Egypt Approaches America for Aid and Investment Package

Ahram Online: Egypt’s Unemployment Rate Hits Record High in Second Quarter

CIA Factbook: Egypt

Forex: Historical Data

The Guardian: Egypt Closes in on $1bn US Debt Deal

New York Times: To Back Democracy, U.S. Prepares to Cut $1 Billion From Egypt’s Debt

Almost sixteen months after pledging to help Egypt’s faltering economy, the United States (U.S.) is nearing an agreement to forgive $1 billion dollars Egypt owes to the U.S., and to pledge $435 million for investment in Egypt. The Egyptian economy has been in decline since the ouster of long time President Hosni Mubarak in February 2012, and the new President, Mohamed Mursi is working to improve Egypt’s economic outlook by reducing government debt and increasing investment.

If the U.S. forgives $1 billion of the $3 billion Egypt currently owes the U.S., it will support the Egyptian economy in two ways. First, it will reduce the amount of cash that Egypt has to use to pay down government debt, and will allow Egypt to spend more money to stimulate its economy. Second, the Egyptian government is less likely to have to raise taxes on its population to pay down government debt, which leaves more money for taxpayers to spend in the economy. As of 2011, Egypt’s gross domestic product (GDP) per capita  (indicator of standard of living) was 136^th in the world, leaving each person with $6,600 to spend per year. The more money that citizens have, the more they are able to spend and stimulate the economy.

The United States has also offered $375 million in financing to American companies that invest in Egypt, and a $60 million investment fund for Egyptians to invest in new businesses. In an effort to entice American companies to utilize the $375 million fund, the U.S. Chamber of Commerce is bringing executives from almost fifty large American companies to Egypt . The United States and Egypt intend the $375 million foreign and $60 million domestic investment funds to help reduce Egypt’s 12.6% unemployment rate, create sources of income for Egyptian citizens, and increase the amount of taxes the government can collect because of the increase in business. Egypt needs an increase in investment to stabilize its economy.

Although the Egyptian stock market showed gains during the week of September 4^th, the country still has a long way to go to reach financial stability. The Egyptian stock index (EGX 30) hit a 15-month high on September 4^th, showing that the market may be responding to Mursi’s effort, but the EGX 30 still sits 30 percent below its high in 2010.The Egyptian government is mired in debt and lacking investment. With support from foreign governments and internal economic growth, Egypt has a good opportunity to grow a stable economy. America looks to be invested in the recovery process; American Deputy Secretary of State Thomas Nides said that the aid is “not just about assistance,” it is about “growth and business.”

Oil-Importing Countries in the Middle East and North Africa Face Continued Financial Challenges

Sources:
Arab News: IMF's economic outlook for MENAP shows growth despite historic transitions
The Daily Star (Lebanon): Experts call for joint action to assist Arab states in need
IMF: Arab Oil Importers Under Strain
IMF: Anchoring Stability to Sustain Higher and Better Growth
IMF: Middle East and North Africa: Historic Transitions under Strain
The Nation (Pakistan): IMF expects high oil prices in 2012

In the Middle East and North Africa (MENA), countries which import oil faced reduced growth last year and projected financial challenges in the future. According to the International Monetary Fund (IMF), growth in the oil-importing MENA countries fell from 4.3% of gross domestic product (GDP) in 2010 to 2.2% in 2011. GDP is the total value of goods and services produced in a country during a year.

The slowed growth came in the form of a reduction in tourism and private investment in local businesses, both of which are sources of employment and revenue. The main cause of reduced tourism was the political unrest in the region as many nations faced either regime changes or significant political changes. Political unrest creates safety concerns, which in turn reduces tourism. It also reduces private foreign investment because the political instability creates a situation in which it is uncertain whether investors will see a return, or profit, from their investment.

