After weeks of non-violent protests in Cairo’s Tahrir Square, demonstrations across Egypt have taken on a more aggressive dimension. Having been held up as something of a model for peaceful revolution compared with other Arab Spring uprisings, this turn of events signals that Egypt’s transition to democracy and stability may be more complicated than expected for both its people and the economy.
This latest unrest spells greater uncertainty for Egypt’s economic policy and its banking sector. The policies the new government is likely to follow are crucial to the country’s survival and growth post-revolution.
A policy of greater openness and transparency is needed in order for Egypt to attract foreign investment, something that it cannot survive without. However, with elections now being pushed back to October or November, uncertainty over its future is likely to continue.
“I guess we are all waiting for the parliament to be elected, to see the shape of that parliament and its views, to see what sort of things will be its priority. I think there are certain inherent conflicts, in terms of monetary policy for example, which would affect the future,” says Andrew Long, head of HSBC Egypt.
This insecurity signals the need for a permanent government with a set economic policy. When a government is elected, the investment terms and laws that are put into place will be crucial in terms of attracting FDI to Egypt. Opening up the economic system, as well as showing more open-mindedness and transparency, would allow the country to compete with other investment markets and be a focus for FDI – something it will rely heavily on to develop its economy.
Having initially been supported by their current military rulers in overthrowing leader Hosni Mubarak, the beginning of July saw protestors heading back out across the country to dispute their rule. One of their main grievances is the corrupt nature of the government under Mr Mubarak. They want a clean break with his regime and greater transparency in their new government, something they don’t see to have been achieved by the revolution.
According to Osama Saleh, the chairman of Egypt's General Authority for Investment (GAFI), social justice and tackling corruption is the key issue of the revolution. “People need to see changes right now, but nobody has a magic [wand]. People need to at least feel some hope that things are happening so the government also needs to take a few minutes to give the public what they want.”
The recent cabinet reshuffle was a step towards appeasing the protestors who feel that not enough has been done to purge the government of officials from the Mubarak era. While this may be a priority for demonstrators, it would prove difficult to ever fully 'cleanse' the government and some argue that at some point it might be more productive to forgive and move on to pursuing the real goals of the revolution – improving the lives of Egyptians, creating jobs and pushing for greater social justice.
In terms of the country’s economy, the revolution and political unrest earlier in the year had a huge impact, as first-quarter losses show.
Mr Long is realistic about the bearing the revolution has had on the corporate arena and the banks themselves. “There was quite a lot of disruption to logistics and supply chains, and all that has resulted in weaker business performance. As a result, there were some issues about deferral of loan repayments and rescheduling of the facilities in the corporate space that all the banks have been party to.”
GAFI is keen to stress that they want to continue with a free market economy and greater openness and transparency, in line with the economic reforms that took place under Mr Mubarak.
“We are aware and convinced of the private-sector role in growth in the coming period,” says Mr Saleh. Invigorating the private sector could be crucial for Egypt in terms of creating employment and boosting foreign investment.
Mr Long says: “From everything that we have heard, there is no intention of reversing the economic changes of the last five to seven years. We are hopeful that they will continue on that line of keeping the economy open and attracting FDI.”
Tourism and employment
A huge blow to Egypt’s economy in the first quarter has been the decline and related losses from the country’s previously booming tourism sector. “On the macro level, the lack of tourism is a big deal because it brings in huge amounts of foreign exchange every year. First quarter up to Easter is normally one of the high spots and it has almost completely disappeared”, says Mr Long.
Egypt is an extremely rich country in terms of culture and history. Creating favourable conditions for tourism to thrive is vital, not just for the economy but also for creating employment.
With Egypt’s huge youth population, mobilising this workforce is of major importance to the country’s economic and political stability, in terms of creating a better lifestyle for its young people and preventing the spread of extremism. According to GAFI’s website, Egypt has a 25-million-strong educated and skilled labour force. Strengthening the private sector could create a wealth of opportunities for this population.
Employment problems are also having an impact on how banks are functioning in the country, according to Mr Long. “On the retail space people have been a bit cautious with their money. They are not convinced that their jobs are secure so they are not necessarily borrowing and not necessarily buying financial products, or savings from wealth management.”
On a positive note, Mr Saleh is keen to stress that Egypt’s diverse economy means that it does not just rely on one sector. “We were least affected during the financial crisis because of this diversification and we continue to put more focus on development projects. Development of the Suez Canal would be a project that would take this country to another level. This is by far the largest shipping project in the whole world and we are not using it at all.”
Aside from this, Egypt is a country with natural energy resources and the potential to develop its renewable energy sector. Another area in particular that could boost its economy is to expand its agricultural business. In terms of exporting food, Egypt has the potential to be the major player in the region.
Favourable growing conditions and its closeness to key markets in the Middle East and Europe mean this sector could generate huge amounts of capital. According to GAFI’s website, the agribusiness sector accounted for E£54bn ($9bn) worth of production in the year 2008 to 2009.
What is evident is that Egypt must attract FDI in order to survive – without this, none of the development can take place. With endless investment opportunities around the world, it needs to be competitive or investors will simply look elsewhere.
With Morocco currently marketing itself as an investment hub for the region and Jordan offering attractive terms to foreign investors, they are in direct competition with Egypt. As the largest country in the Middle East, Egypt has a lot to offer and favourable investment laws would go a long way to attracting the investment it needs to survive and flourish.
Whether or not the revolution in Egypt has been a success in the short term is questionable, but it has the potential to be a success in the long term, should Egypt manage to bolster its economy.
There have been some encouraging developments in terms of investment in Egypt. Ahmed El Alfi, chairman of Sawari Ventures, an international venture capital firm, has announced the launch of a $100m venture capital fund to invest in early-stage technology companies in the Middle East and north Africa.
“The computer science and electronic engineering education is probably the only part of the educational system that is world class and that can compete on the world stage,” says Mr El Alfi. Sawari Ventures is optimistic about Egypt’s young generation and their capabilities if they are empowered.
Some steps have also been taken towards strengthening Egypt’s relationship with current and prospective investors. Prime minister Essam Sharaf recently met with the United Arab Emirates’s Minister of State for Foreign Affairs, Dr Anwar Gargash, to talk about strengthening bilateral co-operation between the two nations.
Sharaf also met with the prime minister of Bahrain, Prince Khalifa bin Salman Al Khalifa, to confirm Bahrain’s support for stability in Egypt and its co-operation in terms of joint investments and boosting the private sector.
These meetings show promise for FDI within the region, but the violent nature of recent protests could prove to be a roadblock for Egypt. Whether or not these investment opportunities materialise remains to be seen.