Tuesday, 27 December 2016

Year in Review: Egypt’s new “New Deal” (Part 2 of 3)


What are you reading?

** Enterprise is taking a little year-end holiday this week. We began running our traditional Year in Review package yesterday. Today’s issue focuses on our view on 2017, including our thoughts on what we see as a new “New Deal” between the government, business and the nation’s electorate. Tomorrow, we’ll have the results of our 4Q2016 Enterprise Reader Poll. We will be publishing a bit later in the morning this week and should be in your inbox by about 7am. We’ll be off again on 29 December and 1 January and resume our normal publication schedule on Monday, 2 January.

What we really like in today’s issue: Our piece on the new New Deal (or: What to Expect in 2017) and the interactive timeline of news events this past year. You can read the new New Deal below, and we’ve included a graphic version of the timeline. Tap it to be taken to our website with the version that has links to individual stories.

What We’re Tracking Today

“Cold” weather advisory: The weather is, by Egyptian standards, chilly this morning, and the Meteorological Authority is warning there’s more of the same in store through next week, with overnight lows in Cairo down to 6°C on Thursday night / Friday morning and daytime highs as low as 14 on Saturday. There’s also a 25% chance of a shower in Cairo this morning according to our favourite weather app, and a 20% chance of a sprinkle some time each day through the night of 1 January. Rains could be particularly heavy on the North Coast, Ahram Online warns.

The Central Bank of Egypt’s Monetary Policy Committee will discuss interest rates for the last time this year on Thursday, 29 December.

Sunday, 1 January 2017, is national holiday in observance of New Year’s Day and Saturday, 7 January 2017 is a national holiday in observance of Coptic Christmas.

Speed Round

Speed Round is presented in association with

Ties with Moscow continue to deepen as we await news on a possible return of tourism. The Russia-backed Eurasian Economic Union has agreed to begin negotiations for free trade agreements with a list of countries that includes Egypt, Iran, India and Singapore, Ahram Gate reports, citing an emailed statement from the Ministry of Trade and Industry. Trade Minister Tarek Kabil said that an agreement with the Union would bring the size of trade activities up to USD 15.7 bn a year from USD 3.5 bn. EEU member states include Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan. Both Mongolia and Tajikistan have been touted as potential members in the past.

Russian security officers to review Cairo International Terminal 2 again? A team of Russian officials were due in Cairo yesterday to review security measures ahead of the possible resumption of flights, initially between Cairo and Moscow, Youm7 reports, citing a source at the Cairo Airport Company. Sky News Arabia cites unnamed sources as saying the resumption of flights would begin at Cairo only and would extend to the resort destinations of Sharm El Sheikh and Hurghada at a later date. The first EgyptAir Cargo flight to Moscow since the Metrojet air disaster in late 2015 left Cairo International this past weekend.

Daba’a agreement signed before 2017? Preparations are underway for Egypt to sign a nuclear power plant agreement with Rosatom on Thursday, a source at Rosatom said, according to a report carried by Ahram Gate. There were no details in the report even though earlier ones indicated signing the agreement would be delayed until 2017.

House undermining Cabinet’s pharma pricing agreement? The House of Representatives is raising objections to the Cabinet’s price agreement with pharma manufacturers, on which the Council of Ministers signed off earlier this week. The agreement, brokered by the Health Ministry, which sets the price of meds in Egypt, would see the price of locally manufactured meds rise 15% every six months, while imported SKUs would be allowed to rise 20% every six months. Al Borsa is now citing an unnamed parliamentarian as saying that the government should cut customs or taxes for pharma manufacturers or provide subsidized electricity and water before allowing a price hike. “We cannot oppose raising the price of medicines to ensure they remain available to citizens. At the same time, we cannot accept that price of medicine rises continuously. As a result, we have required the minister [of health] to review the proposal” once more.

Investment Act due back to Cabinet tomorrow: The Ismail cabinet will look at the fourth and final draft of the Investment Act on Wednesday 28 December, Investment Minister Dalia Khorshid confirmed to Al Ahram, after the draft is amended to reflect the revisions suggested by different ministries at a cabinet meeting earlier this week.

We now have a Supreme Council for the Administration of the Media after President Abdel Fattah El Sisi signed into law yesterday an act of parliament creating it. The council will regulate both public and private media, with Reuters explaining that according to the Official Gazette, “The new council is tasked with suing media organisations that violate its regulations, creating a list of penalties, fining media organisations that break licence terms, and can revoke or suspend the right to publish or broadcast. It will also ensure fair competition between media groups as well as their independence and neutrality, adherence to journalistic ethics, and will make sure they do not compromise national security.”

