News / Economy

Gulf Billions Buy Egypt Economy Breathing Space

A boat passes buildings under construction and the two towers of the Bank of Egypt building (R), overlooking the river Nile in Cairo, June 7, 2013. A boat passes buildings under construction and the two towers of the Bank of Egypt building (R), overlooking the river Nile in Cairo, June 7, 2013.
x
A boat passes buildings under construction and the two towers of the Bank of Egypt building (R), overlooking the river Nile in Cairo, June 7, 2013.
A boat passes buildings under construction and the two towers of the Bank of Egypt building (R), overlooking the river Nile in Cairo, June 7, 2013.
Reuters
Twelve billion dollars in aid from Egypt's wealthy Gulf allies have bought Cairo a window of several months to try and stabilize its politics and repair its state finances - or face fresh economic turmoil.

The massive packages of grants and loans unveiled by Saudi Arabia, the United Arab Emirates and Kuwait on Tuesday and Wednesday should boost Egyptian foreign reserves enough to avert a balance of payments crunch that was looming this year.

By replenishing state coffers, they will keep government departments running and may help authorities end fuel shortages that have caused immense public anger and contributed to last week's military overthrow of elected president Mohamed Morsi.

John Sfakianakis, chief investment strategist at MASIC, a Riyadh-based investment firm, estimated the $8 billion in aid from Saudi Arabia and the UAE could give Egypt a breathing space of four to six months. On top of that, Kuwait has since pledged a further $4 billion.

But the aid will not by itself solve two key problems in the Egyptian economy: a ballooning budget deficit and political instability that is scaring away foreign capital.

If major progress is not made in these areas by the end of this year, Egypt could again risk an economic crisis and be forced to seek large amounts of additional aid from the Gulf, putting itself deeper in debt to governments there.

“Unless there is a resolution of the politics/social schisms, private capital flows will remain elusive and capital flight risks high,” Raza Agha, chief economist for the Middle East at VTB Capital in London, wrote in a report.

The aid from the Gulf “buys time,” he said. “But key at present is whether anything will get the Muslim Brotherhood off the streets.”

Morsi's Islamist supporters continue to protest at his removal by the army. Dozens were shot by troops on Monday.

The Gulf money may also ease pressure on Cairo to finalize a $4.8-billion loan from the International Monetary Fund. Securing it might impress other would-be lenders and investors, but its conditions might prove too politically painful within Egypt.

Finances

The country's foreign reserves totalled $14.92 billion at the end of June. Excluding inflows of aid, they have been falling by around $1-2 billion every month, so the latest aid may cover Egypt's external deficits into early 2014.

The speed with which Saudi Arabia, the UAE and Kuwait announced packages - less than a week after Morsi was deposed - is as important to financial markets as their size. The three Gulf states, which mistrusted Morsi and his Muslim Brotherhood, signaled they are determined to keep a post-Morsi Egypt afloat.

The confidence created by that signal will help Egypt roll over about $5 billion in dollar-denominated Treasury bills maturing by the end of 2013, and could limit or halt further depreciation of the Egyptian pound in coming months.

Cash grants totalling $3 billion from Riyadh, Abu Dhabi and Kuwait - a quarter of their combined $12 billion in loans, grants and donations of oil products - dwarf the $250 million in annual civil aid on offer from Washington.

The European Union has been giving some $190 million annually. Late last year, the EU said up to $6.4 billion in loans and grants was on offer - but that is tied to reforms and would include the European share of the potential IMF loan.

Egypt's military also receives an annual $1.3-billion direct subsidy from the United States. The arrangement, dating from the 1980s, is related to Cairo's 1979 peace treaty with Israel.

The appointment as interim prime minister of Hazem el-Beblawi, an international economist who ran Egypt's Export Development Bank for 12 years, may increase the chances of Cairo obtaining the long-delayed loan from the IMF.

“They need the IMF stamp of approval, given the IMF has criteria regarding economic reforms,” said Sfakianakis. “That will give far greater confidence that the government is addressing the financial reform area, which will unlock further financial aid from the European Union and other agencies.”

But to satisfy the IMF, the government would have to commit to deep cuts in its budget deficit, which nearly doubled from a year earlier to 113.4 billion Egyptian pounds ($16.2 billion) in the first five months of 2013.

It remains unclear whether any Egyptian government - either the interim administration, or the government that would take power after parliamentary elections scheduled in about six months - can muster the will to make the politically explosive cuts in subsidies required to reduce the deficit.

For that reason, an IMF loan may never materialize, said Farouk Soussa, chief Middle East economist at Citigroup: “An IMF deal seems unlikely to me in the current political environment and until a new permanent government is put in place,” he said.

“In fact, a populist, anti-IMF platform is more likely to win votes, so I am not optimistic on a deal in the long run either.”

Politics

In addition to healthier state finances, Egypt needs private capital to revive its economy. Foreign direct investment was just $1.4 billion in the nine months to March, compared to annual levels above $10 billion a few years ago; political stability is vital to lure private money back.

