The Egyptian army’s removal of Mohamed Morsi as president was warmly welcomed by the business community, which had viewed the Muslim Brotherhood-led government as both hostile to business and an ineffective administrator. This positive mood will only have been reinforced by the pledging of $12 billion in aid from three Gulf states, which should help stabilize both the state finances and the fragile currency for the time being.
However, the new government will be operating in a turbulent political environment, which risks causing persistent civil disorder and could deter both tourists and foreign businesspeople from visiting the country. Nevertheless, a revival in business confidence could play an important part in lessening domestic political tensions, especially if it results in a recovery of the economy and the creation of new jobs.
The government formed by the interim prime minister, Hazem el‑Beblawi, includes ministers with experience of dealing directly with business issues, and appears to have the technical qualifications to tackle some of the deep-seated economic problems that overwhelmed the Morsi administration.
The key figure in the government from the point of view of business is Ziad Bahaa el‑Din, who has been given the post of deputy prime minister for the economy and minister of international cooperation – the latter portfolio was previously combined with planning. This will give him overall responsibility for the direction of economic policy and for interaction with international financial institutions, including the IMF and the World Bank.
Bahaa el-Din is one of the few prominent figures to have held influential positions before and after the overthrow of Hosni Mubarak as president in 2011. He took a break from his corporate law office in 2004 to become head of the General Authority for Investment (GAFI), instituting radical changes to its organization and contributing to the surge in foreign direct investment in the middle years of that decade. He then worked with the Mahmoud Mohieldin, a former investment minister who joined the World Bank as a vice-president in 2010, on the establishment of the Egyptian Financial Supervisory Authority, which he headed until February 2011. Since then he has been active in politics. He won a seat in his home town of Sadfa, near Assiut in Upper Egypt, in the end-2011 general election, standing for the Egyptian Social Democratic Party. His ongoing business interests have included the post of non-executive chairman of HSBC Egypt.
Possible IMF loan delay
The prominent role of Bahaa el‑Din is likely to provide assurance to businesspeople that there is someone in government who has a detailed understanding of the issues that businesses face, and who has a track record of providing effective solutions to such problems. Bahaa el‑Din will also have an important say in whether the new government moves quickly to revive discussions with the IMF about a stand-by credit arrangement of $4.8 billion.
“…the risk remains that political turbulence could derail the best intentions of even the most effective economically-reformist government.” – The Economist Intelligence Unit
Ashraf al‑Araby, the planning minister in the new cabinet, said that he believed that the government would not go back to the IMF immediately, owing to the uncertainty about the political situation and to the breathing space afforded by the Gulf Arab aid. However, an IMF program would have the advantage of providing a clear framework for fiscal reforms, and would unlock additional loans from the World Bank, the African Development Bank and the European Union that have been pledged since 2011 to support long-term structural reforms.
It remains unclear on which side of this argument Bahaa el‑Din stands, or what the position is of the new finance minister, Ahmed Galal, a former World Bank economist who has been managing director of the Egypt Economic Research Forum since 2007. Galal said on July 17 that the IMF loan was only part of any solution to Egypt’s economic problems. However, at least in pursuing the loan, the government would be making clear its early commitment to fiscal and economic reform.
Boosting electricity supply as priority
The aid pledged by the Gulf Arab states totaling $12 billion, assuming that most of it is disbursed relatively promptly, will bolster Egypt’s foreign-exchange reserves and help to finance part of the fiscal deficit over the next six months or so (one-quarter of the money is coming in the form of grants, and the bulk of the remainder will be used to prop up the Central Bank’s depleted stock of foreign reserves).
The new government will also have the chance to complete negotiations with Arab, African and European development agencies for loans to finance urgent infrastructure projects. These include an emergency program, financed by the African Development Bank, to increase electricity generating capacity over the next 12 months. The Ministry of Electricity launched this program before the removal of the Morsi administration, and continuity has been assured with the retention of the same minister, Ahmed Imam, in this post in the new cabinet. A World Bank delegation had been due to visit Cairo in early July to discuss part-financing for the program, for which Italy’s Ansaldo has been selected for the first contract, involving the supply of four 150‑mw turbines for 6th of October City, south-west of Cairo, and bids are being evaluated for two more packages for the supply of six 250‑mw turbines in total.
However, the government’s capacity to finance development spending from its own balance sheet is constrained by the low level of is foreign-exchange reserves, even after the influx of funds from the Gulf (including an estimated $8 billion from Qatar during the Morsi period), as well as by the size of the fiscal deficit, estimated to have reached 13 percent of the GDP in 2013, which leaves little room for increasing capital expenditure.
Given Egypt’s experience of the past two years and the violence that followed Morsi’s ouster, the risk remains that political turbulence could derail the best intentions of even the most effective economically-reformist government. In particular, in light of the recent deaths of 55 people in protests on July 5 and the death of seven more in clashes on the evening of July 15, the deteriorating security picture could prove a major deterrent to many foreign firms.
According to the Cyprus-based Middle East Economic Survey, a number of international oil companies have been evacuating non-essential staff from the country, with, for example, BP withdrawing some 60 staff on July 6-7. Equally, the volatile security situation will disincentivize many expatriate Egyptians, who are currently working abroad (around one million Egyptians are estimated to work in the Gulf, for example) and about whom it had been hoped they would return to the country if the situation improved. Similarly, the risk of a “brain drain” of Egyptian professionals will also increase if there is no improvement in the domestic scene
Meanwhile, barring any sudden unexpected boost to the economy, the new government’s fiscal problems are set to persist, presenting it with a host of tough spending and tax decisions. Although the recently announced Gulf aid will certainly assist, the amount is still modest compared with the scale of the task – the $3 billion in grants promised by Saudi Arabia, Kuwait and the UAE is still less than one-tenth of the budget deficit we forecast for fiscal year 2013/14 (July 1-June 3). As a result, the government may yet be forced into ad hoc tax increases, depressing domestic confidence and potentially dampening business’s enthusiasm for the new cabinet.
The new government may have been installed against a backdrop of business optimism and a surge in the stock market, but, even with a cabinet packed with economic experts, the wide-ranging political and economic challenges confronting it may yet still prove overwhelming.
This post has been authored exclusively for MEV by The Economist Intelligence Unit.
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This post has been authored by experts of The Economist Intelligence Unit.