The Egyptian government has high hopes for an international investment conference planned for mid-March 2015 in the Egyptian coastal city of Sharm el-Sheikh. A great many heads of state and government are expected to take part, together with representatives of large corporations and investment banks.
For Egypt, the three-day meeting is a chance to project an image of political stability after four years of unprecedented turmoil, and, the government hopes, to attract foreign investors to help initiate a medium- to long-term process of economic recovery.
Large capital inflows would improve Egypt’s balance of payments and help rebuild the country’s foreign reserves. Foreign direct investment (FDI) would also help to stimulate growth and employment. Moreover, with both foreign and domestic public debt approaching 90 percent of Egypt’s gross domestic product (GDP)—a level generally considered unsafe by economists—foreign investment would provide a welcome alternative to an expansion in external borrowing.
Fresh capital inflows would have a political impact, too. The military-backed political regime that was installed after the July 2013 intervention against the presidency of Mohamed Morsi said it was acting to restore political stability and security, and to revive economic growth. That intervention resulted in Field Marshal Abdel Fattah el-Sisi becoming president, and today, the legitimacy of his regime is being tested by its ability to launch an economic recovery.
The March conference provides Egypt’s leaders with an opportunity to highlight the economic and political progress they have already made. That progress, however, is incomplete, and much uncertainty remains over the political system’s ability to guarantee stability. At the same time, potential international investors—particularly the Gulf states, which provided early backing to the new Egyptian regime—are wrestling with outside factors that will help determine their level of support for Egypt in the coming years.
The Egyptian economy has been suffering from a combination of economic crises since the January 2011 revolution that ousted Hosni Mubarak: a huge budget deficit that was estimated to hover around 12 percent of GDP in fiscal year 2013–2014, according to the Ministry of Finance; a balance of payments deficit due to large capital outflows and the slowdown in tourism; and a severe decline in foreign reserves, which were more than halved from $35 billion in January 2011 to around $15 billion in January 2015. These were not new problems, but rather structural and chronic problems that became pressing and urgent due to the political turmoil and extremely poor management of the transitional period that followed the revolution.
Sisi’s government has stressed that the only way out of the crisis is through private investment. Upon assuming the presidency in June 2014, Sisi quickly sought to demonstrate both his commitment to policies that encourage such investment, and his ability to enforce them. His government put forward a bundle of investment-friendly macroeconomic reforms in the areas of fiscal, monetary, and exchange rate policies, as well as legal reforms aimed at redefining relations between the state and the private sector.
In July 2014, only two weeks after he took office, Sisi decided to cut fuel subsidies—which had constituted an average of 20 percent of Egypt’s public expenditures from 2008 to 20121—by 40–50 billion Egyptian pounds ($5.2–$6.6 billion). The cut came ahead of the significant drop in global fuel prices that began in late 2014, which has resulted in prices that are less than half of what they were at the beginning of Egypt’s fiscal year. This should help the government to further reduce its subsidy bill, as well as the budget deficit, without introducing additional austerity measures, which usually lack popular appeal.
In parallel with the subsidy restructuring, the Central Bank of Egypt has taken a series of measures in preparation for the March conference. On January 15, 2015, the central bank decreased interest rates, a traditional means to stimulate investment. Then, in late January and early February, the bank devalued the Egyptian pound by nearly 7 percent against the U.S. dollar, addressing a long-standing demand of international financial institutions (IFIs). The devaluation is expected to have a positive impact on foreign investors by mitigating the risk of currency conversion that could result from Egypt’s declining foreign reserves. The devaluation is also intended to curb the black market and thus unify the effective exchange rate, and it is expected to have a positive impact on Egypt’s trade balance.
The Egyptian government has also moved to limit policy and legal uncertainty in order to attract private investment. In that context, Adly Mansour, who served as interim president before Sisi took power, issued a law that immunized public contracts from administrative court oversight, significantly curbing the mandate of the Supreme Administrative Court.2
Until then, the administrative court had played a critical role in annulling a number of public contracts with the private sector, especially in the areas of land allocation and the privatization of state-owned enterprises. These court verdicts were a source of embarrassment to the executive branch, and they proved to be a source of uncertainty and risk for investors.
