Egypt reverts to diplomatic fundraising

17 February 2016

Oil prices and regional instability means Egypt cannot soley rely on financial aid from the Gulf

One year ago President Abdel Fatah al-Sisi stood on stage and welcomed the international investment community as well as high level dignitaries from GCC countries that quickly pledged billions of dollars of financial support. Today, Al-Sisi find himself negotiating with GCC member states that are in very different positions to where they were in March 2015, when Egypt hosted the Egypt Economic Development Conference.

One year ago oil prices had not plummeted to lows of $27 per barrel, Russian intervention in Syria wasn’t boosting the Al-Assad regime’s offensive and the Iranians had not yet secured a deal regarding sanctions with the P5+1 countries.

During the conference in March, Saudi Arabia stood out as the biggest foreign investor in Egypt and, representing King Salman bin Abdulaziz al-Saud in Sharm el-Sheikh, the then Crown Prince Muqrin bin Abdulaziz al-Saud announced that Riyadh would provide $4bn of funding to support Cairo.

Since Al-Sisi took power, Riyadh has been spending heavily to support Egypt. In 2014, according to the Washington-based IMF’s Article IV consultation report on Egypt, the kingdom provided $7.8bn of financial support to the North African country, including $2bn deposited with the Central Bank of Egypt, $2bn of grant funding and $3.8bn of energy products to Cairo.

The Saudi support was supplemented by the UAE and Kuwait who also promised large amounts of cash deposits into Egypt’s central bank.

The support received by the GCC states was seen as geo-political strategy aimed at ensuring the stability of the Arab world’s most populous nation, it was also seen as a way for the Gulf to help consolidate Al-Sisi’s position, which has continued to be at the forefront of the GCC’s support to Egypt.

Regional politics

The region’s political compass has shifted over the past 12 months as the war in Syria continues as and Iran rejoined the international community after years of sanctions and being considered a pariah state.

Saudi Arabia’s concern is that Iran now has significant influence in a number of major Arab cities such as, Damascus, Baghdad, Beirut and Sanna. More worryingly for Saudi Arabia the Iranians are now looking at a brighter economic future as a post-sanctions Iran continues to prove extremely attractive to the international investment community.

The threat of Iran has meant Riyadh is scrabbling to consolidate a unified Sunni bloc, which was illustrated through the announcement of an Islamic army to fight extremism. Despite this, many countries including Pakistan and Indonesia were only made aware of their involvement through media reports, raising questions over the seriousness of the plan. More importantly for Egypt, reports and research has suggested that this campaign has also resulted in the Saudi Arabia re-engaging with Egypt’s banned Muslim Brotherhood as it fears alienating one of the Sunni worlds most organised groups in the region.

“Moreover Cairo is not seeking conformation with Iran and would rather aim to keep its ‘neutral’ stance in regional affairs to prosper more trade partnerships and good diplomatic relations with Tehran. It is to be mentioned that Cairo is also not adamant about creating a pan-Sunni force that would involve any Turkish involvement as hostility between the two nations remains high,” says Ahmed Ghoneim, senior analyst at the London-based risk management firm Other Solutions Consulting.

“The fact that Riyadh pulled out of the anti-Brotherhood block should above all be interpreted as an attempt to forge a broad alliance of Sunni states and transnational actors against Shiite Iran, in a less and less favourable regional and international environment,” writes academic Mattias Sailer in a research comment for the German Institute for International and Security Affairs published in January this year.

“For Egypt, and Al-Sisi’s government in particular, rapprochement with the Muslim Brotherhood is not an option as the current government continues to justify its authority with the clamping down on the terrorism, and the brotherhood in particular,” says Ghoneim. “Both Egyptian and Saudi diplomats reassured the public that relations remained strong and that media coverage of diverging interests between the two Arab powers was mere speculation. However signs of frustration and tension amidst the Yemen crisis, where Egypt has not been an ‘insider’ in terms of Gulf Cooperation Council talks.”