Another cause of the reduction of tourism and private investment is the European financial crisis. Europe is a major source of tourism and investment for many MENA countries because of its close proximity to the region. However, Europeans have less money to spend elsewhere on tourism and investments because of domestic financial problems resulting from the European sovereign debt crisis.

While many MENA countries are seeing a return to political stability, the IMF points to continued challenges to economic growth for these oil-importing countries. First, the IMF expects oil prices to continue to rise in 2012, which would increase the amount of money flowing out of the country, making it more expensive to cover the costs of continued oil consumption. Second, Syria is still facing significant political turmoil, affecting the regional economy through continued decreased in tourism and private investment mentioned previously.

To aid in recovery, the IMF asserts that ensuring adequate financing is key. The IMF estimates that oil-importing MENA countries will need $50 billion in 2012 to keep their economies functional during times of political unrest. While the IMF is providing some assistance, the IMF and other experts call for international and regional donors to participate as well. The IMF says that infusions of investment funds will aid in meeting short-term needs and establishing greater long-term stability in the form of job growth and modernizing infrastructure.

Thus, though oil-importing MENA countries are currently facing financial challenges resulting from political unrest in the region and financial instability in Europe, the IMF expects that increased investment assistance will encourage future economic growth.

World Bank Helps Establish Fund for Middle East Infrastructure Projects

Sources: WSJ: World Bank: New Arab Fund To Leverage Infrastructure Investment
Reuters: World Bank to Set Up Arab infrastructure Fund
ABC Live: World Bank Supports AFFI Infrastructure Development for Arab Region

With violence, unrest, and political uncertainty continuing to grip the Middle East, foreign investors have become increasingly reluctant to invest funds in the region. In an effort to fill this investment void, the World Bank, in conjunction with the Arab Development Bank, recently announced that it would seek to create a $1 billion fund to foster development in the region.

The goal of the fund, which is called the Arab Financing Facility for Infrastructure (AFFI), will be to invest in projects aimed at developing basic infrastructure, such as improving access to water and electricity. The fund will support both traditional financing and Sharia-compliant financing. Sharia (the name for Islamic law) places certain restrictions on the terms of financing.

The funding comes at a critical time for the region, where infrastructure has been long neglected by some countries in the regions, especially those countries governed by the leaders that have been, or are currently, the target of protests. To illustrate the extent of the neglect, it is estimated that half of the population in the region do not have ready access to water. However, the fund will provide only a small portion of funding to cover the estimated $75-100 billion annual funding requirement needed to meet the infrastructure needs of region. For example, because of its rapidly growing population, the region is expected to need approximately $30 billion a year to meet the corresponding increase in demand for electricity.

Egyptian Stock Market Falls After Reopening

Bloomberg Business Week: Egypt Stock Market Resumes Decline After Reopening

AP: Egypt Expects Selling to Greet Reopening of its Stock Market

Washington Post: Egypt’s Stock Market Plunge After 2 Months Closure Spotlights Post-uprising Investor Unease

CNBC: Egypt Stock Exchange to Re-Open as Chairman Resigns

On January 27^th, just days after the first protests against now-ousted leader Hosni Mubarak began, Egypt’s Stock Exchange closed after a two-day 16% drop, and has remained closed for the last seven weeks. There have been several efforts to reopen the market, but officials have pushed back the reopening date for several reasons. First, a wave of labor unrest following Mubarak’s removal from power created concern for investors as workers demanded higher pay and slowed manufacturing. Second, the political future of the country was unresolved and government and stock market officials feared the stock market would plummet given the uncertainty.

Several events came together that placed pressure on officials to reopen the market. Pressed by the threat of removal from the MSCI Emerging Markets Market Index and fearing that prolonged closure will increase the likelihood of a higher sell-off at opening, the stock exchange reopened on Wednesday, March 23^rd. Remaining on the MSCI index is important for Egypt’s stocks since many mutual funds and passive investors are benchmarked to the MSCI index and would be obligated to sell Egyptian stocks if Egypt was de-listed. Prolonged market closure had the effect of lowering investor confidence, as many investors were unable to access frozen capital. Therefore, officials felt that keeping the market closed would be increasingly detrimental to the health of the stock market. Furthermore, despite continued political uncertainty, the country voted on Saturday, March 19^th on a referendum approving a new constitution, which officials hoped would ease political fears that could affect opening day performance.