Several other moves further concentrated power in the executive at the expense of the legislature and the judiciary. Under Mansour, the law regulating public tender was amended, making it possible for high-ranking officials to make purchases and award contracts without competitive bidding. This is particularly important given the government’s intention to attract private, and especially foreign, investment into sectors like infrastructure and utilities through public-private partnerships.3
Many observers feared that the military’s political dominance after 2013 would translate into a state-led development model that would crowd out the private sector. However, such fears quickly dissipated, as a division of labor between the military’s economic empire and the private sector became evident, with the military primarily focused on infrastructure and other sectors left to private investors.
Indeed, the military’s expanded role provided at least partial guarantees for some foreign investors. An obvious example is the United Arab Emirates (UAE), which has been both a close political ally of Egypt’s new political regime and an economic partner of the military in a number of ambitious efforts, including a 1 million-unit housing project announced in late 2014. The military’s role was taken as a guarantee against the incompetence of Egypt’s civilian bureaucracy and as a means to gain access to public resources such as land.
In addition, a number of large national projects such as the New Suez Canal are being propagated as signs of economic vibrancy that may provide opportunities for foreign investment.4 This is especially the case with the second phase of the canal project, which includes plans to convert the canal into an economic zone with a concentration of industrial, service, and commercial activities. The government is seeking large-scale participation from foreign investors in the latter phase of the project.
The Return of International Financial Institutions
The return of international financial institutions such as the International Monetary Fund (IMF) and the World Bank to the Egyptian economic scene since Sisi took power is a further indication that the government recognizes the need to get IFIs on board in order to attract serious foreign investment.
The IMF and the World Bank had largely been absent from Egypt since July 2013, when the military took power. Back then, both institutions shied away from dealing with a government that was largely deemed unconstitutional. Moreover, the Egyptian government received massive financial aid from the Gulf and did not need to negotiate a bailout with the IMF, which would have required the imposition of austerity measures in return.
But in the run-up to the March conference, the IMF and the World Bank seem to be increasingly involved in the development of Egypt’s monetary, trade, and fiscal policies. Communication between the government and the two institutions has intensified. In addition, Egypt’s policy and legal changes, and the consistent improvement in the country’s credit rating, which in early 2015 was close to prerevolutionary levels, have earned positive reviews. In December 2014, the Fitch rating agency upgraded Egypt’s credit rating for the first time in four years, to “B,” after successive downgrades. A February 2015 IMF report praised Egypt’s economic reforms and said the country was moving in the right direction.
This shift is likely to reinforce the Egyptian government’s intension to adhere to IMF and World Bank recommendations in areas such as cutting the budget deficit, fighting inflation, and supporting the private sector, and its commitment to future fiscal restructuring and liberalization.
Egypt’s Political System and Its Discontents
One of the principal challenges facing Egypt’s leaders at the March conference is the need to demonstrate that the political path taken after July 2013 is leading to the formation of a viable and functional political system. This burgeoning system wants to show potential investors that it is capable of producing cohesive policies that can support economic development in the future. But its stability, as well as its ability to create such an environment, are not yet assured.
The military has succeeded in rallying political and social support for its road map for the country’s democratic transition. A new constitution was passed in 2014, and presidential elections were held in May of that year. The transition to a new political system is to be completed with the election of a parliament, which had been scheduled for March and April of 2015. It was no coincidence that the investment conference was postponed several times until a clear date was set for the parliamentary elections, in order to demonstrate that the transitional period had successfully concluded.
However, the parliamentary vote was suspended following a March 1 ruling from Egypt’s Supreme Constitutional Court that part of the election law concerning the drawing of voting districts was unconstitutional. Sisi is intent on containing the disruptive impact of the ruling, and he has ordered the government to amend the law in no more than a month.
