Egypt is one of the most important Middle Eastern countries, and its transition to an Islamist government headed by the Muslim Brotherhood’s Mohammed Morsi has been fraught with difficulties. And the stakes are high. The prospect of the protests to Morsi’s moves to get the Egyptian economy moving again descending into complete chaos threatens the peace treaty it has with Israel and could even derail the global recovery.
The recent performance of the Market Vectors Egypt ETF (EGPT) reflects all the turmoil. The still-small $36 million fund—the only exchange-traded fund targeting Egypt—has bled some 12 percent of its value in the past three months, and suffered outflows of assets as well. It was one of 2012’s top-performing ETFs, but is now just 5 percent higher in the past year.
But as messy as Egypt’s current situation seems to Western eyes, there’s a silver lining in the shaping of a new government that understands what needs to be done and who it can count on, according to Reva Bhalla, an analyst at Austin, Texas-based Stratfor, the geopolitical consultancy founded by George Friedman. Bhalla, an expert on Middle Eastern, South Asian and Latin American affairs, told IndexUniverse’s Cinthia Murphy that things aren’t as bad as they seem. Still, that doesn’t mean they won’t get worse before they get better.
IU.com: There's a lot going on in Egypt these days, and it seems the government could collapse there. Why is it that Egypt is so difficult to govern right now? What's the main challenge?
Bhalla: There was a lot of expectation, particularly from the financial world, watching Egypt in this severe economic distress. Egypt, of course, is going to have to cut public spending, cut its public sector, liberalize its market, hike taxes and take an IMF loan and basically absorb the pain of austerity.
But when we look at the situation, we look at the political constraints first and foremost. So, to understand why Egypt is so seemingly ungovernable right now, we have to take a look at what is going on in the Muslim Brotherhood’s mind first. There's a lot of rhetoric about what the Brotherhood actually represents, but it’s actually quite pragmatic in a lot of its views and it knows that coming into power is going to be a difficult process.
There's a big difference between being opposition and actually taking responsibility once you're in power. It was easy for them to go out and protest and try to de-legitimize the government when Mubarak was still in power. This is a whole different ballgame now.
IU.com:How does the military fit into this?
Bhalla :Obviously, the military is the center of gravity in Egypt. We always look to the military first. Why? Because the military has been the pillar of stability in the Egyptian state. And if the military can maintain its cohesion, then we are not looking at state collapse from this uprising.
And indeed, the military exploited the protestors during the revolution and they’ve been able to exploit demonstrations since then to keep the Brotherhood in check. Right now the military and the Brotherhood are trying to basically work out some sort of relationship, a working relationship, to where both sides realize that neither one is capable of making unilateral moves. They both need each other.
While the Brotherhood came to power because it had a lot of popularity in the streets, it can't actually control the streets. It needs the military for that. And we've seen that proven time and time again.
When we look at the protest movement, we see right now a lot of the fringe factions that are driving the unrest. They’ve been sidelined from power. They don’t have as large a following as the Brotherhood. And therefore, they're the most vocal right now in trying to de-legitimize the government and try to force a government collapse. In this vast protest spectrum, you see the Brotherhood and the military trying to find a way to isolate those groups and basically get the economy moving again.
IU.com:Of all these people who are involved, all these different groups playing different parts, is there a group that is truly committed to implementing democracy in Egypt?
Bhalla: Well, “democracy” is a funny term applied to this region. Not every protest you see is necessarily an uprising, not every uprising is going to lead to a liberal democracy—not every democracy is a liberal democracy. Egypt is a perfect case of that. Egypt is a very difficult state to govern.
And if you look at it geopolitically, you have a very large population that's concentrated along the Nile River Valley. You have huge, desolate areas around that, and you have polarization within the society, not only on religious lines, but on ideological lines, although sectarianwise, it doesn't face the same severity that, say, Iraq or Syria does. But it is a difficult state to rule. So that’s why you've seen time and time again that it just gives rise to more authoritarian styles of power.
