Gulf states come to Cairo’s rescue

EGYPT’S political crisis has dealt a blow to any hopes for a quick economic recovery, but aid from its Gulf allies is likely to prevent a financial collapse.
When the army-backed government took over after the ousting of Islamist President Muhammad Mursi last month, it hoped to repair the business environment and attract money back to Egypt by improving security, removing logistical bottlenecks and pumping in new funds. That in turn could reduce social tensions by starting to create jobs and raise living standards.
The latest violence may have doomed such hopes for some months at least. If the conflict continues to worsen, the economy could slow further from the anemic 2.2 percent growth in the first quarter of this year — a rate already much too low to cut unemployment, officially estimated at around 13 percent.
“If you see widespread terrorism and bombs, you won’t get a recovery in tourism or domestic investment, and capital flight may continue,” said Simon Kitchen, a strategist with investment bank EFG Hermes.
But after Mursi was deposed, Saudi Arabia, Kuwait and the United Arab Emirates promised Egypt a total of $12 billion in loans, grants and fuel shipments. Of that, $5 billion has already arrived — an unusually fast delivery of aid commitments, showing the importance the Gulf attaches to stabilizing Egypt.
That means a balance of payments crisis or a collapse of government finances — which had seemed possible during Mursi’s administration — do not appear to be on the cards.
Late on Monday, Foreign Minister Prince Saud Al-Faisal signaled that the Kingdom was ready to provide more billions if necessary.
“To those who have declared they are stopping aid to Egypt or are waving such a threat, the Arab and Muslim nations are wealthy with their people and resources and will not shy away from offering a helping hand to Egypt,” he said.
Much depends on whether the struggle between the army and the Islamists develops into a protracted armed conflict. Even if it does not, the latest violence is likely to have harmed the economy for some months.
Tourism may not recover before next year at the earliest.
In response to the latest violence, European travel agents are again suspending trips to Egypt, while the United States has warned citizens against traveling to the nation.
After closing facilities in Egypt for several days, major foreign investors such as General Motors, German chemicals firm BASF and Swedish home appliance maker Electrolux have fully or partially reopened for business this week.
They are likely to stay open, barring another big outbreak of violence. But even a low level of political unrest or tension in coming months could hurt the Egyptian economy at the margins, by making foreign buyers of its exports more cautious.
Efforts to put Egypt’s catastrophically weak state finances on a sustainable footing may be another casualty. The army-backed government has inherited a budget deficit that since January has been running at around $3.2 billion a month, equivalent to almost half of state spending.
The Cabinet expects to be in power only until early next year, when it is to be replaced after planned elections, so it lacks a popular mandate to take big steps to cut the budget deficit. Locked in a struggle with the Brotherhood, it is even less likely to push politically sensitive economic reforms.
“If the violence continues, the government will be even less politically armed to go out and control the budget deficit by reducing subsidies,” said John Sfakianakis, investment strategist at Saudi investment firm MASIC.
Being unable to fix the finances may not matter so much, however, if Egypt can draw on the resources of the Gulf states, most of which view crushing the Muslim Brotherhood as a geopolitical priority, since they see the group as a long-term threat to their monarchies.
Egypt’s foreign reserves totaled $14.9 billion at the end of June, before any of the Gulf aid announced in July arrived. Excluding inflows of aid, they had been falling by around $1-2 billion every month, so the aid may cover Egypt’s external deficits into early 2014.
By itself, the Gulf aid announced so far only covers a few months of Egypt’s state budget deficit, but confidence created by the aid should help the government finance the rest of the deficit with borrowing. Yields at government Treasury bill auctions fell after Mursi was deposed; they spiked up during last week’s violence, but are still a couple of percentage points or more below their peaks under Mursi.
Most importantly, as Prince Saud indicated, Egypt can count on additional billions from the Gulf if its political turmoil causes fresh capital outflows or delays the transition back to civilian rule.
This should more than offset any potential loss to Egypt if the European Union or the United States cut back their economic and military assistance to Cairo in protest at the killings.
The EU and international financial bodies last year promised Egypt 5 billion euros ($6.7 billion) of grants and loans over several years, but little of that money has actually arrived and much has been blocked because Cairo failed to meet conditions for democratic reform. Washington has provided $1.3 billion of military aid and just $250 million of economic aid annually.
The resilience of Egypt’s stock market shows how the Gulf aid has kept hopes for the economy alive. The market is down about 4 percent since last week’s violence, but it is still up 21 percent from its low in June.