The government and stock market officials took several precautions to avoid a massive sell-off of Egyptian stocks. First, market officials instituted “circuit breakers” which are rules that are meant to slow or limit trading in the case of large losses in the stock market. The circuit breakers were set at a 5% drop in the stock exchange, at which point there would be a 30-minute cooling period, and at 10% drop, at which point the market would close for the day. The circuit breakers are intended to promote confidence and encourage stockholders to hold their stock while they reconsider their positions during a “cooling off” period. Second, the finance minister set up a fund worth 250 million Egyptian pounds (approximately $42 million) in case the market needed a capital infusion. Finally, the government led a campaign to encourage Egyptians to invest in the stock market in order to increase activity.

Despite the efforts to encourage investor confidence, the market plunged 8.95% on the first day of trading on Wednesday. On the second day of trading, before the Egyptian weekend, the stock market lost 6.7% of totally value at one point in the day but rebounded to a 4% fall. The rebound was seen as a positive sign as investors feared a second day of heavy losses. Despite the rebound, it may be too early to anticipate that the stock market will soon recover to pre-revolution norms given the continued political uncertainty. While political and social uncertainty remains, investors will be weary of heavy investment in Egypt.

Youth Unemployment Highest in the World for MENA

The Nation: Jobless Youth Tell of Their FrustrationsCNBC: Bleak Jobs Picture in the Middle EastThe Nation: Davos Focus on Jobs for YouthGulf New: Middle East Joblessness World’s HighestDeloitte: Wanted: A National Labor Force

On January 25, 2011, the International Labor Organization (ILO) released the Global Employment Trends 2011 report, finding that the Middle East and North Africa (MENA) region has the highest unemployment rate in the world, at 10.3%. The unemployment situation is exacerbated for youths between the ages of 15–24 who also face the highest rate of unemployment in the world, at 23.7% in the Middle East and 23.8% in Northern Africa, according to a November 2010 study by Deloitte. Even those that are employed receive meager wages. According to an ILO study, 40% of the Middle East working population and 32% of the North African working population live on less than $2 a day. Furthermore, the unemployment numbers do not reflect the number of youths who are unemployed and have given up looking for work.

As highlighted at the World Economic Forum in Davos, lowering the alarming level of youth unemployment is essential for increasing social inclusion and future economic security in the region, given that youths comprise a staggering 60% of the regional population. While the issue of job creation is not new, recent political unrest in Tunisia and Egypt have drawn attention to the problem. Commentators like Monica Malik, Chief Economist at EFG-Hermes, have stated that youth unemployment is the “biggest challenge facing the region.”

There are inherent inadequacies in the growth and development of the labor market in MENA countries. While the region as a whole faces similar concerns, MENA can be divided into two groups: (1) countries that have an accumulation of wealth driven by oil revenues (including Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and UAE) and (2) import countries that do not have the oil-revenue buffer (including Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia). In oil-exporting countries, job creation has grown at a constant rate of approximately 100,000 jobs annually, yet unemployment for nationals remains high because many of those jobs are filled by expatriates. While oil-exporting countries have the resources to invest into job creation, the existence of oil revenues does not necessarily translate into lower youth unemployment rates. For example, Saudi Arabia, a large exporter of oil, has a youth unemployment rate of 25.9%.

Another problem for both oil importing and exporting countries is that the skills required by private companies do not match those acquired through the vocational and higher education systems. With university graduates remaining unemployed for an average of three years after graduation, both governments and employees must make efforts to lower unemployment rates. Private companies should provide skills guidance while governments must make greater efforts to provide for educational opportunities that match employer needs.