Bhalla (cont'd.): Anybody who’s going to be governing Egypt is going to use the tools at their disposal. For Mubarak, it was a heavy reliance on the military, and he used the tools of the security and state intelligence apparatus to keep a check on his opponents and maintain tight control over the state. Everybody was shocked and awed when Morsi implemented a state of emergency in three provinces. Even though it was a 30-day state of emergency, everyone said, “Oh, well, he’s another Mubarak.”
But really, that's not surprising to us. This is the state that he’s been dealt. You see the extreme polarizations within the society and the economic distress, and more to come of that. Those are the tools that he’s going to use. So, the emergency law crackdowns on some of these fringe groups, arrests and his reliance on the military—which he cannot avoid—those are all things that we can expect to see more of because Egypt’s problems are only going to intensify with time.
IU.com: You're saying that troubles will get worse before they get better? Do you think Morsi’s government will be able to navigate through this and get some sort of government stabilized there?
Bhalla: In short, yes. To understand why things are getting worse, we need to understand clearly what kind of economic condition Egypt is in. So here's a country that imports 60 percent of its food, 40 percent of its fuel. It’s heavily exposed to debt where right now, its fiscal debt is around 13 percent of GDP. It has to borrow extensively from local banks. And so you just see its debt ballooning at this point, and its currency reserves are depleting and they are trying to defend the currency.
How do you maintain a stable value of the Egyptian pound and this ever-growing payment deficit? And how do you secure the resources to finance that deficit? These are not easy problems to resolve, because when Egypt had no choice but to look to external borrowing to manage this economic crisis that comes with conditions. When we look at the IMF loans and the negotiations, it’s not easy for the Brotherhood in this precarious position to meet the demands attached to that loan.
So, when you already have such a riot-prone society, how are you going to raise taxes and cut public spending and hit the core of the base of your support in the streets? That's just adding more fuel to the fire.
IU.com:How do neighboring economies play into this economic challenge?
Bhalla :What we've seen is time-buying tactics, and that's where the foreign competition over Egypt has become very interesting. So while we see a country like Qatar in the Gulf which is trying to use its natural gas resources to boost its foreign policy credentials in the region, they are coming in doubling their loans to Egypt and giving them an extra $500 million grant because they are trying to bolster the Muslim Brotherhood and basically use that influence with the Brotherhood to entrench itself much deeper in the region.
Bhalla (cont'd.): That strategy runs counter to a strategy of, say, Saudi Arabia. So while Egypt is also asking Saudi Arabia for money, the Brotherhood also notes that Saudi Arabia is deeply fearful of the rise of the Muslim Brotherhood because the Saudi state—the monarchy—does not want to see an Islamist political uprising come to the Kingdom. And so while Qatar is giving money to bolster the Muslim Brotherhood, the Saudis are meanwhile funding the Salafis—rivals to the Brotherhood—to counter them.
So we have a very complex mosaic when we look at this from a regional perspective, and even as the Brotherhood government tries to do the cabinet reshuffle and try to show that, well, OK, this minister is going to be more technocratic, maybe that will allay market concerns and try to get more countries to relieve its debt. There was just a visit to Germany, but it doesn't look like there's any clear answer on whether Germany’s going to be relieving Egypt’s debt there.
This is not an easy situation to be in. If the austerity measures and the spending cuts are inevitable, you can see why Morsi has been delaying the inevitable, because it’s going to come and bite him politically. And right now, we can see in the streets what that looks like.
IU.com: But like you said, it’s inevitable, right? So it’s going to have to be done one way or another.
Bhalla: Yes, exactly. And that’s why it’s so critical to watch the Brotherhood-military relationship. And we have to watch these IMF negotiations carefully. If the IMF can create the veneer of austerity and enforcement with Egypt in negotiating this loan, that’s going to be really important for IMF credibility overall.