Al-Sisi also continues to support the idea of Bashar al-Assad playing a role in a post-war Syria. A position that is exasperated by Cairo’s renewed military ties with Moscow. Egypt’s position on Syria and its ties with Russia have undoubtedly caused problems for Saudi Arabia as Russia continues to bolster the Tehran-backed Syrian regime’s position in the war. “Moreover, Egypt, Jordan and the UAE view Russia’s role in Syria in a different light than Saudi Arabia,” explains Ghoneim.

Egypt and Saudi Arabia have not had a public diplomatic dispute regarding regional affairs, but as the Kingdom’s economy struggles, Cairo could find that financial aid does not flow as conveniently as it did in 2015. Further to this, Egypt has steered away from offering little more than rhetorical support for the Kingdom’s offensive in Yemen.

“The Gulf’s economic uncertainty and political positioning means that Egypt cannot completely rely on the Gulf, with international financial institutions, Europe and Russia able to fill the void that may be left if Saudi Arabia does not continue with its cash support,” says a source close to Egypt’s central bank that has chosen to remain anonymous.

Foreign aid

Egypt has continued its attempt to boost its depleting foreign reserve capacity, currently sitting at $16.4bn, in order to provide itself with the flexibility needed to press ahead with much needed fiscal reforms. Cairo is desperate to encourage local and international investors to press ahead with some of the country’s much needed schemes.

With the country’s main streams of hard cash such as the Suez Canal and tourism revenues drying up, Egypt is now being forced to revert back to foreign aid in order to improve its foreign reserves.

Falling oil prices and increased defence spending has also meant some Gulf countries may not be as generous as before.

Towards the end of 2015, Egypt continued to secure support from Saudi Arabia, although this support came in the form of investments and oil products, rather than grants and central bank deposits as seen in early 2015.

US ratings agency Moody’s Investors Service has warned that changes in the external financial support Egypt is receiving will increase future repayment obligations at a time where the country’s main focus is to improve the supply of dollars in order to assist import industries and entice foreign investors.

As such, relationships with international financial intuitions such as the World Bank and the IMF have restarted despite the attachment of fiscal and governance conditions, which Egypt has proven reluctant to apply.

In February MEED reported that a $3bn World Bank loan could be delayed as Cairo fails to take the necessary steps to apply a value added tax (VAT) by the specified deadline. Despite this, a week after the report, Egypt’s prime minister said that parliament was ready to push through the VAT draft law.

The UAE on the other hand, which boats a more apolitical relationship with Cairo, is understood to be unhappy the pace of fiscal reform in Egypt. “The UAE has been happy to support Al-Sisi’s government in return for offering a favourable investment environment for UAE companies to benefit from,” says the central bank source.

UAE-based companies such as Majid al-Futteim have invested heavily in Egypt over the past few years, but with little changes to the economic conditions, Abu Dhabi may start to become more stringent with the flow of financial aid it provides to Egypt until it is satisfied with the government’s efforts.

China and others

Amid the complications of Gulf relations and governance conditions attached to support from international institutions, China has emerged as a short-term solution, at least, for the Egyptians.

Unlike politically driven support from the GCC, China’s interest in Egypt is part of a vital economic strategy from Beijing as it looks to alleviate pressures from a slowing economy.

China’s economy grew by 6.9 per cent in 2015, compared with 7.3 per cent last year, marking its slowest growth in 25 years. Hungry for foreign growth, the Chinese will be keen to tap into markets with a similar demographic to Egypt as it aims to diversify its risks and boost its manufacturing.

In what seems like a win-win situation for both parties, Chinese investment is a welcomed addition to a growing portfolio of GCC funds, international financial institution support and foreign direct investment Egypt needs to start implementing the ambitious plans laid out last year.

Egypt’s foreign policy position is unlikely to change in order to suit the anti-Tehran driven agenda of Riyadh. Al-Sisi’s relationship with Russia will mean a stronger position regarding the war in Syria is not expected, and although relations between the GCC and Egypt are unlikely to breakdown, the drying up of cash injections and grants will see Egypt revert back to Mubarak-like methods of securing funds from different factions within the international community.

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