. Major economists and lenders are also cutting their growth forecast for Egypt (the IMF cut its 2013 growth forecast for the Egyptian economy to 2%, down from the 3 percent initially predicted last October).
As mentioned above in previous blog posts, the Morsi administration has repeatedly made ad hoc decisions, which seemingly disconnect from one another and stray far from a long-term economic plan. That has meant a delay in major spending cuts, and revenue-generating initiatives.
In fact, if anything, Egypt has increased spending where it least needs it. It spends an extra $1.6 billion every three months on inefficient energy subsidies (on top of what is already budgeted), and has hiked the bill for public salaries by 80% to $25 billion as the Islamist-led government appears to try to appease the public with more money ahead of parliamentary elections in October.
What’s more, revenue generation is weak. Falling short of making any dramatic tax increases, Egypt regularly misses tax collection targets, losing out on billions of Egyptian pounds every fiscal year.
All of the above really points to one conclusion: the President and his band of loyal Brothers have failed, after nine months in power, to improve the lives of Egyptians.
Yes, considering the scale of the political transition, change was never going to be easy, but the government’s repeated blunders have undermined confidence in Egypt and overseas, and left them with an even more difficult job.
But Morsi must act now, reach to the other side for consensus, and convince Egyptians and international lenders he is not a fraud grappling for power, or prepare to be held accountable by the people.
A somewhat contrarian Reuters analysis this afternoon should calm those panicked by Egypt’s currency woes:
The key to preventing a messy devaluation of Egypt’s pound may lie with the country’s households, whose dollar holdings are being eyed by foreign investors as a critical gauge of trust in the authorities.
So in fact, it is “not the withdrawal of foreign investors from a market but the flight of local households and businesses from a currency that is instrumental in [the pound’s] collapse,” according to the article.
That means that despite what all those big foreign investors might be saying about the collapse of the pound, take no notice, because it’s ordinary Egyptians who are critical to avoiding a currency crash.
“Increased household dollarization and a run on the currency, that’s the big risk,” says Jean Michel Saliba, BofA-Merrill Middle East economist, who estimates households account for more than 70 percent of deposits in the banking system.
In contrast, foreigners hold a mere 3-4 percent of the local bond market, according to other estimates from Barclays.
This is an important indicator of how public perception is crucial and inherent to economic stability. The Morsi administration’s handling of the IMF loan negotiations – which have lasted almost 20 months, have contributed to worries over the economy.
But it was a series of bad decisions (1) pushing through an unpopular constitution, 2) issuing an “all-powerful” decree and then backtracking and 3) announcing tax hikes, and then suddenly suspending them) that have only served to undermine confidence in the economy and push panicked Egyptians to swap their pounds for dollars.
Essentially, if the government wants to stop the run on reserves and the pound, President Morsi must convince the nation he is in control. Right now, that’s exactly what the public do not see.
Guest post by Mohamed El-Bahrawi, business editor at Daily News Egypt[caption id="attachment_674" align="aligncenter" width="580"] Khairat Al Shater, courtesy of Egypt Independent[/caption]
The saying goes, “behind every great man there is a great woman” or, in Egypt’s case, “behind President Morsi there is Khairat Al Shater”.
It is no secret that it is Khairat Al Shater and not Mohammed Morsi, who has really been running the Muslim Brotherhood behind the scenes.
The multi-millionaire, or The Engineer as he likes to called by friends, is regarded as the brains behind the group’s “Renaissance” or El Nahda project, and is among the most powerful members of the Islamist movement.
Evidence of this power play has been piling up by the month.
Last month, for instance, when Morsi issued a decree that granted him omnipotent authority, it came as a surprise to everyone, including his aides and his vice president. In response, many of his advisors resigned in protest and his former vice president, who resigned last week, denied any previous knowledge that such a decree was going to be issued.
So if his aides and his own VP were not privy to the decision-making process, someone else has to be. Who are the decision makers then? Whose advice does the president seek before taking action?
In October, more evidence of Al Shater’s influence was leaked when word got out that he was appointed to the presidential economic team and would be given an office in the presidential palace.
And just a few days ago, Egypt’s Al Watan newspaper (disclaimer: also regarded as a rumour mill) said Al Shater and Hassan Malek, another elite business-oriented Brotherhood member, had compiled a black list of businessmen they wanted excluded from certain activities.
So where does that leave Morsi?
Morsi is being cast more as a puppet the longer he is president.
His determination to push through the new charter with such a slim mandate has damaged his political clout.
The Muslim Brotherhood are not as strong as when they first came to power, and with the economy in tatters, narrowing the budget deficit and showing tangible signs of economic recovery is their last chance to prove to the people that they are capable of getting the country back on its feet.
If they fail to do so, they’re finished.
With the cabinet reshuffle ten ministers were replaced, including the critical positions of finance and interior minister.
