The period since the 2011 revolution has been a turbulent one for Egypt and its foreign investors and never more turbulent than over the last month, in the wake of the downing of the Russian passenger jet over the restive Sinai Peninsula.
Those who took to Tahrir Square in support of a democratic revolution in 2011 have been left disappointed. Four years on, the country has endured the ousting of a democratically elected president, the advent of a low level insurgency affiliated with Islamic State (IS), the collapse of its tourism industry with serious consequences for the economy, and the restoration to power of a military man in the Mubarak mould.
But what are the implications of these developments for the business environment? There is some cause for optimism. Egypt’s investment conference held in March of this year signalled the imminent conclusion of the transition period which guided the country towards the restoration of democracy, following the military’s removal of President Morsi in July 2013. The conference encouraged investors to buy-in to this new phase of stability in post revolution Egypt. It was well attended and despite a relatively slow initial investor response, a number of large corporations, including General Electric and Pepsico, have announced multimillion-dollar investments in recent months.
Indeed, in the two years since Morsi’s removal, a number of regional and domestic political developments have consolidated Sisi’s presidency and improved political stability. In regional terms, widespread instability, waning strategic alliances, and the rise of IS have aligned a once sceptical western international community with Sisi’s regime. The United States has re-commenced military aid to the Egyptian armed forces; President Sisi visited the UK, Germany, and Italy; and the International Monetary Fund (IMF) stands ready to explore the possibility of extending a loan to the Central Bank upon completion of the parliamentary elections.
Egypt also enjoys strong support from regional sponsors who have propped-up the ailing Egyptian economy over the transition period. Saudi Arabia and the United Arab Emirates (UAE), longstanding opponents of the Muslim Brotherhood, have bankrolled the military-backed regime since its removal of Brotherhood-linked President Morsi. While Saudi support appeared less assured in the period following the death of Saudi King Abdullah early this year, Saudi reliance on Egyptian military support for the prosecution of its campaign in Yemen appears to have cemented a bond of mutual convenience between Sisi and Saudi’s new king, Salman.
Domestically also, a drift in popular, liberal sentiment towards former Presidential candidate Shafik was righted in Sisi’s direction by an uptick in violence in the country. The affiliation of Sinai-based jihadi group, Ansar Beit al-Maqdis, with IS towards the end of 2014, extended the group’s capabilities beyond Sinai to the capital. This, combined with the radicalisation of some youth elements within the Muslim Brotherhood, rallied popular support behind the firm hand of Sisi’s military-backed leadership. The restoration of stability and with it economic prosperity, was the mandate on which Sisi was elected and the basis on which he is tolerated by pro-democracy elements within the electorate.
However, Egypt is not yet out of the woods. Political stability is tied to the fortunes of the country’s economy, which is subject to a number of short and longer-term risks. Western intelligence agencies have lent weight to the credibility of IS’s claim of responsibility for downing the Russian passenger jet over Sinai. In large part an act of revenge against Russia’s intervention in Syria, IS also seeks to undermine the Egyptian economy for the purpose of destabilising the regime. The current, low level insurgency has the potential to intensify, deterring tourism and foreign investment in the longer term with consequences for economic and political stability.
In the short term, the IMF’s imposition of structural adjustment conditions in return for a loan will likely force the government to cut subsidies. Unless carefully managed, the reduction of subsidies has the potential to create relatively widespread social unrest. There is also a risk that in the longer term, falling oil prices may limit the Gulf patrons’ willingness and ability to support the economy. In the absence of an influx of foreign investment and the recovery of the tourism industry—which comprised 12 percent of the country’s GDP before the fall of Mubarak—a reduction in Gulf financial assistance could push the economy towards collapse, carrying an associated risk of social and political unrest.
Egypt offers significant investment potential and provides a relative safe haven for FDI, compared to many of its regional neighbours. However, while parliamentary elections and the conclusion of the transition period do in many respects mark a new era of opportunity for foreign investment, there are a number of latent risks to Egypt’s medium- to long-term political and economic stability, of which investors should be aware.