Previous Quarterly Editions
Expropriation Risk: 48 46 46 46 Political Violence Risk: 60 56 54 52 Terrorism Risk: 68 68 66 67 Exchange Transfer and Trade Sanction Risk: 62 60 59 57 Sovereign Default Risk: 50 49 47 49
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The regime is behind a popular petition launched in December that calls for an amendment to the constitution so that President El-Sisi could stand for a third term in 2022. The president enjoys the backing of senior generals and has enough influence in parliament to pursue his agenda without the need to create a specific party to ensure support. Much of his strength lies in the apparent preference among Egyptians for the stability of his regime over the chaos of the 2011-2013 period, despite its repression of dissent from any direction. At the same time, El Sisi knows that, whilst Egyptians accept short-term pain is necessary for longer term economic growth, he must deliver tangible benefits over the next two years if he wants another term in office. In that context, the government he appointed in June 2018, with Mostafa Kemal Madbouly as prime minister, is performing well. The government is expected to enhance social security protection for the poorest Egyptians and has proposed long-needed reforms to local government that should offer some improvements to life outside Cairo. At 5.5%, GDP growth is likely to be slightly higher in 2018-19 than the previous year and should reach 6.5% in 2019-20. This is in line with a strategy to achieve a sustained 8% from 2021-22, the level needed to provide employment for the large numbers of Egyptians entering the labour market each year. Despite an attack on a tourist bus near the Pyramids at the end of the year, there was a sharp fall in terrorist incidents in 2018 and tourist numbers reached 5.1 million in the first six months, up 40% year-on-year. This recovery should continue in 2019. However, a further cut in subsidies will have to be implemented later this year to meet the IMF’s Extended Fund Facility target under the stabilisation plan agreed in 2016. Regionally, Egypt has given strong backing to Saudi Crown Prince Muhammad bin Salman in the wake of the Khashoggi murder and continues to cultivate sufficiently good relations with the UAE to retain its financial support without getting embroiled in the war in Yemen. Egypt’s relations with Sudan have improved again after both sides sought to avoid a confrontation over border issues and the use of Nile waters. Cairo now needs to improve relations with Ethiopia in order to persuade Addis Ababa to take greater account of Egyptian interests as it develops the major Renaissance Dam project. President El-Sisi recently revealed that the depth of Egyptian-Israeli military co-operation, mostly related to Sinai and Gaza, is much greater than has been previously admitted. Relations with Washington remain solid despite concerns in Cairo over the US decision to withdraw troops from Syria.
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Egypt no longer needs to import gas and recent discoveries should enable it to reduce the amount it still owes to international companies that sell gas for the domestic market. Over the next few years it will again become a net exporter of gas. More broadly, the military’s expanding role in the economy under El-Sisi raises competitive as well as reputational risks for foreign investors, as military-owned businesses are exempt from the VAT introduced in 2016 and enjoy subsidised loans. The government is still expected to restart its privatisation programme in 2019 despite failing to meet its pledge to offer stakes in five major state companies, including two banks, in 2018.
The relentless crackdown on the Muslim Brotherhood and its associates continues. The regime justifies its increasingly repressive legislation by talking up the threat of the Brotherhood but uses the laws to supress all forms of dissent and criticism. The direction of travel is towards authoritarianism and the regime clearly feels its measures are working given the president’s popularity and the absence of demonstrations. However, criticism of the regime is increasing on social media.
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Security forces killed 30 suspected terrorists in and around Cairo and a further ten in Sinai during the crackdown that followed the December terrorist attack on a tourist bus carrying Vietnamese tourists near the Giza pyramids. Egyptian security forces have normally been able to prevent such attacks through pre-emptive strikes based on good intelligence and, despite the Giza incident, the sharp fall in the number of attacks in 2018 suggests that the long military campaign in Sinai is having some effect. Even so, concerns remain that not enough is being done to address the issues that drive Sinai Bedouin towards radical groups. The UK still bans flights to Sharm al-Shaikh, reflecting concerns about the security of the airport, but EgyptAir has been allowed to restart cargo flights to the US. Although a High Council to Combat Sectarian Violence has been set up to deal with security incidents of a sectarian nature, Egypt’s Copts continue to be targeted by Islamist extremists; seven were killed in an attack in Minya in November.
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Inflation has fallen to 15%, half the level seen in late 2017, although the continuing removal of subsidies could see a slight rise again during 2019. Remittances are still buoyant but may be affected by the scale of the Saudisation programme in Saudi Arabia, which is likely to increase the exodus of Egyptian workers. Interest rates are already high, and if exchange rate pressures mount then the central bank could face a difficult choice between protecting its reserves or the government's popularity.
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Foreign exchange reserves fell from 44.5 billion dollars to 42.5 billion dollars in December, the first monthly decline since 2016. While reserves are still enough to cover eight months of imports, there is concern in Cairo that Egypt could be affected by capital flight resulting from broader investor worries about the prospects for emerging markets. The government had to abandon an auction of debt in December because foreign banks wanted higher interest rates. Egypt’s foreign debt was 92.6 billion dollars in mid-2018, a rise of 17% year-on-year that puts it slightly above the IMF’s target figure of 34.5% of GDP.
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