Khairat Al Shater is still nowhere to be seen. As the most charismatic, shrewd and business-minded member of the Brotherhood, some may question why he is not represented in the government in any way.
But he has morphed into the perfect silent leader of the Brotherhood, using relatively inexperienced politicians to enact his orders.
He will remain in the background as it would be political suicide for the Brotherhood to openly push out Morsi.
As the Muslim Brotherhood’s first choice for a presidential candidate, he is already running the country through Morsi, and is the defacto president.
What happens when a president of a newly democratic country decides to act more like a tyrannical than post-revolutionary leader?
It’s clear that it leads to a severe crisis of confidence from the public; the same people that elected this president (albeit, by a narrow margin) to his place less than six months ago.
President Morsi’s decision to issue a decree that granted him far-reaching powers effectively began an avalanche of economic mayhem not seen since the revolution broke out in early 2011.
The swift backflip on this decision did not make any difference, because Morsi had decided to go ahead with a referendum on the constitution, despite calls to delay it. That has now been passed but there was no landslide victory and Morsi must accommodate a slim mandate that will make it difficult to enforce any economic reform measures.
Above all, the political turmoil that has ensued over the last month has prompted fears that the government is not in control of its finances and the economy.
As a result, fears have grown over the pressure on the pound currency and there has been a rush by Egyptians to withdraw their savings from banks. Initially, the Central Bank sent out a cryptic message of reassurance that it would protect the public’s bank deposits.
Al Arabiya flashed a headline two days ago:
Then the bank made its move in an attempt to nip in the bud a dangerous path of dollarization, which would put increasing pressure on the pound and the nation’s dwindling international reserves.
Egypt banned travelers from carrying more than US$10,000 in foreign currency cash in or out of the country. It was part of a presidential decree that modified the central bank law in order to tighten foreign currency transfers amid another wave of dollarization that hasn’t been seen since last year.
The anxiety over the economy was visible at currency exchanges in the upscale Cairo neighborhood of Zamalek, which ran out of dollars by midday and offered only euros — a rare occurrence. Some banks, too, said they had run out of cash dollars, forcing people to seek foreign currency from exchanges around the city.
There were also reports from the local media that an Emirati aircraft delivered cargo loads of cash amounting to $30 million to Egypt to help plug the shortage of dollars. In another blow, the ratings agency Standard & Poor’s cut the government’s credit rating citing the political turbulence and warning that another cut could come if political problems persist.
The panic prompted a full-scale media management.
The Central Bank of Egypt issued a statement on Monday calling on banks not to listen to rumours circulating about the fiscal health of the nation.
The official English website of the Muslim Brotherhood published an interview with the Freedom and Justice Party’s economist Mohammed Gouda “refuting rumours” about the economic health of Egypt:
Dr. Mohamed Gouda refuted rumors being persistently reported in print and broadcast media about the poor economic situation in Egypt, pointing out that there is a difference between explaining the economic situation and spreading panic.
“Economic problems can be solved. There is nothing impossible about them. But security and political stability are essential to help the economy and implement the reform plan.”
Well, those aren’t rumours. Egypt is in a dire economic situation and denying this will only prolong the pain.
Finally the prime minister, Hisham Qandil, pointed out the obvious saying political stability was crucial to luring back foreign investors and tourists to help plug the budget deficit and heal the country’s struggling economy.
Meanwhile, Morsi is taking advice from a man that the New York Times described as someone who “frightens most economists”: Hamdeen Sabahi, an outspoken opponent of free-market economic moves in general as well as of a pending $4.8 billion loan from the IMF.
The president made a terrible decision just over a month ago, and now the nation is paying for it. It’s time we saw Morsi making some sacrifices and leading a nation rather than his Brotherhood colleagues.
Early results in Egypt’s referendum on a draft constitution has put supporters with a narrow lead with an unofficial tally placing backers of the charter with 56.5% of the vote.
Though voting will continue in other parts of Egypt next week, Saturday’s vote is important because it represents Cairo and Alexandria, the nation’s two biggest cities. The areas represent the stronghold of the opposition to the constitution.
Conflicting results from the Muslim Brotherhood and the main opposition umbrella group, the National Salvation Front, showed both claimed victory. However in past votes, the Brotherhood’s preliminary numbers have closely matched final results, will be announced after the December 22 second round vote.
Yesterday’s ballots show the referendum is likely to be passed and the challenge now rests with the country’s president Mohammed Morsi, who has already undermined confidence in the democratic transition and economy. He campaigned with billboards that read: “With the Constitution, the wheel will turn”. But reality paints a different picture.
The most punishing challenges are ahead for Morsi:
When Mr Morsi captured the presidency in June by a slim margin, he signalled magnanimity by formally quitting the Muslim Brotherhood and appointing a largely technocratic government. Egyptians cheered in August when he removed the domineering generals who had shakily guided the post-revolutionary transition.
