The Shifting Regional Political Landscape and the Impact on Egyptian Assets

Egypt, along with many other developing countries, is suffering from the aftereffects of the COVID-19 pandemic and the impact on grain and energy prices as a result of Russia’s invasion of Ukraine. Recently, however, some indicators suggest that there may be a wider loss of confidence in the Egyptian government’s ability to successfully navigate its debt burden and stabilize its economy: Egyptian sovereign debt prices have been falling in recent weeks, while prices in comparable countries have risen or remained stable. 

As recently as December 2022, Egypt entered into its third loan program with the International Monetary Fund (IMF) since Abdel Fattah al-Sisi’s regime took power. This normally would be a positive development and result in a favorable disposition of international capital markets toward a country. The loan amount of three billion dollars is small in comparison to Egypt’s financing needs, estimated at $17 billion this year. Still, an IMF agreement is typically accompanied by additional financing from international and regional partners like the Gulf states. In this instance, another $14 billion of financing is anticipated from the latter group.  

Egypt has also agreed to sell its state-owned assets as part of its agreement with the IMF. Many of these assets have arisen from an expanding military presence in Egypt’s economy during President Sisi’s tenure, as the President has granted privileges and favors to his generals and the military at large to cement his grip on power. A 2020 World Bank estimate suggests that the military owns 60 companies in 19 of the 24 economic sectors. For example, the National Service Projects Organization, a military affiliate, oversees 30 companies in the food, mining, petroleum, and construction sectors. In addition, these companies have an inherent advantage as they pay no taxes or customs duties, unlike the private sector. There are several fundamental issues with this plan. Firstly, there is little visibility of these assets and their profitability to the public; secondly, divesting them to the private sector would result in the loss of military patronage, and President Sisi has been announcing privatization initiatives since 2019 with minimal progress; lastly, the buyers are likely to be mostly Gulf Cooperation Council (GCC) sovereign wealth funds which are known to be opportunistic. 

During his visit to Egypt, the Crown Prince of Saudi Arabia, Mohammed bin Salman, announced deals totalling $7.7 billion. Out of this deal, some $1.3 billion have been invested based on reports from Egyptian state-owned news company Al-Ahram. But progress has since stalled. Similarly, the Qatar Investment Authority has been in discussions to purchase a stake in Vodafone Egypt, which Telecom Egypt partially owns. These negotiations are also at an impasse. Beyond the traditional financial negotiations, there are likely to be deeper political drivers that need to be considered. 

In the case of Saudi Arabia, an ongoing dispute about the transfer of two Red Sea Islands, Tiran and Sanafir, which Egypt agreed to in 2017 is once again stalled – these were islands disputed and claimed by Saudi Arabia for many years. The Saudis may be using their financial clout to pressure the Egyptians, who are fast approaching their self-imposed deadline of June 2023 for divesting six billion dollars in assets to buy financial headroom for their crisis-hit economy. Beyond this, the transfer of islands has a wider impact on the attempt to normalize Saudi-Israeli relations following the Abraham Accords. Brokered by the United States, the Islands transfer would also open Saudi airspace to Israeli air traffic. This is an important regional development for which the Saudis would seek to use all leverage to accelerate. Likewise, the stalled Qatari negotiations may include this dimension, as they come under pressure from the Saudis and the Americans to further regional normalization. 

The Egyptians have used the delaying tactic on the islands to pressure the United States to release part of its one billion dollars in military aid that the Americans have held up to force the Egyptian government to improve its human rights record. And the above drama is taking place against a wider rapprochement in the region. A recent Chinese initiative facilitated talks between the Saudis and the Iranians on normalizing relations and enforcing a ceasefire in Yemen, where both countries are involved through proxies. A normalization of Saudi Arabia with its traditional foes, Israel and Iran, would diminish Egypt’s role in the region, given that the Egyptian military has historically provided an umbrella for Saudi security. 

Standard & Poors Global Ratings, one of the three biggest credit rating agencies, issued a report on the state of the Egyptian economy and its creditworthiness in January 2023. It stated that it considered the importance of stability in Egypt a major incentive for official and commercial lenders to help it meet its external finance requirements. It also opined that the Egyptian government was committed to the necessary reforms and viewed its growth prospects favorably. Most notably, Egypt has begun to benefit from the return of foreign tourists and is making headway in its gas exports. 

The transition of Egypt’s economy from military-run to private-sector growth is unlikely to be straightforward as vested interests hinder the process. At the same time, regional politics is likely to cause turbulence in negotiations for the sale of assets and increase of financing. But the normalization of relations between the Saudis, Israelis and Iranians will likely take several years, given historical distrust and regional rivalries. The Saudis and the remainder of the Gulf Cooperation Council are unlikely to abandon Egypt, given its military importance. The turbulence in Egypt’s financial assets is most likely a response to the drama unfolding in the region.