Previous Quarterly Editions
Expropriation Risk: 46 46 46 45 Political Violence Risk: 56 54 52 51 Terrorism Risk: 68 66 67 64 Exchange Transfer and Trade Sanction Risk: 60 59 57 56 Sovereign Default Risk: 49 47 49 49
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Amendments to the constitution that were approved by a hastily arranged referendum in April will enable President El Sisi to remain in office until 2030 and give greater power to the military, while reducing the independence of judges and recreating an Upper House that will be heavily packed with the president’s supporters. Parliament backed the changes, with the state’s repressive powers significantly increased since El Sisi took office, ensuring that opponents of the changes were marginalised. While many Egyptians continue to prefer stability under El Sisi to the chaos of the 2011-2013 period, the president realises that he must use his powers to deliver a better life for Egyptians and has been making progress in achieving this. The economy is growing well, tourist numbers are up, unemployment is falling, inflation is under control and changes are being planned to improve social security and medical provision. However, cuts to subsidies that are due in June under the IMF Stabilisation Plan will increase inflation for a time. Spending on the military has increased as El Sisi looks after his base. Although Egypt recently ordered fighter aircraft from Russia, it still gets the bulk of its arms from the West. The president’s visit to Washington for a meeting with President Trump in April, after which the White House announced its intention to designate the Muslim Brotherhood as a terrorist organisation, sustained the country’s relationship with its most important external partner. Terrorist incidents remain low in Cairo and other urban areas, although the situation in Sinai and potentially the Western Desert is troubling. El Sisi will pursue a more assertive policy in the Middle East and Africa, using Egypt’s current chairing of the African Union. Egypt has been trying to bolster Assad’s regime in Syria and provide support to General Haftar in Libya even though Haftar’s recent attempt to take Tripoli did not achieve an early success. Elsewhere, Egypt is awaiting the expected announcement from Washington that is likely to see the US endorsing the One State solution in Palestine. While El Sisi may support this, there will be significant opposition among Egyptians even if they grudgingly accept the reality of Israel’s existence and the power of the Netanyahu government following its victory in the April general election. El Sisi can rely on backing from Saudi Arabia and the UAE for his support for such a deal, as well as any measures he takes to reduce domestic opposition. Both countries now seem content to subsidise Egypt without expecting Egypt to get any more deeply involved in the conflict in Yemen.
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Israel will soon start to export gas via Egypt, boosting Cairo’s ambition to become a regional gas hub. Egypt itself will once again become a net exporter of gas over the next few years as new offshore gas fields come into production. The government has confirmed its intention to issue IPOs to divest its holdings in 23 state-owned enterprises over the next two to three years. It is likely to do so given its goal of decreasing the public debt-to-GDP ratio to 80% by June 2022. The stability under the current government is helping to attract foreign direct investment (FDI) with recent figures showing FDI at 3.7 billion dollars, over a third higher than last year.
The campaign against the Muslim Brotherhood and its associates continues. The threat that the government claims it poses provides a convenient reason for passing legislation that can pre-empt or repress opposition from any groups. Cairo cooperates with Riyadh and Abu Dhabi in opposing the pro-Brotherhood policies of Qatar and Turkey. However, Egyptian dissidents will be heartened by the progress of non-violent popular uprisings in Sudan and Algeria earlier this year.
Following a sharp reduction in the number of incidents during 2018, the first quarter of 2019 saw only one terrorist attack. This is largely due to the success of counterterrorist operations in Sinai and the enhanced capacity of the security forces to pre-empt attacks through intelligence-led operations and more intensive security in Cairo. Despite heavy investment, the government is unlikely to eradicate the North Sinai militant threat soon. It needs to do more to tackle the causes of terrorism and rely less on heavy-handed repression. El Sisi has warned of a threat posed by Islamic State fighters fleeing Syria and Iraq and of the potential for terrorist groups in Libya to infiltrate Egypt through the Western desert, one reason for Cairo’s support of General Haftar.
The IMF has praised Egypt’s recent economic performance, noting that the macroeconomic outlook remains favourable thanks in part to strong policy implementation. GDP growth should be close to 5.8% in 2018-19 and the draft budget for 2019-20 aims at 6%, to be driven by higher tourist numbers, gas prices and tax receipts. The budget deficit is currently 7.2% of GDP, down from 8.4%, and inflation has fallen to 14%. However, it will increase temporarily when fuel prices rise by 10-15% in June as required under the IMF Stabilisation Programme, which is now in its final year. Further 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 central bank cut its key interest rate by 1% to 16.75% in February on a dip in inflation but a further cut is not expected soon.
TREND ► OUTLOOK ▲
Foreign reserves, which are currently around 45 billion dollars, should rise slightly during the current fiscal year. Egypt has experienced high demand from foreign portfolio investors for its treasury bills and a 4-billion-dollar Eurobond issue in April was five times oversubscribed. However, it needed to carry a higher yield than previous issues, reflecting a level of foreign debt that is likely to reach 107 billion dollars this year compared with 92 billion in 2017-18. A further Eurobond of 3 billion dollars is likely to be issued later this year.
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