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

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In your 30s? You missed out on £26,000 and you're not even protesting

The 1980s kids seem resigned to their fate - for now. 

Imagine you’re in your thirties, and you’re renting in a shared house, on roughly the same pay you earned five years ago. Now imagine you have a friend, also in their thirties. This friend owns their own home, gets pay rises every year and has a more generous pension to beat. In fact, they are twice as rich as you. 

When you try to talk about how worried you are about your financial situation, the friend shrugs and says: “I was in that situation too.”

Un-friend, right? But this is, in fact, reality. A study from the Institute for Fiscal Studies found that Brits in their early thirties have a median wealth of £27,000. But ten years ago, a thirty something had £53,000. In other words, that unbearable friend is just someone exactly the same as you, who is now in their forties. 

Not only do Brits born in the early 1980s have half the wealth they would have had if they were born in the 1970s, but they are the first generation to be in this position since World War II.  According to the IFS study, each cohort has got progressively richer. But then, just as the 1980s kids were reaching adulthood, a couple of things happened at once.

House prices raced ahead of wages. Employers made pensions less generous. And, at the crucial point that the 1980s kids were finding their feet in the jobs market, the recession struck. The 1980s kids didn’t manage to buy homes in time to take advantage of low mortgage rates. Instead, they are stuck paying increasing amounts of rent. 

If the wealth distribution between someone in their 30s and someone in their 40s is stark, this is only the starting point in intergenerational inequality. The IFS expects pensioners’ incomes to race ahead of workers in the coming decade. 

So why, given this unprecedented reversal in fortunes, are Brits in their early thirties not marching in the streets? Why are they not burning tyres outside the Treasury while shouting: “Give us out £26k back?” 

The obvious fact that no one is going to be protesting their granny’s good fortune aside, it seems one reason for the 1980s kids’ resignation is they are still in denial. One thirty something wrote to The Staggers that the idea of being able to buy a house had become too abstract to worry about. Instead:

“You just try and get through this month and then worry about next month, which is probably self-defeating, but I think it's quite tough to get in the mindset that you're going to put something by so maybe in 10 years you can buy a shoebox a two-hour train ride from where you actually want to be.”

Another reflected that “people keep saying ‘something will turn up’”.

The Staggers turned to our resident thirty something, Yo Zushi, for his thoughts. He agreed with the IFS analysis that the recession mattered:

"We were spoiled by an artificially inflated balloon of cheap credit and growing up was something you did… later. Then the crash came in 2007-2008, and it became something we couldn’t afford to do. 

I would have got round to becoming comfortably off, I tell myself, had I been given another ten years of amoral capitalist boom to do so. Many of those who were born in the early 1970s drifted along, took a nap and woke up in possession of a house, all mod cons and a decent-paying job. But we slightly younger Gen X-ers followed in their slipstream and somehow fell off the edge. Oh well. "

Will the inertia of the1980s kids last? Perhaps – but Zushi sees in the support for Jeremy Corbyn, a swell of feeling at last. “Our lack of access to the life we were promised in our teens has woken many of us up to why things suck. That’s a good thing. 

“And now we have Corbyn to help sort it all out. That’s not meant sarcastically – I really think he’ll do it.”