Previous Quarterly Editions
Expropriation Risk: 49 48 46 46 Political Violence Risk: 62 60 56 54 Terrorism Risk: 68 68 68 66 Exchange Transfer and Trade Sanction Risk: 64 62 60 59 Sovereign Default Risk: 52 50 49 47
TREND ▼ OUTLOOK ►
Moving quickly after his re-election in March, President El-Sisi made sweeping changes to his government in June that included bringing in a new prime minister, Mostafa Kemal Madbouly. The replacement of both the defence and security ministers suggests that, despite being unchallenged politically, the president may have a narrower power base in the military than early in his first term and is wary of leaving powerful generals in place for too long. The new government has set itself demanding economic targets for 2021-22 with GDP growth to reach 8% compared with 5.4% for 2017-18. It is moving ahead with new and stringent cuts to energy subsidies that are required under Egypt’s agreement with the IMF over a 12 billion dollar loan, with a 20% rise in electricity costs in July. The resultant price increases will hit middle and lower income Egyptians hard, and there were some limited protests at a sharp rise in urban transport fares in May.
Many Egyptians still appear to accept that short-term pain is necessary for economic growth, although protests have also been forestalled by earlier pay rises for civil servants and greater social security payments to the most vulnerable. Even so, El-Sisi has felt the need to warn that protests play into the hands of extremists. The most vocal complaints about rising prices have come from some MPs and from the commercial sector. The IMF will expect further but smaller cuts in subsidies to be made before June 2019 so that the regime will feel that the worst is over. El-Sisi chose, as he did in his first term, to make unpopular announcements early in the hope that he can deliver the better life he has promised Egyptians before he submits himself for election again. He cannot stand for a third term under the constitution but there are already calls from some of his supporters that the constitution should be amended. Inflation, which fell from a high of 33% in November 2016 to 11% in June, subsequently rose again on a monthly basis to 14% but should be falling again as the year ends.
A new press law now being drafted would provide greater protections for journalists, but with heavy punishment for those found guilty of spreading ‘fake news’. The number of terrorist attacks in mainland Egypt has dropped and the harsh military campaign against Islamic State affiliates in Sinai continues. Egypt has adroitly managed its relations with Saudi Arabia and the UAE, retaining the financial support they provide without getting embroiled in their war in Yemen. Cairo has also been able to join their year-long boycott of Qatar without jeopardising the flow of remittances from Egyptian workers. Egypt appears to welcome President Trump’s abrogation of the nuclear deal with Iran. Relations with Sudan have taken a turn for the worse and Egyptian attempts to persuade Ethiopia to take greater account of Egyptian interests in implementing its Renaissance Dam project are getting nowhere, suggesting greater problems in the medium term.
TREND ► OUTLOOK ▼
Recent gas discoveries may be larger than first assessed and Egypt expects to become a net exporter of gas over the next few years. It is already looking at ways to opt out of some proposed deals to import Israeli gas and has been able to reduce the amount it owes to foreign gas producers. The expanding role for the military 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 to resume its privatisation programme, which had been suspended by law suits following the Arab Spring: five major SOEs, including two banks, are to be privatised by the end of 2018.
The relentless crackdown on the Muslim Brotherhood and its associates continues. Courts are sentencing even more people to death or long periods in jail despite evidence that the majority of its supporters oppose violence. The regime justifies its increasingly repressive laws 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 great authoritarianism and the regime clearly feels its measures are working given the president’s re-election and the absence of demonstrations, although criticism of the regime is increasing on social media.
TREND ▼ OUTLOOK ▲
The major operation in February to deal with Islamic State and other terrorists in Sinai has been followed by the deployment of significant numbers of troops to the area. To judge by the big drop in the number of terrorist actions in both Egypt, where some terrorists responsible for attacks in early 2018 have been arrested, and Sinai the operation has been successful. However, there is concern that the army is alienating too many Sinai residents and that not enough is being done to address the economic and social causes that Islamic State has been able to exploit.
Remittances rose by almost 50% year-on-year in the first 10 months of fiscal 2017-18 and should reach 26 billion dollars for the fiscal year. However, this is not the result of greater productivity but of Egyptian workers in Saudi Arabia sending their families home following changes in Saudi employment law. Tourism is also buoyant and monthly Suez Canal revenues topped 500 million dollars in May. However, Cairo will be concerned about the impact on the Suez Canal of attacks by Huthi rebels on ships in the Bab al-Mandab strait at the other end of the Red Sea.
Egypt’s foreign exchange reserves reached an all-time high of 44.3 billion dollars in July. The target of 8% growth in 2021-22 is the minimal level needed to match the pace of new entrants joining the labour market. The government intends to address the serious shortcomings in the education system to make available the skills needed for sustained growth. Egyptian debt is about 100% of GDP although most of this is held domestically. The IMF is satisfied that Egypt is reducing the budget deficit, controlling inflation and restoring stability to its balance of payments.
Return to contents Next Chapter