Loaded labels and Egypt’s economy
 
 

It’s another year down the drain for Egypt’s economy. Three years since the January 2011 revolution and little has been done to salvage what’s left of the crumbling economy, weighed down by the burdens of political turmoil and mismanagement.

Now, a growing fear of terrorism has been added to the many economic ailments.

I had started to think about what 2013 meant for Egypt’s economic conditions (bad things), and maybe attempt an outlook for the coming year (gloomy at best). Then the government threw a curve ball and dubbed the Muslim Brotherhood a terrorist organization.

What’s in a label? And what ripple effects does it have?

There’s no use arguing here over the political virtues or hollowness of such a decision. That’s an analysis better left to political pundits, and I’m not one.

But a label as heavily laden with consequences as this one cannot be divorced from the broader context. It is sure to have implications beyond its political nature, ones that are economic, social, and even cultural.

What added risks are associated with a state that has declared it is battling a terrorist group made up of hundreds of thousands of members who live amongst regular citizens? As an outsider, as a tourist or an investor, how does this figure into your risk calculations?

It may be too early to tell. Or maybe it’s too much of a loaded question for now.

On the eve of 2014, I put the question to several of my most trusted and reliable analysts and industry insiders. I wanted to gauge the potential economic implications of the government’s decision to call the Brotherhood a terrorist group, as well as the subsequent actions taken against its members, supporters and assets.

In what may be the most prompt and honest responses, one of my sources wrote me back, saying, “Will have to pass on this loaded question, and instead just wish you a happy 2014.”

Another replied, “Sorry, but I have no clue at all.”

Both work in Cairo-based private equity firms, where assessing risk and forecasting the future plays a big role in determining strategic investment decisions.

It’s not common for people in the business world to throw their hands up in the air and admit that they simply do not have an answer. But considering the issue at hand, it came as no surprise and the honesty was greatly appreciated.

However, the lack of clarity on where the country is heading is in itself a reflection of the biggest economic problem we are currently facing: a foggy forecast with low visibility.

Just as we’re wrapping up one bleak year, it looks like the economy needs to brace itself for yet another, despite attempts to build confidence by stating otherwise. When it comes to the economy, confidence and perception will take you a long way, but they must be backed up by viable opportunities, as well as a level of certainty and predictability. After all, risk must be assessed and managed.

Karim Helal, economist and chairman of Abu Dhabi Islamic Bank (ADIB) Capital, simply replied that the new label will have “very little [impact], if any” on the economy. 

Angus Blair, founder of Signet Institute, a Cairo-based think tank, said, “The indirect effect is the action taken against the group and its response to those actions as to whether it dampens the investment sentiment or not. So that is difficult to quantify. It is a very difficult question to answer.”

I clarified that I was asking more what it means for a state to suddenly be battling “terrorism,” as opposed to changing a political course. Will the “terrorist” label will make investors and tourists even more wary than before?

“The issue is not the state taking legal action against one group and its effects,” he replied, “but what the overall ‘noise’ there is and whether there are terrorist acts.”

“Investors are fully aware of security, as well as human rights issues, but it is a rise in terrorist acts which would act as the greatest deterrent to new investment,” he added.

If we keep using terrorist acts as a loose term, is it not to be expected that the group’s members and supporters will continue to reject this newly minted label? At the very least, do we not expect ongoing protests and demonstrations to be confronted with more heavy-handed security measures and, in turn, outbreaks of violence? Instability on the streets? Further rounds of aggression?

Will the label stop the bombing of security institutions, for which the Sinai-based jihadi group Ansar Beit al-Maqdes has claimed responsibility? Will it quell the looming threat of violence against citizens?

And what if the terrorist designation does not offset the economic consequences of all the above? How, then, do we deal with deeper economic stagnation?

Wael Ziada, head of research at regional investment bank EFG-Hermes, said the effect would be negative. But before offering further explanation, he clarified that he has vehemently criticized the Muslim Brotherhood for “failing miserably on the political and economic fronts,” and for “making us go through what we’re going through at the moment.” He understands the need for the government to “calm things down,” and understands that there are concerns that things are not calming down.

On the other hand, he says, the Brotherhood and their supporters are a significant group, with “possibly 1 million members, at least. What is the measure we have used to determine that they are all terrorists?”

“They have economic interests,” he said, “even if small, through schools and businesses, and [the state] is trying to dry up their economic resources. This has a direct social impact.”

However, he added, “In the grand scheme of things, you cannot say that the economic impact will be significant. It will be at the level of service positions for obviously tactical social and political agenda that serves the Brotherhood.” The state, in turn, might not yet have the means on an institutional level to compensate for the lack of these services.

