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Country Report Egypt

Country Report

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The ouster of president Morsi placed Egypt on a new political transition trajectory – unfortunately, not a more democratic one. Generous assistance from the GCC countries gives Egypt financial breathing space, but economic perspectives remain bleak due to unaddressed structural problems.

Strenghts (+) and weaknesses (-)

(+) Geopolitical importance ensures financial support

Egypt’s strategic importance is derived from the economic significance of the Suez Canal and the country’s key role in regional diplomacy, and facilitates financial support in times of crisis.

(-) Dependence on the import of food and fuel

Egypt imports more than half of the 19m tons of wheat it consumes every year and the majority of the fuel it needs, rendering the country highly susceptible to the volatile prices on these markets.

(-) A large welfare state that is difficult to reform

Already extensive food and fuel subsidy programs during the Mubarak regime (equal to 9% of GDP and 27% of the budget in 2010) were expanded to contain social unrest afterwards. The high reliance of the population on this system makes it difficult to reform without causing backlash.

(-) Fluid political preferences

The political preferences of most Egyptians are not based on ideology, but on other grounds, such as perceived capability to improve living standards or voter’s familiarity with a party, and are therefore very volatile. A certain degree of widespread loyalty to the army provides some stability.

Key developments

1. Morsi’s ouster places Egypt on a different transition path

Widespread protests led to the ouster of president Morsi and his cabinet on July 3rd, a de facto military coup backed by the people. The army installed a new president, whom, in turn, appointed a technocratic government and announced a ‘transition roadmap’: a timeframe for amending and adopting a revised constitution and holding elections within 6 months. After a year of polarization under Morsi, the selection of a constitutional committee by the new government, tasked with deliberating on a revised constitution draft, hinted towards a more inclusive approach by the interim government, as it included members from all political parties and all relevant civil society groups, including Islamic parties such as Nour. However, the committee excluded the Muslim Brotherhood (MB), which refused any collaboration and maintained its protests and its stern demand to reinstate the ousted president. The reply of the authorities was a harsh crackdown on the organization and its supporters: the MB was ‘decapitated’ by the arrest of thousands of MB leaders, sympathizing media was shut down and the supporter camps were dispersed on 14 August during clashes that claimed hundreds of lives. Protests have been clamped down upon repeatedly ever since.  

Several developments in the past months are particularly worrisome for Egypt’s democratic perspectives. First, the emergence of a widespread ‘MB phobia’ according to which the majority of the Egyptian population blames the MB for the current state of disarray in Egypt. Nationalist propaganda in recent months exacerbated the widespread discontent with the former president amongst a population yearning for stability and, consequently, generated widespread support for the heavy handed crackdown on the MB and its supporters, and on any critics of the interim government or the army. Second, Egypt seems to be evolving into a security state. The authorities capitalized on the popular sentiment to push the MB underground through freedom-limiting actions, such as the three months state of emergency, which gives security forces free hand over civilians, the inclusion of a ban on religious political parties in the constitution draft and legislative proposals for regulating protests and anti-terrorism. The MB was further banned by a court order.

Looking forward, the transition roadmap is expected to be implemented, though the diversity of interests in the constitution committee is set to lead to delays. Sensitive issues, such as the role of the military, are already causing disputes. A broadly supported constitution and free elections could lead to a period of increased stability. However, given the isolation of the MB from politics, Islamist insurgency is expected to pick up. Though it is unlikely to become a threat to the stability of the state, it will keep tourists and investors away and hinder economic recovery. A deal with the IMF could turn the tide by restoring confidence in the Egyptian economy. But concerns about the autocratic tendencies mentioned earlier have already strained relationships with the West, making such a deal highly unlikely. A possible presidential candidacy by army general Sisi could make matters worse. Meanwhile, as assistance from the GCC countries is available, the urgency and political willingness to reach an IMF deal are low. Without an economic recovery, the future government, whether close to the military or not, is poised to eventually fail to deliver on economic promises, which will wear out its political capital. As a result, Egypt’s medium-to long-term future is blurry.

Figure 1: Budget deficit soars
Figure1: Budget deficit soarsSource: EIU
Figure 2: FX reserves above alarming levels
Figure2: FX reserves above alarming levelsSource: EIU, Reuters Ecowin, Rabobank

2. Fiscal imbalances worsen

Egypt’s public deficit is expected to soar to 14% of GDP in 2013, up from 11% of GDP in 2012, pushing public debt to 92% of GDP, 8ppts higher than in 2011. Energy and food subsidies weigh heavily on the budget, as they account for 10% of GDP. The ouster of president Morsi brought in USD 15bn in aid from the GCC countries, including USD 6bn in budget support and USD 3bn in oil, which has provided some relief. But, as a result of the interim government’s expansionary fiscal policy, the budget deficit will remain high. Lower borrowing costs after Morsi’s ouster and domestic appetite for sovereign debt provide some comfort, but keeping public debt at sustainable levels might require further external assistance. Money from the GCC countries is expected to flow in in the short-term, but could become more elusive in the medium- to long-term. 

3. External assistance reduces the risk of an imminent balance of payments crisis

Aid from the GCC countries included USD 6bn in deposits placed with the Central Bank of Egypt. As a result, Egypt’s level of FX reserves are no longer at the alarmingly low levels seen in March, namely USD 10.1bn, or less than 2 months of import cover. At the end of September, FX reserves climbed to USD 16.2bn, or almost 3 months of import cover. Moreover, oil donations from the GCC countries contribute to a lower current account deficit in 2013 (forecasted at 2.4% of GDP). All in all, while the level of FX reserves is still critical, the risk for an imminent balance of payment crisis has been reduced significantly. However, as important FX sources such as tourism and foreign investments remain lackluster, Egypt will maintain its reliance on external support from the GCC countries, which could become more elusive, as mentioned above.

Factsheet of Egypt
Factsheet of EgyptSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

97% of Egypt’s territory is a vast desert plateau. The remainder is made up by the Nile valley and delta, where most of economic and human activity takes place. Though the Nile waters are shared with Sudan and Ethiopia, historically Egypt has the right to use most of the water stream, with the majority being used in agriculture. However, these rights have been questioned by the other countries on the Nile in recent years, leading to several disputes. While Egypt used to be a fairly closed economy in the past, the development of the oil and gas sector boosted the value of exports. In 2012, the oil and gas sector accounted for roughly 15% of GDP and 50% of total exports. Wholesale and retail trade accounted for the largest share of output in services (11% of GDP), but tourism and receipts from transit on the Suez Canal were the main foreign exchange earners, accounting for almost half and, respectively, almost a quarter of service exports (9% of GDP). The remainder of exports still consists of (semi)finished goods, though some diversification towards iron and steel is visible.

Ever since independence from the UK in 1952, the Egyptian army has played a prominent role in politics, albeit behind the curtains. The military facilitated both the ousting of Hosni Mubarak and of Mohammed Morsi - both events representing de facto coups backed by the Egyptian people. The ouster of Mubarak in 2011 was also backed by the international community, while Morsi’s ouster was rather controversial. The military’s influence is also visible in the national economy, where their stake was estimated at 40% in 2009. It is therefore expected that the army will intervene to protect its economic interest (including traffic over the Suez Canal) in case the functioning of the economy is endangered. Therefore, the army plays a stabilizing role and provides some mitigation against an eventual state collapse.

Economic indicators of Egypt
Economic indicators of EgyptSource: EIU
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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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