An escalation in protests only weeks ahead of the conference may signal early weaknesses in the new political system. The 2015 anniversary of the January 25, 2011, revolution witnessed violent clashes between police and both Islamist and non-Islamist forces that find themselves subject to intense repression and increasing restrictions on the right to associate, demonstrate, and strike.
The forces allied with the Muslim Brotherhood have been completely banished from the political sphere for allegedly committing acts of violence and terrorism. In their fight against what they deem a coup d’état against Morsi, they have been seeking to deepen the economic and security crises facing the new regime. Continuous protests, occasional bombings, and attacks on policemen and police posts all hurt the government’s credibility in the eyes of local as well as foreign investors. The increased protests may indicate the inability of the political system to contain all political and societal actors, and its limited capacity to mediate social conflict through a degree of pluralism and multiparty competition.
Such an environment may also exacerbate the grave problem of terrorism that Egypt is already facing in the Sinai in a way that precludes attempts at economic recovery and stabilization in the long term. The establishment of a cohesive and integrated political order is a crucial precondition for the capital inflows Egypt hopes to attract.
Traditional Limits on Foreign Investment
Egypt’s Ministry of Investment has said the government hopes to attract $10–15 billion in foreign investment in the two years following the March conference. That projection—far above Egypt’s usual rate of FDI—may be based on unjustified optimism given the global and local contexts and the structural constraints the Egyptian economy has long faced in attracting foreign direct investment.
Egypt has not traditionally been a major recipient of foreign investment, with FDI historically representing a minute share of the country’s overall GDP compared to other developing economies such as Brazil, Mexico, and China. Between 1990 and 2004, foreign direct investment averaged 0.9 percent of GDP. That ratio rose steeply between 2004 and 2009, reaching nearly 5.9 percent before it declined again because of the global financial crisis and local political turmoil.5
Egypt is highly unlikely to secure large amounts of foreign investment in the current context. Globally, financial markets have not yet recovered from the 2008 financial crisis, while locally, the stability that was present during the earlier surge in investment has not returned.
In addition, foreign direct investment in Egypt has traditionally had a sectoral concentration in oil and natural gas extraction. Given the plunge in global energy prices that began in late 2014, it is doubtful that this sector would witness any significant expansion in investment. In the meantime, there is no reason to anticipate a dramatic expansion of FDI in non-oil sectors such as tourism, services, manufacturing, and agriculture.
Gulf Support and Geopolitics
The willingness and ability of the Gulf states, especially Saudi Arabia and the United Arab Emirates, to support Egypt is perhaps the most crucial factor as the country seeks to launch an economic recovery.
A friendly government in Egypt has traditionally been considered by Gulf rulers as crucial for their regional security, and Saudi Arabia and the UAE have invested heavily, both diplomatically and financially, in stabilizing the country’s military-backed regime.
Unprecedented Gulf budget support to Egypt between 2013 and 2014 amounted to a massive $20 billion. The Gulf capital inflows took the form of aid to support Egypt’s foreign reserves and the government’s widening budget deficit. In a February 2015 speech, Sisi acknowledged that, had it not been for the Gulf’s generous support, Egypt would not have made it through the transitional period that followed the deposition of Morsi.
However, immediately following Sisi’s assumption of power, the UAE and Saudi Arabia almost completely stopped their budget support. Their efforts were redirected toward backing Egypt’s new leadership in its fiscal restructuring and economic reform efforts, with the aim of making the economy more attractive for foreign investment.
This suggests that the Gulf countries do not consider themselves to be a substitute for IFIs, but rather an ally and partner to Egypt as it attempts to reintegrate into the global economy. It was in this context that the late Saudi king called for an international conference to support Egypt. The call targeted a broad circle of states, corporations, and investment banks in an attempt to create a wide consortium of sponsors and investors who would support Egypt’s economic recovery and subsequent political stabilization.
