The swearing-in ceremony of Egypt’s new president Abdul Fattah al-Sisi on 8 June was attended by dozens of political figures from across the Middle East, all eager to show their support for the man taking charge of the turbulent North African country.

Faced with a divided and frustrated population, a large fiscal deficit, rising unemployment and a heightened risk of terrorist attacks, Al-Sisi has his work cut out to deliver on his promises of stability and prosperity and to lure back foreign investors.  

“Yields on Egypt’s April 2020 eurobonds have been falling before and after Al-Sisi’s inauguration”

Among those in attendance at the ceremony were UAE Crown Prince Sheikh Mohammed bin Zayed al-Nahyan, Saudi Arabia’s Crown Prince Salman bin Abdulaziz al-Saud, and Kuwait’s Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah. Their participation reflects wider support from the three GCC states, which view Al-Sisi as a strongman with the military experience and leadership qualities needed to both generate economic growth and suppress the Muslim Brotherhood.

Key to stability

As the most populous Arab state, Egypt is considered pivotal to the stability of the region by Gulf rulers who do not want to see it fall under the influence of the Brotherhood and political Islam. “The glory, prosperity and security of Arabs relies heavily on Egypt’s glory, prosperity and security,” read a statement from the vice-president and prime minister of the UAE and ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum, following the ceremony.

Many also consider Al-Sisi’s accession as an investor-friendly move, and even a throwback to the era of former president Hosni Mubarak. During his 30-year leadership, the military-backed president successfully attracted high volumes of foreign direct investment (FDI). Following his removal in 2011, Egypt’s economy went into a tailspin, worsening under the one year that Brotherhood-supported president Mohamed Mursi was in office and further deteriorating following his ousting in July 2013.

Almost a year later, the country’s population is more divided than ever, with regular outbreaks of violence and frequent terrorist attacks. Amid this turmoil, the UAE, Saudi Arabia and Kuwait have remained supportive, providing multibillion-dollar financial aid packages to prop up the post-Mursi interim government.

With Al-Sisi now officially at the helm, investment flows from the Gulf are likely to grow, and not just in the form of aid and concession loans. Funding will increasingly be in the form of FDI from regional firms looking to capitalise on the hope of stability.

“His election should ensure a consistent flow of support from the GCC, specifically from the UAE, Saudi Arabia and Kuwait,” says Paul Gamble, director of the sovereign group at the US’ Fitch Ratings. “There will be some effort to shift the source of GCC financing from direct budgetary support and central bank deposits into FDI.”

Although Mubarak’s rule was characterised by cronyism and corruption, he was also reasonably successful in attracting FDI. In his final years in power, he took measures to make Egypt an easier place to do business, including speeding up processes around the registration of new firms and reducing customs tariffs. Mubarak’s Egypt was also considered a stable place to do business, and the country attracted grants and loans with relative ease from foreign governments and development banks.

Direct foreign investment inflows totalled $12.8bn in the 2008/09 fiscal year, dipping slightly to $11bn in 2009/10. The global economic crisis eventually took its toll and led in part to the unravelling of Mubarak’s regime. By 2010/11, FDI had fallen to $9.6bn.

Investment slows

Since the 2011 revolution, investment has struggled to return to pre-2009 levels. Traditional partners such as the US radically reduced their investment in Egypt. US investment fell to a low of $577.6m in 2011/12, from a total of $3.5bn in 2008/09.

The need for increased foreign investment is acute, given the economic problems facing the country. Unemployment stood at 13.4 per cent in the first quarter of this year, according to official records, although it is estimated to be much higher in reality.

The government’s fiscal deficit is growing, partly due to the costs of food and energy subsidies. Key industries such as tourism have continued to suffer amid the heightened risk of terrorism over the past year. Visitor numbers fell to 9.5 million in 2013, compared with 14.7 million in 2010 and the industry only generated $5.8bn in income last year. External debt has risen from $31.5bn in 2009 to $45.7bn at the end of the second quarter of 2014.

FDI will provide a lifeline for Egypt’s cash-strapped government, which is eager to spark economic growth and create jobs. At present, most investment is coming from the Gulf region. In the immediate aftermath of the ousting of Mursi, Kuwait, Saudi Arabia and the UAE pledged a total of $12bn in financial aid. This package was later expanded, with the UAE extending a further $4.9bn concession loan in February – part of this will be used to fund the construction of 25 wheat silos in Egypt.

Much of the aid came in the form of direct budgetary support, central bank deposits and concession loans. Regional support is now evolving, with Gulf-based companies following the lead of their governments and making investments in the North African country.

The landmark deal inked in the run-up to Al-Sisi’s election was the $40bn agreement in March between Egypt and UAE-based Arabtec Holding to build 1 million low-cost homes. Dubai bank Emirates NBD subsequently announced the opening of its Egypt office in April, having acquired the Egyptian arm of French lender BNP Paribas last year.

During a visit to Cairo in early June, UAE State Minister Sultan Ahmed al-Jaber, who leads the coordination office for UAE-funded projects in Egypt, said support for the North African country had reached a “new stage of work and optimism”. UAE-funded projects include the construction of 100 schools in 128 Egyptian villages and sewage networks, said a note published by UAE state media.

Other projects include bridges and railway intersections, as well as work to install solar panels for more than 6,000 houses, schools, mosques and health centres in order to generate electricity and reduce the country’s reliance on diesel. 

Efforts are also being made to revive Egypt’s tourism industry. The Tourism Ministry has launched a new advertising campaign to attract Arab tourists. There are also plans afoot to develop new tourism resorts along the Red Sea coast. So far, contracts have been awarded to five local firms, but Tourism Minister Hisham Zaazou says he also hopes to attract Arab investors for this project as well as for other plans to further develop Egypt’s Mediterranean coast.

A new investment fund set up to support the tourism industry aims to raise $1bn. It is being targeted at Arab investors, with roadshows expected to begin in July.

Meanwhile, capital market investor confidence is showing signs of improvement. Yields on Egypt’s April 2020 eurobonds have been falling before and after Al-Sisi’s investiture. There are reports the country is considering issuing its first international bond since 2010.

“It will be interesting to see what pricing they get and how that compares with pricing over recent months and years,” says Trevor Cullinan, director of sovereign ratings at the US’ Standard & Poor’s. “It could be good a indicator of the market [and investors] having increased confidence in Egypt.”

Divided nation

Al-Sisi’s image as a military strongman is clearly helping to improve investor confidence and secure regional funding. However, his position is less secure than his reputation would suggest. Although he was expected to win the May election, the turnout of 47 per cent illustrates there are still large sections of Egyptian society that do not support him. This could make some investors wary about the long-term political stability of Egypt.

Furthermore, Al-Sisi’s lack of popularity among certain segments of society is likely to make it harder to implement a much-needed reform programme to tackle the country’s burdensome subsidies bill. “Egypt is nowhere near out of the woods economically; Al-Sisi has a tough year ahead of him,” says Oliver Coleman, senior analyst, Middle East and North Africa at UK risk consultancy MapleCroft.

As one of the requirements for a ratings upgrade by most credit agencies, subsidy reform is essential to Egypt’s long-term appeal to investors. “A key economic issue is reducing the budget deficit, which is likely to require subsidy reform,” says Gamble.

But if Al-Sisi moves too quickly with reforms that push up the cost of fuel and food, he risks angering an already divided population and potentially laying the ground for another revolution. “He will have to play a clever political game,” says Coleman. 

Al-Sisi’s image may be tough, but his presidency and the future of Egypt’s economy remain fragile.