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

    US-Russia Tensions Complicate Syria War

    With a shared enemy and opposing allies, Russia and the US are working to avoid confrontation

    Video Re-opening Old Wounds in Beirut's Bullet-riddled Yellow House

    Built in neo-Ottoman style in 1920s, it is set to be re-opened in Sept. as ‘memory museum’ - bullet-riddled walls and bunkered positions overlooking city’s notorious ‘Green Line’ maintained for posterity

    Cambodian-Americans Lobby for Human Rights Resolution

    Resolution condemns all forms of political violence in Cambodia, urges Cambodian government to end human rights violations, calls for respect of press freedom

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Brexit Vote Plunges Global Markets Into Uncharted Territoryi
    X
    June 24, 2016 9:38 PM
    British voters plunged global markets into unknown territory after they voted Thursday to leave the European Union. The results of the Brexit vote, the term coined to describe the referendum, caught many off guard. Analysts say the resulting volatility could last for weeks, perhaps longer. Mil Arcega reports.
    Video

    Video Brexit Vote Plunges Global Markets Into Uncharted Territory

    British voters plunged global markets into unknown territory after they voted Thursday to leave the European Union. The results of the Brexit vote, the term coined to describe the referendum, caught many off guard. Analysts say the resulting volatility could last for weeks, perhaps longer. Mil Arcega reports.
    Video

    Video Orlando Shooting Changes Debate on Gun Control

    It’s been nearly two weeks since the largest mass shooting ever in the United States. Despite public calls for tighter gun control laws, Congress is at an impasse. Democratic lawmakers resorted to a 1960s civil rights tactic to portray their frustration. VOA’s Carolyn Presutti explains how the Orlando, Florida shooting is changing the debate.
    Video

    Video Tunisian Fishing Town Searches for Jobs, Local Development Solutions

    As the European Union tries to come to grips with its migrant crisis, some newcomers are leaving voluntarily. But those returning to their home countries face an uncertain future.  Five years after Tunisia's revolution, the tiny North African country is struggling with unrest, soaring unemployment and plummeting growth. From the southern Tunisian fishing town of Zarzis, Lisa Bryant takes a look for VOA at a search for local solutions.
    Video

    Video 'American Troops' in Russia Despite Tensions

    Historic battle re-enactment is a niche hobby with a fair number of adherents in Russia where past military victories are played-up by the Kremlin as a show of national strength. But, one group of World War II re-enactors in Moscow has the rare distinction of choosing to play western ally troops. VOA's Daniel Schearf explains.
    Video

    Video Experts: Very Few Killed in US Gun Violence Are Victims of Mass Shootings

    The deadly shooting at a Florida nightclub has reignited the debate in the U.S. over gun control. Although Congress doesn't provide government health agencies funds to study gun violence, public health experts say private research has helped them learn some things about the issue. VOA's Carol Pearson reports.
    Video

    Video Trump Unleashes Broadside Against Clinton to Try to Ease GOP Doubts

    Recent public opinion polls show Republican Donald Trump slipping behind Democrat Hillary Clinton in the presidential election matchup for November. Trump trails her both in fundraising and campaign organization, but he's intensifying his attacks on the former secretary of state. VOA National Correspondent Jim Malone reports.
    Video

    Video Muslim American Mayor Calls for Tolerance

    Syrian-born Mohamed Khairullah describes himself as "an American mayor who happens to be Muslim." As the three-term mayor of Prospect Park, New Jersey, he believes his town of 6,000 is an example of how ethnicity and religious beliefs should not determine a community's leadership. Ramon Taylor has this report from Prospect Park.
    Video

    Video Internal Rifts Over Syria Policy Could Be Headache for Next US President

    With the Obama administration showing little outward enthusiasm for adopting a more robust Syria policy, there is a strong likelihood that the internal discontent expressed by State Department employees will roll over to the next administration. VOA State Department correspondent Pam Dockins reports.
    Video

    Video Senegal to Park Colorful ‘Cars Rapide’ Permanently

    Brightly painted cars rapide are a hallmark of Dakar, offering residents a cheap way to get around the capital city since 1976. But the privately owned minibuses are scheduled to be parked for good in late 2018, as Ricci Shryock reports for VOA.
    Video

    Video Florida Gets $1 Million in Emergency Government Funding for Orlando

    The U.S. government has granted $1 million in emergency funding to the state of Florida to cover the costs linked to the June 12 massacre in Orlando. U.S. Attorney General Loretta Lynch announced the grant Tuesday in Orlando, where she met with survivors of the shooting attack that killed 49 people. Zlatica Hoke reports.
    Video

    Video How to Print Impossible Shapes with Metal

    3-D printing with metals is rapidly becoming more advanced. As printers become more affordable, the industry is partnering with universities to refine processes for manufacturing previously impossible things. A new 3-D printing lab aims to bring the new technology closer to everyday use. VOA's George Putic reports.
    Video

    Video Big Somali Community in Minnesota Observes Muslim Religious Feast

    Ramadan is widely observed in the north central US state of Minnesota, which a large Muslim community calls home. VOA Somali service reporter Mohmud Masadde files this report from Minneapolis, the state's biggest city.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.9036
    JPY
    USD
    102.32
    GBP
    USD
    0.7297
    CAD
    USD
    1.3005
    INR
    USD
    68.004

    Rates may not be current.