For its part, Egypt is hoping that, if Gulf countries again show their support, other international investors will do the same. But the high hopes that Egyptian leaders have for the March conference and the investments to follow can only be achieved based on political, rather than economic, considerations. Such political, and primarily geopolitical, factors cannot be underestimated when it comes to capital transfer in the aftermath of dramatic political transformations.
For example, aid and foreign investment played a major role in easing the transition to market democracies in Central and Eastern Europe in the 1990s following the fall of the Berlin Wall. Capital flows from Western Europe were not only driven by economic motives such as the search for investment opportunities and a trained workforce, but also by the political goals of expanding the European Union and the North Atlantic Treaty Organization. That experience suggests that in grand transformations, economics and politics usually overlap. This may indeed be the case in the Middle East after the Arab revolutions, as the Gulf countries followed the same political-economic dynamic and supported certain political paths.
The big question, however, is whether the Gulf countries, namely Saudi Arabia and the UAE, can indeed meet Egypt’s expectations amid the dramatic decline in oil prices. Gulf countries have, since the 1970s, adapted to oil price cycles by amassing huge foreign reserves in the boom years in order to sustain public spending during the bust. The recent decline in oil prices will definitely put pressure on the reserves accumulated by these countries since 2008.
While the massive support provided in 2013 and 2014 is unlikely to be repeated, two factors will be help determine the level of Gulf investment in the medium term. The first is the volume of dollar reserves accumulated by the Gulf countries allied to Egypt. The second is the future of oil prices and whether the decline lasts for a long time, as it did in the 1990s.
Saudi Arabia holds the third largest dollar reserves in the world, amounting to almost $740 billion on December 31, 2013. Official UAE reserves were estimated at $58 billion at the end of 2013, while Kuwait’s were $34 billion. In addition to the dollar reserves kept at central banks, the Abu Dhabi sovereign fund had assets of up to $773 billion in September 2014, while the Kuwait Investment Authority, another sovereign fund, was reported to own $548 billion at that time.
Do such huge reserves mean that the Gulf states will inject badly needed capital into Egypt over the next few years even if oil prices continue to decline? This will likely depend on the way the Gulf countries manage their surpluses and on the domestic conditions within each of them. It can be argued, however, that the UAE—with its limited population and relative economic diversification—is better positioned than others, such as Saudi Arabia, to use its resources to help Egypt.
Conclusion: Politics Prevails Over Economics
The March conference will provide a clear illustration of the overlap between politics and economics. And, at the meeting, and in years that follow, questions of economic recovery and the regeneration of growth will be determined by political considerations and international support for the newly established regime in Egypt.
Based purely on economic considerations, the state of the global economy together with local political turmoil would seem to rule out any exceptional increases in investment inflows into the Egyptian economy. This is especially the case given that Egypt has not historically been a large recipient of foreign direct investment.
But geopolitical interests seem likely to prevail in the end over economic ones. The decisive factor will be whether Egypt’s Gulf allies and partners are willing to commit themselves to supporting the political path taken in the aftermath of the military intervention in July 2013. Given the Islamic State’s rise across Syria and Iraq, concerns about the Iranian nuclear program, and the political turmoil in Yemen, ensuring a friendly Egypt that is committed to Gulf security indeed seems necessary.
Egyptian officials expect that support, in the form of large investment inflows that would facilitate economic recovery, generate employment, and help to rebuild Egypt’s foreign reserves. The critical question is whether the Gulf states will be able to meet these obligations given the recent plunge in oil prices.
1 Calculation by the author based on General Budget Final Accounts, 2008–2012, Egyptian Ministry of Finance, http://www.mof.gov.eg/English/Pages/FinalAccountsData.aspx.
2 Personal interview with Ahmed Hossam Aldin, administrative lawyer, Cairo, January 11, 2015.
3 Telephone interview with Mohamed Gad, economic journalist at Aswat Masriya, February 6, 2015.
5 Calculation by the author based on Foreign Direct Investment, Net Inflows, 1990–2013, World Development Indicators, World Bank, http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD.