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

Photo: Getty
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PMQs review: Jeremy Corbyn prompts Tory outrage as he blames Grenfell Tower fire on austerity

To Conservative cries of "shame on you!", the Labour leader warned that "we all pay a price in public safety" for spending cuts.

A fortnight after the Grenfell Tower fire erupted, the tragedy continues to cast a shadow over British politics. Rather than probing Theresa May on the DUP deal, Jeremy Corbyn asked a series of forensic questions on the incident, in which at least 79 people are confirmed to have died.

In the first PMQs of the new parliament, May revealed that the number of buildings that had failed fire safety tests had risen to 120 (a 100 per cent failure rate) and that the cladding used on Grenfell Tower was "non-compliant" with building regulations (Corbyn had asked whether it was "legal").

After several factual questions, the Labour leader rose to his political argument. To cries of "shame on you!" from Tory MPs, he warned that local authority cuts of 40 per cent meant "we all pay a price in public safety". Corbyn added: “What the tragedy of Grenfell Tower has exposed is the disastrous effects of austerity. The disregard for working-class communities, the terrible consequences of deregulation and cutting corners." Corbyn noted that 11,000 firefighters had been cut and that the public sector pay cap (which Labour has tabled a Queen's Speech amendment against) was hindering recruitment. "This disaster must be a wake-up call," he concluded.

But May, who fared better than many expected, had a ready retort. "The cladding of tower blocks did not start under this government, it did not start under the previous coalition governments, the cladding of tower blocks began under the Blair government," she said. “In 2005 it was a Labour government that introduced the regulatory reform fire safety order which changed the requirements to inspect a building on fire safety from the local fire authority to a 'responsible person'." In this regard, however, Corbyn's lack of frontbench experience is a virtue – no action by the last Labour government can be pinned on him. 

Whether or not the Conservatives accept the link between Grenfell and austerity, their reluctance to defend continued cuts shows an awareness of how politically vulnerable they have become (No10 has announced that the public sector pay cap is under review).

Though Tory MP Philip Davies accused May of having an "aversion" to policies "that might be popular with the public" (he demanded the abolition of the 0.7 per cent foreign aid target), there was little dissent from the backbenches – reflecting the new consensus that the Prime Minister is safe (in the absence of an attractive alternative).

And May, whose jokes sometimes fall painfully flat, was able to accuse Corbyn of saying "one thing to the many and another thing to the few" in reference to his alleged Trident comments to Glastonbury festival founder Michael Eavis. But the Labour leader, no longer looking fearfully over his shoulder, displayed his increased authority today. Though the Conservatives may jeer him, the lingering fear in Tory minds is that they and the country are on divergent paths. 

George Eaton is political editor of the New Statesman.

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