Whether it’s the military, whether it’s the Brotherhood or any of these secular liberals who are protesting, all of them would be carrying the same problems, and none of them can absorb the political costs of imposing austerity on the level that's required to manage the economic crisis.
IU.com: From a global perspective, what are some of the ramifications of economic collapse or a government collapse in Egypt?
Bhalla: To be clear, I'm not saying that government collapse is inevitable here. And that's why the military-Brotherhood collaboration is very important to watch. If the military can maintain its cohesion and can intervene, that's the kind of thing that gives a little bit of hope that they're going to be able to maintain some kind of order overall, even though it’ll look very messy from our eyes.
But if we were looking at a scenario where the military could not control the streets, Egypt, geographically speaking, is relatively well insulated. It doesn’t have the same effect that, say, Syria does when it collapses. That's something that spreads very easily and very rapidly, like wildfire.
The biggest concern with Egypt is the future of its peace treaty with Israel because that's crucial to the Arab/Israeli balance of power in the Middle East. And there's a lot of interest on both sides, on the Egyptian side and the Israeli side in spite of all the rhetoric, to maintain that peace treaty at all costs. Neither side really gets anything out of a military engagement.
IU.com: What's Egypt’s No. 1 industry?
Bhalla: Tourism. The tourism industry is about 11 percent of the economy, and it’s one that is severely hurt right now. If you go to Cairo right now, it’s a very depressing scene. You see the Nile cruises that have nobody on them, the foreign hotels, like the Intercontinental, in the middle of Tahrir Square, being ransacked by mobs. The tourism industry is not going to recover any time soon.
When it comes to the services industry, you're also just seeing depression across the board there. Industrial manufacturing, a huge public sector, and within that, it’s all bloated bureaucracy, and very low productivity.
It’s important, when you're looking at industry in Egypt, to look at the military’s role in that as well. Egypt’s military is very entrenched in the economy and the public sector, and you can see a number of generals on the boards of many of these major firms. And that's also a key containment strategy that the Brotherhood has to maintain its balance with the military in trying to control the government.
Another difficult thing for the Brotherhood government to manage is the wealth concentration in the hands of a very small percentage of the population. When you talk to the Egyptian elite, you get this very high sense of unease from them. They fear policies that would lead to some sort of redistribution of wealth, and they almost expect it. I don't think we're on the verge of that yet, but longer term for Egypt, I think we have to take a very close look at how that wealth is concentrated and whether an Islamist government, a civilian government, is going to be able to challenge the military’s interests in the economy.
IU.com: From a GDP perspective, what are Egypt growth prospects?
Bhalla: Well, I know Morsi came out recently projecting quite high GDP growth, somewhere between 5 and 6 percent, but that was pretty much disregarded by most. Right now, it’s pretty flat growth. I think the latest estimates were still around 2 percent or so, which is not bad, but it’s completely stagnant growth.
IU.com: The takeaway here is that there's still a lot more to unfold before we have a good sense of what’s the next chapter for Egypt; is that fair?
Bhalla: That's fair. We’re not near some sort of stabilized model. But I think it’s important to watch the military’s relationship with the Brotherhood, given its interests. As long as you have enough control in the streets and the military willing to work with the Brotherhood, this should be still manageable. Again, it’s going to look very violent, it’s going to look very messy, but we have to look at how the military is very apt to go and secure the streets because it’s very important to the Egyptian economy.
Secondly, you have Egyptian military generals that are directly invested into those projects. And at the same time, Qatar, who’s giving these loans to Egypt, is also very interested in getting a big contract from the Brotherhood government to develop the Suez Canal further. You can see multiple economic interests in play to prop up this government and prevent that sort of collapse that I think many are speculating about.
IU.com: That's an interesting point. Everybody wants to see a happy ending, basically.
Bhalla: Right. It's not a happy ending, but it’s also not as dire as many are making it out to be.
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