But Mr Morsi has proven equally erratic and domineering. The Brotherhood, meanwhile, has infiltrated state institutions. It has tried to shape the message of the state-owned press, arranged for its members to distribute government-subsidised goods, and quietly scaled back family-planning programmes.
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.
Supporters of Egyptian president Mohammed Morsi have begun putting up billboards around Cairo that read: “With the Constitution, the wheel will turn“, suggesting that the economy is at risk without the stability offered by the new constitution, which goes to a referendum Saturday.
Yet, reality paints a wholly different picture.
Morsi’s dogged determination to hold a referendum without the support of the opposition continues to hurt his credibility as president, that of the people he governs and the country’s economic state.
In fact, though the president promises with this slogan that the wheels of production will keep turning in Egypt, he has stopped them in their tracks because he refuses to open up to the opposition.
In the biggest blow to Egypt’s economic recovery for several months, Egypt and the International Monetary Fund have agreed to postpone a decision on a $4.8 billion loan that had been scheduled for discussion by the fund’s board next week. An IMF statement suggests it was Egypt’s decision to postpone negotiations:
“In light of the unfolding developments on the ground, the Egyptian authorities have asked to postpone their request for a Stand-By Arrangement with the IMF.”
However, it is unlikely the IMF would lend in the current circumstances.
Other programmes that form part of Egypt’s economic recovery plan, including tax reforms and drastic cuts in wasteful energy subsidies, are yet to see the light of day.
The country’s finance minister, Mumtaz al Saeed, told Bloomberg earlier that the economic programme has been “misunderstood” (presumably by the public who have reacted negatively to austerity measures):
“We have an Egyptian economic and social program, and it seems that some have misunderstood the measures, so the president decided to give more time for social dialogue to stress that the measures won’t harm people with limited income.”
But a lack of real, grassroots dialogue with the public has left many wondering exactly what the government means by “societal dialogue”.
Meanwhile, the wheels of production are grinding to a halt as foreign investors reassess whether to pour money into an unstable Egypt. The delay of the IMF loan will also have a knock on affect on other loans pledged from the European Union and the African Development Bank.
Morsi’s supporters may consider opting for a simpler strategy when it comes to showing their support for a referendum, because so far the leadership of the Muslim Brotherhood and the country’s president has led to anything but wheels of production.
It begs the questions of whether Morsi is holding the country hostage to his own ambitions.
There’s one thing worse than a president who implements unpopular decisions. It’s a president who is scared to do so.
In yet another swift turnaround, Egypt’s President Mohammed Morsi has back-tracked on plans to raise taxes on a range of services and goods only to damage further his credibility in the eyes of public and the international community.
Months of planning that include increasing the top-level income tax rates and implementing a 1% sales tax have fallen through without any real explanation. Fundamentally, the tax increases are part of the government’s aim (under the IMF programme) at reducing the 11% budget deficit by increasing government revenues.
Morsi’s only justification was that the taxes would amount to a “burden” on the average citizen, Egypt Independent reported:
“The president of the republic feels the pulse of the Egyptian street, and he realizes how much the citizen is bearing and struggling from his burdens in this difficult economic period,” the statement said, according to the website of the state-owned newspaper Al-Ahram.
Morsi’s move has in fact worsened the economic position of the average Egyptian. The most important taxes (the top-level income tax and sales tax) are likely only to affect a certain part of the Egyptian population that can afford to pay more. Meanwhile, additional taxes, including the luxury tax on cigarettes, soft drinks and beer may do Egypt some good.
Many Western cities and countries have adopted a “nanny-state” approach for years to encourage their citizens to lead healthier lives, by raising the price of cigarettes and alcohol. As a result, a 20-piece pack of Marlboro’s will set you back $12.50 in New York, while the same packet will cost just $2.1 in Egypt. A twice-a-pack-a-day habit would cost a New Yorker $9,000 a year.
Egypt, however, is still stuck in the 1950s, when other countries have moved on. How can we take Egypt’s economy seriously when straightforward tax measures cannot be implemented?
Above all, Morsi’s most critical mistake has been to make decisions in a void, without consultation with the public.
The tax plan was signed into effect on December 6 and was not made known to the public until December 9 (four days later).
Then when Morsi faced a huge backlash to the hikes, he delayed the hikes. All of this was in the absence of “societal dialogue”. If the public understood the benefits of paying more for electricity and water, that might deter usage and help alleviate the huge domestic consumption of both. Meanwhile, taxes could pay for nationwide programmes such as energy subsidies so the neediest still get access to cheap fuel.
The public must realise that taxes are inevitable. Convincing the people why this is the case is Morsi’s real job.
Next year should be characterised by tough spending cuts and taxes that aggressively tackle Egypt’s deficit. Yet, the biggest question is how the government will make these cuts and whether they will be enforced in another black hole.
While Morsi continues to make populist decisions rather than the right ones, Egypt’s economy suffers.