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

    Self-doubt, Cultural Barriers Hinder Cambodian Women in Tech

    Longtime Cambodian tech observer Sok Sikieng says that although more women have joined profession in recent years, there remain significant factors hindering women from reaching tech potential

    Trans-Adriatic Pipeline to Boost European Energy Security

    $4.5 billion-pipeline will become operational in 2020 and will deliver gas from Azerbaijan’s Shah Deniz II field to southern Italy

    Video California Celebration Showcases Local Wines, Balloons

    Annual festival showcases the region's harvested agriculture, fine wines and offers opportunities to experience the gentle breeze in a hot air balloon flight

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Vietnamese-American Youth Optimistic About Obama's Visit to Vietnami
    X
    Elizabeth Lee
    May 22, 2016 6:04 AM
    U.S. President Barack Obama's visit to Vietnam later this month comes at a time when Vietnam is seeking stronger ties with the United States. Many Vietnamese Americans, especially the younger generation, are optimistic Obama’s trip will help further reconciliation between the two former foes. Elizabeth Lee has more from the community called "Little Saigon" located south of Los Angeles.
    Video

    Video Vietnamese-American Youth Optimistic About Obama's Visit to Vietnam

    U.S. President Barack Obama's visit to Vietnam later this month comes at a time when Vietnam is seeking stronger ties with the United States. Many Vietnamese Americans, especially the younger generation, are optimistic Obama’s trip will help further reconciliation between the two former foes. Elizabeth Lee has more from the community called "Little Saigon" located south of Los Angeles.
    Video

    Video First-generation, Afghan-American Student Sets Sights on Basketball Glory

    Their parents are immigrants to the United States. They are kids who live between two worlds -- their parents' homeland and the U.S. For many of them, they feel most "American" at school. It can be tricky balancing both worlds. In this report, produced by Beth Mendelson, Arash Arabasadi tells us about one Afghan-American student who seems to be coping -- one shot at a time.
    Video

    Video Newest US Citizens, Writing the Next Great Chapter

    While universities across the United States honor their newest graduates this Friday, many immigrants in downtown Manhattan are celebrating, too. One hundred of them, representing 31 countries across four continents, graduated as U.S. citizens, joining the ranks of 680,000 others every year in New York and cities around the country.
    Video

    Video Vietnam Sees Strong Economic Growth Despite Incomplete Reforms

    Vietnam has transformed its communist economy to become one of the world's fastest-growing nations. While the reforms are incomplete, multinational corporations see a profitable future in Vietnam and have made major investments -- as VOA's Jim Randle reports.
    Video

    Video Qatar Denies World Cup Corruption

    The head of Qatar’s organizing committee for the 2022 World Cup insists his country's bid to host the soccer tournament was completely clean, despite the corruption scandals that have rocked the sport’s governing body, FIFA. Hassan Al-Thawadi also said new laws would offer protection to migrants working on World Cup construction projects. VOA's Henry Ridgwell reports.
    Video

    Video Infrastructure Funding Puts Cambodia on Front Line of International Politics

    When leaders of the world’s seven most developed economies meet in Japan next week, demands for infrastructure investment world wide will be high on the agenda. Japanese Prime Minister Shinzo Abe’s push for “quality infrastructure investment” throughout Asia has been widely viewed as a counter to the rise of Chinese investment flooding into region.
    Video

    Video Democrats Fear Party Unity a Casualty in Clinton-Sanders Battle

    Democratic presidential front-runner Hillary Clinton claimed a narrow victory in Tuesday's Kentucky primary even as rival Bernie Sanders won in Oregon. Tensions between the two campaigns are rising, prompting fears that the party will have a difficult time unifying to face the presumptive Republican nominee, Donald Trump. VOA national correspondent Jim Malone has more from Washington.
    Video

    Video Portrait of a Transgender Marriage: Husband and Wife Navigate New Roles

    As controversy continues in North Carolina over the use of public bathrooms by transgender individuals, personal struggles with gender identity that were once secret are now coming to light. VOA’s Tina Trinh explored the ramifications for one couple as part of trans.formation, a series of stories on transgender issues.
    Video

    Video Amerikan Hero Flips Stereotype of Middle Eastern Character

    An Iranian American comedian is hoping to connect with American audiences through a film that inverts some of Hollywood's stereotypes about Middle Eastern characters. Sama Dizayee reports.
    Video

    Video Budding Young Inventors Tackle City's Problems with 3-D Printing

    Every city has problems, and local officials and politicians are often frustrated by their inability to solve them. But surprising solutions can come from unexpected places. Students in Baltimore. Maryland, took up the challenge to solve problems they identified in their city, and came up with projects and products to make a difference. VOA's June Soh has more on a digital fabrication competition primarily focused on 3-D design and printing. Carol Pearson narrates.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.8971
    JPY
    USD
    110.16
    GBP
    USD
    0.6811
    CAD
    USD
    1.3106
    INR
    USD
    67.378

    Rates may not be current.