Previous Quarterly Editions
Expropriation Risk: 46 45 44 43 Political Violence Risk: 55 51 48 50 Terrorism Risk: 67 64 65 63 Exchange Transfer and Trade Sanction Risk: 57 56 54 52 Sovereign Default Risk: 49 49 49 48
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While President El Sisi was in the United States for a cordial meeting with President Trump in September, demonstrations broke out in several Egyptian cities criticising his government and accusing the military of corruption. These were the first serious public protests against the president since he came to office, and the first demonstrations against the growing role of the military in the economy. Though the protests were quickly shut down by a massive response from the security forces which included over 4,000 arrests, they show that grievances about economic inequality remain strong. Egypt has made good economic progress in recent years but the effects have not trickled down, leaving five million Egyptians now living below the poverty line. Even the compliant parliament has recently seen MPs condemning the government’s performance. In an unacknowledged response to the protests, the government has tried to ease the impact of recent subsidy cuts that are part of the conditions of its loan from the IMF. In a more typical Sisi response, a cabinet reshuffle in late December left the main positions unchanged but gave the prime minister direct responsibility for carrying out administrative reforms. Economic progress seems sustainable and, despite the September protests, Sisi continues to calculate that he can rely on the support of the majority to give him more time to deliver broad economic benefits. As such, he does not view the 2020 parliamentary elections as a threat. His target of 6% growth for the fiscal year that ends in June 2020 should be achievable thanks to higher revenues from the Suez Canal, rising tourist numbers, and increased gas and oil exports. These will offset the impact of lower remittances as Saudi Arabia and other GCC reduce their numbers of foreign workers. New construction projects, lower interest rates, and business-friendly reforms are leading to higher levels of FDI and greater appetite for Egyptian bonds, while long-needed reforms of the education system have finally been announced as part of the campaign to produce a better skilled work force. In regional developments, Sisi will continue to enjoy financial backing from Saudi Arabia and the UAE without being required to make any politically difficult concessions in return. Tensions with Ethiopia have flared again over the Great Renaissance dam project, which Cairo fears will reduce its access to Nile water while the lake behind the dam is being filled, but a compromise still seems possible around a slower filling process than currently planned. Ties with Russia seem to be strengthening around shared support for General Haftar in Libya. Noting this, Washington has warned Cairo against making a two-billion-dollar purchase of Russian fighter aircraft in 2020. The president is reported to be moving his son Mahmoud from the intelligence agency to be defence attaché in Moscow early in 2020. While ostensibly underlining improving bilateral relations, the move has been prompted by comparisons during the September protests between Sisi and former President Mubarak, who was accused of grooming his son to replace him before he was ousted. Sisi currently has three sons in government positions.
Egypt’s gas sector should deliver significant revenues over the next three years as new offshore gas fields come on stream and Israeli gas begins to flow through Egypt to foreign buyers early in 2020. Cairo expects that major investment from leading companies will ensure that it can meet growing domestic demand even whilst gas exports accelerate, although energy sales face increasing competition in the main European market.
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Attempts to link the Muslim Brotherhood with the anti-government protests in September were symptomatic of the regime’s continued campaign against it. The Brotherhood is still presenting a huge threat to stability despite the arrest of so many of its leaders and the dismantling of its organisational infrastructure. Laws passed to counter the alleged threat it poses are now routinely used to suppress all forms of dissent. Partly because of Doha’s support for the Brotherhood, Cairo has been an enthusiastic member of the quartet led by Saudi Arabia and the UAE that is still boycotting Qatar. With indications that the Gulf states may be looking for a solution to this damaging dispute, Cairo will hope to extract some economic benefit from supporting their change of direction. By contrast, complaints from the EU and UN over alleged human rights abuses will continue to be ignored.
Security forces have eliminated the cell from Hasm, a small militant group, that killed 20 people in Cairo when a car bomb apparently exploded prematurely in August, and there have been no further attacks in Egyptian cities since then. Although the security services devote considerable resources to preventing such groups from creating the infrastructure to launch a sustained campaign, occasional acts of terrorism are still likely. Militants aligned with Islamic State will continue to attack the military in north Sinai, an area in which they have tapped into deep resentment among the Bedouin at perceived neglect by Cairo.
Inflation ended 2019 at less than 5%. This is a significant achievement given that the annual rate was 33% as recently as 2017 and began the year at 14%, but even more so given the rise of electricity prices that followed a reduction in subsidies. Falling inflation opened the opportunity to reduce interest rates and the central bank made two cuts totalling 250 basis points in the second half of the year. Rising tourist revenues in 2018 and 2019 have boosted foreign exchange reserves and this has helped to strengthen the Egyptian pound. The sector will receive another boost in 2020 now that direct flights are resuming from the UK to Sharm El Sheikh after security concerns at its airport.
Egypt has already issued Eurobonds worth two billion dollars in three tranches to cover part of the budget for the current fiscal year to June 2020, and further issues look likely. As a result, foreign debt, which began 2019 above 100 billion dollars, rose steadily during 2019. However, Egypt’s foreign reserves reached a record high of 45 billion dollars at the end of 2019 and further growth is expected during 2020 as energy exports increase and imports decline.
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