“The most serious indirect impact is that, effectively, you do not wish to go down any form of a reconciliation route. This will continue to result in an extremely volatile political situation, which will put a lot of weight on serious economic reform,” said Ziada.

The government has gone to great lengths to assure observers that the economy is, against all odds, nearing the right track. On New Year’s Eve, ministers spoke at a televised press conference to update Egyptians on the state of affairs.

Deputy Prime Minister Ziad Bahaa Eddin said that the first six months of 2013 (the second half of deposed President Mohamed Morsi’s year in power) saw stagnation, a shortage of basic commodities, Egypt’s isolation from the global economy and other negative things.

The second half, he went on, saw improved stock market performance, a flush of financial support in the form of Gulf aid amounting to US$12 billion and two stimulus package totaling around LE50 billion. The latter funds were spent on infrastructure projects that target poorer segments of society and restocking Egypt’s basic commodities, namely wheat and fuel.

I might be wrong, and it might be too early to tell, but if it’s merely positive indicators we’re after, then all we’ve done is rewind back to 2010 when positive growth, foreign direct investment (FDI) and stock market performance did little to alleviate the struggles of the poor. Delayed structural reforms and tough decisions on unpopular subsidy and tax policies are unlikely to be tacked anytime soon.

Looking at the numbers, the economy grew at a meager rate of 2.2 percent in the fiscal year ending in June. The government is aiming for a 3.5 percent growth rate for the current fiscal year; the Central Bank of Egypt (CBE) has begun cutting interest rates in a bid to boost growth and cut borrowing costs.

Still, even achieving this rate will not do much to create enough jobs to bring down the rising rate of unemployment, which has risen above 13 percent.

Meanwhile, the Investment Ministry is targeting US$4-5 billion in FDI for the fiscal year ending this coming June, which would be an improvement from last fiscal year’s US$3 billion.

A much-needed source of hard currency and job creation, FDI is down drastically from a high of US$12 billion before the January 2011 uprising. It has not recovered due to the continuing political instability and lack of clarity when it comes to governance.

The Egyptian pound sold at LE6.9 to the dollar in the CBE’s latest foreign currency auction, while in the black market it was as high as LE7.5, according to Reuters. One economist said the authorities appeared to be adjusting policy to allow the pound to weaken as Egypt prepares to pay US$1.5 billion it owes to foreign oil companies in January, from a total debt of $6 billion, Reuters reported.

Tourism took another nosedive in 2013 and only began slightly improving after several countries lifted travel bans imposed in August. Still, tourist numbers and revenues are not nearly where they should be, and any recovery hinges upon the return of security.

The stock market is one bright spot. Egypt’s main EGX 30 index jumped 24 percent in 2013, reversing a downward trend that lasted until June. The EGX 30 broke a resistance level of 6,000 points in late October 20 and has since been nearing the 7,000 mark.

Trading volumes remained low until September, when they began to rise. This movement was mostly driven by local retail investors, who saw an increase in liquidity due to the Central Bank’s expansionary monetary policy. But foreign investors are sitting on the sidelines, their interest fading due to the persistent repatriation problem caused by capital controls.

The results of a survey of leading fund managers in the region conducted in late December by Reuters showed growing optimism about an economic recovery, despite the ongoing political uncertainty. Of the six major Middle Eastern stock markets covered by the survey, funds are in general most bullish about Egypt, Reuters said the survey results indicated.

“As the Egyptian government’s decision to list the Muslim Brotherhood as a terrorist organization last week showed, the country is still struggling through a difficult transition back to civilian rule,” Reuters reported. “But most fund managers are assuming a drastic deterioration of public security will be avoided and are focusing instead on signs that billions of dollars worth of aid from Gulf states are starting to revive the Egyptian economy.”

Alongside that, local and foreign investors, as well as analysts and economists, will surely be looking for signs of political stability in order to spur the economic recovery. They will be observing the process of conducting a referendum on the new draft of the constitution in mid-January, and will then follow events closely as Egypt holds parliamentary and presidential elections (we still do not know which will come first).

Security, again, is key to ensure a smooth voting process.

Alaa Ezz, secretary general of the Federation of Egyptian Chambers, says the “terrorist” label is a “double-edged sword with an economic impact that goes both ways.”

“The positive is very clear. It closes a chapter and will assist in speeding up the highly needed stability for investments and tourism to come back and the economy to rebound,” he said.

On the other hand, he added, the downside is “the terrorism reaction we were witnessing . . . that might have some very short-term impact on tourism more than investments.”

As a reply to both that and the earlier wishes for a happy 2014, all I can say is, here’s hoping. 

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Amira Salah-Ahmed