Is business as usual possible in Egypt?

Dr Elizabeth Stephens takes a look at the current condition of the Egyptian economy, and asks whether businesses will be able to operate with any kind of normality.

A series of challenges have been presented to investors since the deposing of Hosni Mubarak, with uncertainty and outbreaks of violence exerting downward pressure on investment flows. Despite the deteriorating economic environment and payment delays that plague the oil and gas sector in particular, many foreign companies have remained committed to their Egyptian operations, anticipating a return to stability.

Events in the past eight weeks - the ousting of President Mohammed Morsi and the military’s clearing of two protests camps in Cairo resulting in the death of hundreds of Egyptians – have fundamentally altered these calculations. The potential for disintegration has become clear.

The inflow of funds from the Gulf states is positive and more funding is likely to be announced in the coming months if there is a fall in violence. Egypt is receiving several billion dollars in financial aid and considerable assistance in kind. Saudi Arabia is paying directly for wheat contracts while the Qataris are supplying gas, creating a more positive picture than the USD 19 billion in foreign exchange reserves implies.

In the short term Egypt’s economy will muddle along but underlying economic problems will worsen over the course of the year due to disinvestment. Saudi Arabia is muting the figure of USD 12 billion in aid for the Egyptian fiscal year of July to June 2014 but even Riyadh with its deep pockets will be reluctant to bankroll another state indefinitely.

Over the medium term we may end up with predictable confrontation; cycles of protests that don’t escalate in the manner of recent weeks but with each protest having the potential to unleash another uprising. This makes it difficult for companies to recommit fully to their Egyptian operations because of the risk this creates in moving staff and their families back to Cairo.

While parallels have been drawn with Algeria in the 1990s, one of the many notable differences is that Algiers could be ignored by oil companies operating in the country in a way that Cairo cannot. Egypt’s economy is dependent on the service sector whereas Algeria was a hydrocarbons-dependent economy. Ultimately, Algeria was able to transcend its difficulties with higher state spending as oil prices rose. There is no such light on the horizon for Egypt.

Oil and gas companies recently renegotiated payment agreements with the government and payments were to be resumed in exchange for the reinstatement of investment programmes. In the current climate companies will be reluctant to ramp up investment and a new agreement will need to be reached with interim oil minister Sherif Ismail. Ismail knows the energy companies well and will be sympathetic to their predicament, although the outlook for either party is not positive at present.

In contrast to Libya and Iraq, foreign investors in Egypt’s oil and gas sectors can’t even argue that commitment in the short term will lead to worthwhile gains and financial upside in the future. There is no reserve replacement potential for the next five years at least and the risk of expropriation will rise as the domestic energy balance becomes more precarious.

Astute investors had their credit and political risk insurance in place ahead of the uprisings. While the insurance market has remained open throughout the course of Egypt’s political transition, with some rate and capacity fluctuations, the recent coup and violence has led the private market to close for new credit and investment risk. Existing cover continues and underwriters will honour their commitments but support for new market entrants is only available from multilateral insurers for very select investments. Some limited insurer appetite remains for political violence cover.

The Egyptian economy is highly dependent upon the service sector. Photograph: Getty Images.

JLT Head of Credit & Political Risk Advisory

Getty Images.
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Tom Watson rouses Labour's conference as he comes out fighting

The party's deputy leader exhilarated delegates with his paean to the Blair and Brown years. 

Tom Watson is down but not out. After Jeremy Corbyn's second landslide victory, and weeks of threats against his position, Labour's deputy leader could have played it safe. Instead, he came out fighting. 

With Corbyn seated directly behind him, he declared: "I don't know why we've been focusing on what was wrong with the Blair and Brown governments for the last six years. But trashing our record is not the way to enhance our brand. We won't win elections like that! And we need to win elections!" As Watson won a standing ovation from the hall and the platform, the Labour leader remained motionless. When a heckler interjected, Watson riposted: "Jeremy, I don't think she got the unity memo." Labour delegates, many of whom hail from the pre-Corbyn era, lapped it up.

Though he warned against another challenge to the leader ("we can't afford to keep doing this"), he offered a starkly different account of the party's past and its future. He reaffirmed Labour's commitment to Nato ("a socialist construct"), with Corbyn left isolated as the platform applauded. The only reference to the leader came when Watson recalled his recent PMQs victory over grammar schools. There were dissenting voices (Watson was heckled as he praised Sadiq Khan for winning an election: "Just like Jeremy Corbyn!"). But one would never have guessed that this was the party which had just re-elected Corbyn. 

There was much more to Watson's speech than this: a fine comic riff on "Saturday's result" (Ed Balls on Strictly), a spirited attack on Theresa May's "ducking and diving; humming and hahing" and a cerebral account of the automation revolution. But it was his paean to Labour history that roused the conference as no other speaker has. 

The party's deputy channelled the spirit of both Hugh Gaitskell ("fight, and fight, and fight again to save the party we love") and his mentor Gordon Brown (emulating his trademark rollcall of New Labour achivements). With his voice cracking, Watson recalled when "from the sunny uplands of increasing prosperity social democratic government started to feel normal to the people of Britain". For Labour, a party that has never been further from power in recent decades, that truly was another age. But for a brief moment, Watson's tubthumper allowed Corbyn's vanquished opponents to relive it. 

George Eaton is political editor of the New Statesman.