Egypt: And the Money Starts Rolling In?
Saudi Arabia has stepped up to the plate for Egypt, announcing a US$4 billion package for Egypt which included transfers, investment, a capital injection for the central bank, purchases of some of T-bills and bonds that Egypt will issue in the coming year, as well as other financial support. This announcement comes just days after President Obama’s speech promising U.S. support to Egypt, and just days before G8 leaders discuss economic support for Egypt, Tunisia and other transitioning Arab states. The timing of the announcement, ahead of the G8 Deauville meeting, is likely no coincidence, and is a sign of regional and global players stepping up to provide the needed short-term financing and long-term capital Egypt needs. Egypt’s supporters will be keen to hear at the meeting how the government plans to move forward in the midst of recent deterioration in the political environment. But financial support will give the government some space to avoid further losses.
The package so far
- A World Bank loan of US$2.2 billion
- US$4 billion package from Saudi Arabia including funds for the central bank to prop up its diminishing reserves, bond purchases (US$500 million) export credits, loans from the Saudi development fund and other investment. The package also includes needed funds to small and medium sized enterprises, which continue to have trouble receiving bank finance. As such certain elements of the package are reminiscent of financing included in the recent domestic support packages in Saudi Arabia.
- A largely symbolic debt relief from the U.S. of up to US$1 billion, and another US$1 billion in loan guarantees, Enterprise funds of up to US$ 1 billion to finance infrastructure– most of this requires congressional approval, but is likely to be financed by the reallocation of funds committed elsewhere in the U.S. budget including perhaps some of the funds allocated to the Afpak theatre. As highlighted in President Obama’s speech, continued progress towards democracy and free elections seems to be a requirement.
- Investment from OPIC and other Arab development institutions. These might be project based, focused on job creation, given the rising unemployment.
Further investment/aid likely to include
- An IMF package worth about US$4 billion but possibly with the opportunity to extend. This may well come with backloaded conditionality, particular concerning fiscal consolidation, and the subsidies although Egyptian authorities will try to limit this given the upcoming election cycle. We do not think they will be able to avoid all conditionality but the IMF and others will be wary of getting involved in the political process.
- Loans from the EBRD, which is looking for new clients now that many of its past recipients have outgrown its services, and the EBRD has the necessary expertise to work in tandem with Egyptian authorities particularly reviving private sector activity and the financial sector. Moreover, from a U.S. perspective this shift to North Africa might serve the focus of moving the institutions focus more away from the Former soviet space, a goal which the U.S. has been focused on for some time. The EBRD is planning to loan as much as US$4 billion to Egypt and other North African countries, likely to banks and private enterprises, its key clients.
- Likely investment from regional sovereign funds and other government investors. GCC government funds, especially the more direct investment focused ones, may well see this as an opportunity to make investments. Kuwait Investment Authority (KIA), the international investment arm of the Kuwaiti government, has previously set up funds that invest in Jordan, Egypt and Morocco. The new focus on investing in the region could spark more such funds and possibly encourage private investment.
The move fits with RGE’s expectation, that Egypt’s Arab neighbors would provide support lest the dire economic situation add to the mounting political stresses. Moreover, it may also reflect the importance for Saudi Arabia of showing regional leadership and maintaining good ties with Egypt, which has flirted with changes to its foreign policy links. Although the Saudi officials may not have liked the way in which Mubarak was forced from office, their business and political interests dictate providing support. In fact, the main outlines of the plan were presented to Egypt’s government over a week ago, likely following weeks of discussion but could have been delayed pending final agreement or as a desire to present the package as a unit.
We could expect other GCC countries to follow Saudi Arabia in some way, either indirectly through regional institutions or directly. As noted in our last MENA focus, GCC countries are among some of the largest foreign investors in Egypt, especially direct investment. Saudi Arabia and the UAE have perhaps the largest exposure, particularly in property and construction, but also in a wide range of sectors such as retail and tourism. Moreover, Saudi Arabia hosts many Egyptian workers. GCC investors are looking for clarity on the regulatory environment, and have been quite concerned about a string of legal cases invalidating some of the past privatizations and land sales to either foreign or local business leaders. The Saudi package coincides with the announcement by Egyptian authorities of creating a committee to settle arising problems around investment deals.
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