Discussion Questions
1. Do companies operating in the region have a responsibility to create opportunities for employment to nationals or should the government of the respective country be largely responsible?

2. What government programs initiatives would be most effective in eradicating youth unemployment?

3. Should oil-exporting countries assist non-exporting countries in developing youth employment opportunities, to avoid regional disruption?

The Lead Up and Possible Consequences of the Tunisian Turmoil

Foreign Policy: Suicide for a Cause

NPR: What Went Wrong in Tunisia

FT: How Did the World Get Tunisia So Wrong

FT: Rating Lowered on Tunisia’s Debt Outlook

US Department of State: Background Note: Tunisia

The current Tunisian unrest is the topic of much concern in the MENA (Middle East and Northern Africa) region given the political and economic implications for Tunisia and surrounding countries. Commentators generally agree that similar political revolts are unlikely in countries like Egypt, Jordan and Algeria, yet those countries and others in the region face similar conditions as those that have culminated in the ousting of Tunisia’s leader of 23 years, Abidine Ben Ali. While the removal from power of an authoritarian leader is a positive development, short-term civil unrest and a slowing of the economy may undermine long-term development.

Ben Ali came to power in a peaceful coup in 1987, just as Islamist political movements were increasingly becoming violent throughout Northern Africa. Ben Ali removed the President and authoritarian leader of the last thirty-one years, Habib Bourguiba, and thwarted a radical Islamist movement. Neighboring Algeria was fighting a violent civil war at the time, and Ben Ali was championed with preventing a similar war in Tunisia. However, within a year of becoming President, Ben Ali established a single-party rule, limiting both centrist Islamic parties and other secular parties from participating in elections.

Despite the rampant corruption, human rights violations, and an unequivocally authoritarian rule, Tunisia enjoyed warm relationships with European countries, European Union as a whole, and the United States. The World Bank and IMF continuously praised the regime for its stable economic growth, which has averaged over 5% for the past decade.

However, much of the wealth generated over this period was pocketed by the elite, particularly Ben Ali’s family. In hindsight, the situation war ripe for upheaval. Because of the international recession, real growth in Tunisia declined to 4.6% and 3–4% in 2009 and 2010 respectively. Prices for goods increased and unemployment averaged 14% (31% for young Tunisians). Last month, a 26-year old Tunisian vendor who was college educated but who was unable to find work burned himself to death in protest after authorities shut down his vegetable stand and rejected his demands to speak with the local government. He later died of third degree burns. His protest sparked similar actions of protest in the region and led to the ousting of Ben Ali and the current political vacuum.

The political and economic consequences of the upheaval are unclear, as the opposition government has not established control. The revival of the banned Islamist party (who pledge greater secularism than Iran or Saudi Arabia and greater women’s rights) is a source of concern for the future government. Currently, Standard & Poor’s lowered Tunisia’s credit rating to BBB+, and Fitch Ratings placed the BBB foreign currency debt rating on a negative watch— effectively increasing the country’s cost of borrowing for new and existing projects. Moreover, the Tunisian economy will likely experience a decline in tourism, a sector that employs 12% of the active workforce.

However, without nepotism and corruption, there is a potential that growth rates could increase up to 3 percentage points according to Philippe Dauba-Pantanacce, a senior economist at Standard Chartered. Furthermore, multinational companies have stated that they do not intend to cut back investments or operations, and commentators have stated that they are “cautiously optimistic” on the effect of the revolution on Tunisia’s economy.

Discussion Questions

1. Will the tourism industry be able to recover? If not, what will the consequences of a sharp decline in the industry have on Tunisia’s economic and political landscape?

2. Where should the new government focus its efforts in reviving the economy?

3. Does the simple threat of an Islamist movement, no matter how unfounded, affect Tunisia’s chances of economic development?