Egypt’s new president is expected to look to the Arabian Gulf to help plug a US$9 billion foreign-exchange funding gap for the next six months to help meet its urgent food and fuel needs.
As Abdel Fattah El Sisi swears in today, economists warn that without such aid the country’s economic condition may deteriorate further in the absence of receipts from tourism and foreign investment. Following years of economic growth averaging more than 7 per cent, the country’s GDP growth dipped to 2.2 per cent in 2012, according to the World Bank.
Egypt has been battered by more than three years of unrest after the deposal of the former president, Hosni Mubarak, in February 2011. Experts say that Gulf nations will continue to extend the Arab world’s most populous country a lifeline until public finances are shored up. Saudi Arabia’s king called for a donor’s conference last week to help the beleaguered country, and the UAE has been active in helping Egypt come up with a blueprint for recovery.
“In the next six months we estimate that Egypt will need about $8bn to $9bn,” said Alia Moubayed, the London-based director and head of research for the Middle East and Africa at Barclays. “This is critical, as it takes care of a large portion of Egypt’s import bill. But the question is what will happen after August. Our baseline assumption is that aid will likely continue at least until the end of the fiscal year 2014-15, and the recent statement by the King Abdullah of Saudi Arabia is another confirmation. Without it, pressures on foreign-exchange reserves will increase, causing further depreciation in the local currency.”
The Egyptian pound has depreciated by 23 per cent against the US dollar since the nationwide protests against Mubarak’s rule erupted in January 2011, and shortages of hard currency have created a vibrant black market for US dollars. That is because the Arab nation, which relies on tourism, Suez Canal receipts and remittances from abroad to provide it with the hard currency, has struggled to rebuild its economy since Mubarak’s exit after a series of political upheavals that caused his successor, Mohamed Morsi, to be removed from office last July. Tourism, which is estimated to have accounted for 13 per cent of GDP in 2010, has been particularly damaged by the violence of the past three years, during which thousands have been killed. Many of the country’s sites such as the Pyramids remain woefully bereft of visitors.
The Egyptian economy had been in crisis mode on and off even before Mubarak’s departure, struggling to make ends meet since the 1952 revolution after which many industries were nationalised and subsequently mismanaged for decades. During this time the country had been urged by the likes of the IMF to remove subsidies and sell off state enterprises.
But when the former president Anwar El Sadat tried to remove food subsidies in 1977, massive riots ensued. Sadat reversed his decision and successive rulers of the country have put off the task, only making piecemeal concessions to the economy. Energy subsidies alone cost the government, which has been running massive fiscal deficits for years, about $19bn.
“I don’t think it’s realistic to expect Sisi to come in and reduce subsidies aggressively to bring the budget deficit down sharply,” said Farouk Soussa, the chief middle east economist at Citigroup in London. “That’s not on the agenda. What the government is most likely planning is to rationalise expenditure, reducing subsidies from the rich and increasing subsidies and spending on the poor. The impact on the budget deficit will therefore be fairly neutral, but this would have the desired effect, showing an immediate improvement in the livelihood of poorer Egyptians.”
Still, the UAE, Saudi Arabia and Kuwait, which have given Egypt at least $12bn in aid since last year, are keen to persuade Egypt into taking measures to reduce its budget deficit, which is running at 11.5 per cent of GDP. Sultan Al Jaber, the UAE minister of state responsible for overseeing assistance to Egypt, told Bloomberg News last week that the country needs to get its public finances back in shape to attract much-needed foreign investment. And it was reported on Friday by Reuters that at the behest of the UAE, western advisers are drawing up plans for reshaping the Egyptian economy.
That could possibly reopen negotiations with the IMF over a $4.8bn loan that has been up for grabs for several years but shunned by the Egyptian government, which fears the international lending agency will require it to undertake painful reforms in return.
Since last year, UAE firms have been among the most aggressive first movers in investing in Egypt amid the flourishing ties between the two nations. Arabtec, the country’s largest listed construction firm, won in March a $40bn low-cost housing contract in Egypt, its biggest venture overseas. And Majid Al Futtaim, the UAE company behind the Mall of the Emirates and the City Centre mall brands, announced plans in the same month for the development of three new shopping malls in Egypt, together with the redevelopment of City Centre malls in Maadi and Alexandria.
“We look forward to supporting the development of Egypt’s retail industry, as we continue with our planned investments of 16.5m Egyptian pounds over the coming five years,” said Iyad Malas, the chief executive of Majid Al Futtaim.
Egyptian markets expect aid inflows
Egypt’s stock market is looking for fresh aid from the Arabian Gulf states to provide long awaited stimulus.
The country’s benchmark stock index rallied 4.7 per cent on Thursday ahead of Abdel Fattah El Sisi’s swearing in, after which aid pledges from GCC countries were expected. The index has advanced 22 per cent this year as companies start recovering from more than three years of political instability.
The EGX30’s rally this year makes it the sixth-best performer out of 90 stock measures tracked by Bloomberg. Last year, during which Mohamed Morsi was removed from power by Abdel Fatah El Sisi amid nationwide protests at his rule, the measure rose 24 per cent.
While investment in the stock market continues to be dominated by local retail buyers, foreign investors have been increasing holdings in recent months, especially as the gap between the official and unofficial exchange rates narrows. These international fund managers are also betting that the government will be forced to take measures, such as managing spending more efficiently, that will boost economic growth. Even after the country announced a plan to levy a capital-gains tax, foreigners have been undeterred.
“You’ve seen a pickup in foreign investment in the stock market in recent months, certainly, but you have to assume that it will be aid that will fill the gap for the next few months,” said Simon Kitchen, a Cairo-based strategist at the Egyptian investment bank EFG-Hermes. “If you look at the budget for this year, that promises a hefty cut in subsidy fuel spending.”
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