Previous Quarterly Editions
Expropriation Risk: 46 46 45 44 Political Violence Risk: 54 55 51 48 Terrorism Risk: 66 67 64 65 Exchange Transfer and Trade Sanction Risk: 59 57 56 54 Sovereign Default Risk: 47 49 49 49
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Changes to the constitution in April mean that President El Sisi can remain in office until 2030. Working with a compliant parliament and a subdued media, he will remain unchallenged as long as the painful economic reforms of recent years start to deliver a better life for ordinary Egyptians. The IMF has released the final tranche of the 12 billion dollars in loans that were agreed in 2016, praising Cairo for implementing deep cuts in subsidies and accepting a devaluation of the pound. The president’s position remains that Egyptians prefer stability over the chaos of the 2011-13 period and will put up with short-term economic pain and curtailed political freedoms in return for the prospect of sustained growth. Although the rapid rise in population has meant that the number of Egyptians living below the poverty line has increased since 2015, while middle class purchasing power has declined, El Sisi can now point to figures that show a strengthening economy. Growth reached 5.6% in fiscal 2018-19, which saw significant increases in FDI and export revenues. Tourist earnings rose to contribute nearly 12% to GDP and remittances were the equivalent of 8% of GDP. Unemployment has fallen, as has the fiscal deficit. The new social insurance law, now before parliament, will provide essential protections in exchange for raising pension ages in the long term. The Egyptian pound has been one of the world’s best performing currencies and foreign exchange reserves cover eight months’ exports. However, private sector investment, which is the key to sustained levels of high growth, remains sluggish. To stimulate it, the government needs to move more quickly on privatisation and embrace the use of public–private partnerships to boost infrastructure spending. The education system also needs much greater spending to accompany current reform efforts if it is to provide Egyptians with the skills needed to support private sector growth, yet the military has been the main recipient of recent government spending as the president looks after his base. Abroad, Egypt has been trying to bolster the Assad regime in Syria and provide support to General Haftar in Libya even though Haftar’s campaign to take Tripoli has failed. The president had a successful visit to Washington in the spring and has so far been able to sidestep the Trump administration’s expectations of Egyptian support for its Deal of the Century initiative over Palestine. El Sisi can rely on backing from Saudi Arabia and the UAE, both of which seem content to subsidise Egypt as a bastion of stability at a time when regimes in Algeria and Sudan face domestic challenges. However, Riyadh and Abu Dhabi will look for expressions of political support from Egypt as tensions with Iran flare in the Gulf.
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Egypt’s gas sector should deliver significant revenues over the next three years as new offshore gas fields come on stream, and the government hopes that it will soon be among the top ten exporters of LNG. Although domestic demand is growing rapidly, Cairo expects that major investment from leading companies will ensure that this can be met even as exports accelerate. With the revitalised hydrocarbons sector opening up new investment opportunities in energy-intensive industries and petrochemicals, the government is keen to present the country in a positive light for business.
Although the death in custody in June of former President Morsi has removed the Muslim Brotherhood’s most prominent leader, the government’s relentless campaign against the Brotherhood and its associates goes on. The laws passed to counter the alleged threat it poses are increasingly used to suppress all forms of dissent. Cairo is also cooperating with Riyadh and Abu Dhabi in opposing the pro-Brotherhood policies of Qatar and Turkey. However, Egyptian dissidents have been encouraged by the progress of non-violent popular uprisings in Sudan and Algeria.
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The government blamed the Hasm movement, a small militant group, for an explosion that killed 20 people and wounded 47 in central Cairo in August 5 when a car packed with explosives detonated prematurely after a collision. Hasm emerged in mid-2016 and claimed some targeted attacks in 2017 against officials, notably the state mufti and the assistant public prosecutor, but has been largely inactive since then. The government has been able to limit the terrorist threat to mainland Egypt to occasional small-scale attacks against tourists over the past two years, such as the attack on a tourist bus near the pyramids in May that was a clear attempt to damage a key sector of the economy. BA and Lufthansa temporarily suspended flights to Cairo in July in response to unexplained security concerns and the UK ban on flights to Sharm al Shaikh remains in place.
With interest rates kept high, in July inflation dipped briefly into single digits for the first time in several years. However, additional cuts to subsidies will result in higher electricity prices from September, and the government is by no means certain of meeting its goal of bringing inflation down to 9% in 2020-21. The IMF, which may provide new support, has stressed that the government’s adoption of greater exchange rate flexibility remains essential for its efforts to increase growth and create jobs. The central bank plans to raise capital requirements for local banks tenfold after a rise of 25% in bank loans during the last two years. This should guard against the risk of banks overstretching their lending capacity, but it could also hinder the government's plans to stabilise and broaden the real estate sector by improving access to financing.
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Foreign exchange reserves were a steady 44 billion dollars in June. The government’s four-billion-dollar Eurobond in April was five times oversubscribed but needed to carry a higher yield than previous issues to reflect concerns about rising foreign debt. This stood at almost 100 billion dollars at the start of 2019 as the government funds major infrastructure projects. Further Eurobond issues of between four and seven billion dollars look likely during the current fiscal year.
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