The size of the Gulf aid packages may give the post-Morsi government room to launch spending programs designed to buy social peace, as Saudi Arabia itself did successfully after the 2011 uprisings elsewhere in the Arab world.

Soussa said he expected the new Egyptian administration to focus on restoring law and order through a combination of tougher policing and raising standards of living.

“I'd therefore expect to see a ramp-up in public services, a raise in salaries, and an increase in imports of key products such as fuel and food,” he said.

But it is not clear whether an end to shortages and better living standards could paper over political divisions that have widened since Morsi's removal, with many Islamists outraged by the army's intervention and this week's bloodshed in Cairo.

While Brotherhood leaders insist they will not take up arms, others may. Attacks on tourists in the 1990s hit Egypt's income hard. When Algeria canceled a 1991 election that Islamists were winning, a decade of civil war ensued, crippling development.

Emad Mostaque, strategist at Noah Capital Markets, said there was a risk that polarization on the streets could develop into general strikes and militant violence, which would seriously damage the Egyptian economy.

“We remain concerned about attacks against tourist centers by splinter groups,” Mostaque said, “With our key takeaway from Algeria being that groups can quickly re-radicalize and it doesn't take many people to cause an almighty mess.”

You May Like

Turkey's Controversial Reform Bill Giving Investors Jitters

Homeland security reform bill will give police new powers in search, seizure, detention and arrests, while restricting the rights of suspects, their attorneys More

Audio Slideshow In Kenyan Prison, Good Grades Are Path to Freedom

Some inmates who get high marks could see their sentences commuted to non-custodial status More

'Rumble in the Jungle' Turns 40

'The Champ' knocked Foreman out to regain crown he had lost 7 years earlier when US government accused him of draft-dodging and boxing officials revoked his license More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Victorious Secularists Face Challenge to Form Government in Tunisiai
X
Henry Ridgwell
October 30, 2014 11:39 PM
Official results from Tunisia show the Islamist Ennahda party has failed to win the second free election since the so-called "Arab Spring" uprising in 2011. Ennahda, which handed power to a government of technocrats pending the elections, lost out to the secular party Nidaa Tounes. Henry Ridgwell reports from London that the relatively peaceful poll offers some hope in a volatile region.
Video

Video Victorious Secularists Face Challenge to Form Government in Tunisia

Official results from Tunisia show the Islamist Ennahda party has failed to win the second free election since the so-called "Arab Spring" uprising in 2011. Ennahda, which handed power to a government of technocrats pending the elections, lost out to the secular party Nidaa Tounes. Henry Ridgwell reports from London that the relatively peaceful poll offers some hope in a volatile region.
Video

Video Africa Tells its Story Through Fashion

In Africa, Fashion Week is a riot of colors, shapes, patterns and fabrics - against the backdrop of its ongoing struggle between nature and its fast-growing urban edge. How do these ideas translate into needle and thread? VOA’s Anita Powell visited this year’s Mercedes Benz Fashion Week Africa in Johannesburg to find out.
Video

Video Smugglers Offer Cheap Passage From Turkey to Syria

Smugglers in Turkey offer a relatively cheap passage across the border into Syria. Ankara has stepped up efforts to stem the flow of foreign fighters who want to join Islamic State militants fighting for control of the Syrian border city of Kobani. But porous borders and border guards who can be bribed make illegal border crossings quite easy. Zlatica Hoke has more.
Video

Video China Political Meeting Seeks to Improve Rule of Law

China’s communist leaders will host a top level political meeting this week, called the Fourth Plenum, and for the first time in the party’s history, rule of law will be a key item on the agenda. Analysts and Chinese media reports say the meetings could see the approval of long-awaited measures aimed at giving courts more independence and include steps to enhance an already aggressive and high-reaching anti-corruption drive. VOA’s Bill Ide has more from Beijing.
Video

Video After Decades of Pressure, Luxembourg Drops Bank Secrecy Rules

European Union finance ministers have reached a breakthrough agreement that will make it more difficult for tax cheats to hide their money. The new legislation, which had been blocked for years by countries with a reputation as tax havens, was approved last week after Luxembourg and Austria agreed to lift their vetoes. But as Mil Arcega reports, it doesn’t mean tax cheats have run out of places to keep their money hidden.
Video

Video Kobani Refugees Welcome, Turkey Criticizes, US Airdrop

Residents of Kobani in northern Syria have welcomed the airdrop of weapons, ammunition and medicine to Kurdish militia who are resisting the seizure of their city by Islamic State militants. The Turkish government, however, has criticized the operation. VOA’s Scott Bobb reports from southeastern Turkey, across the border from Kobani.

All About America

AppleAndroid

World Currencies

EUR
USD
0.7893
JPY
USD
107.68
GBP
USD
0.6238
CAD
USD
1.1214
INR
USD
61.185

Rates may not be current.