Price of water to rise? The Water Supply and Sanitation Authority is done setting new and higher tariffs for consumption brackets north of 21 cubic meters of water a month, Al Mal reported. Cabinet is expected to sanction the hike this week, according to the deputy head of the Holding Company for Water and Wastewater Salah Bayoumy, who added that lower-tier users will not be affected, but might even see their water fees reduced under this new tariff regime.

Egypt will announce its average USD exchange rate for the state budget in March 2017, according to the Finance Ministry, Al Ahram reported. Meanwhile, Ministry officials said the budget deficit for 2016-17 is now projected at EGP 319 bn, not the EGP 340 bn that has been reported.

CBE launches tourism industry upgrade fund? Central Bank of Egypt Governor Tarek Amer has reportedly launched an EGP 5 bn fund to “to help investors develop and upgrade tourist facilities including hotels, resorts and Nile boats nationwide,” Ahram Online reports, citing state news agency MENA. The fund — which we presume will be used to finance below-market-rate loans at commercial banks — will offer a 10% interest rate to qualified borrowers in the sector, the newspaper said.

In other CBE news, central bank governor Tarek Amer has reportedly canceled a meeting scheduled today to discuss the challenges of companies with USD-denominated debt, Al Masry Al Youm reports. The companies had insisted on having legal representatives present during the meeting, despite objections from Amer, who is said to have backed out and said legal counsel was unnecessary at a friendly sit-down.

Remember the Econ 101 class about inelastic demand? Food producer Domty announced that the EGP flotation had no negative impact on its sales in November. The company’s white cheese sales, accounting for 60% of Domty’s revenues, inched up 2% in October and November combined, according to an EGX statement. Even though the float only took place on 3 November, Domty did not provide a breakdown for the sales in November alone. The company also said it increased its product prices in December and will introduce another round of price increases in January 2017 to “absorb the impact of the EGP flotation.”

Farmers will be getting a raise: The government will be buying crops from farmers at higher prices to balance out the effect of recent hikes in fertilizer prices, Al Borsa reported. The Ismail government has given a preliminary nod to the raise, unnamed MPs told the newspaper, and Prime Minister Sherif Ismail has asked the Finance and Agriculture Ministries to set new rates that would come into effect as of the next growing season. The sources added that members of the House’s committee on agriculture had met with Ismail earlier this month to discuss increases to the prices of crops such as wheat and sugarcane, among others.

On a reasonably quiet day for Egypt in the international press, Peter Hessler is back with another long read on Egypt in The New Yorker. In the 2 January issue, Hessler writes that President Abdel Fattah El Sisi “has unwittingly revealed more about his country’s political structures than anybody could have imagined” in an unusually substandard piece titled: “Egypt’s failed revolution.” Hessler uses pretty much every major political incident, relevant and not, since El Sisi became president to reflect on how Egypt is run currently.

Other stories about Egypt in the international stories worth noting this morning:

  • Let’s not and say you didn’t: A “tri-state” solution to the Israeli-Palestinian conflict. It’s just one line in an op-ed on Israel, the US and the UN by former US ambassador to the United Nations John Bolton, a Republican. It’s also the last thing our nation needs: “Far better to essay a ‘three-state solution,’ returning Gaza to Egypt and giving those parts of the West Bank that Israel is prepared to cede to Jordan.”
  • Copts may have reservations about the economic and security performance of the Egyptian government, but fears of Islamists could renew their confidence in the current administration, Ahmed Hidji writes for Al-Monitor.


Enterprise is available without charge — just visit our English or Arabic subscription page, depending on which edition you would like to receive. We give you just about everything you need to know about Egypt, in your inbox Sunday through Thursday before 7am CLT (8am for Arabic), and all we ask for is your name, email address and where you hang your hat during business hours.

The Enterprise Year in Review

The new New Deal

2016 was the year when the Egyptian economy probably bottomed out. Promises of an avalanche of investment following 2015’s Egypt Economic Development Conference (EEDC) were dashed as the pace of reform turned sluggish and shocks emanating from global markets and terrorism exacerbated the nation’s challenges. Instead of debating policy and trying to kickstart economic activity, investors were obsessed with the exchange rate. It was not a question of whether Egypt would experience a devaluation, but when — and by how much. And, as we expected at the end of 2015, the delay in taking action made pressure pile up from very early on in the year.

We got our answer on 3 November, when central bank governor Tarek Amer shocked the market by announcing letting go of his institution’s grip on the exchange rate and setting the currency on a free float. The central bank said it was moving “with immediate effect, to a liberalised exchange rate regime to quell any distortions in the domestic foreign currency market … [to] allow market demand and supply dynamics to work effectively in order to create an environment of reliable and sustainable provision of foreign currency.” We saw the step to be a change in course away from an unsustainable limbo that would have spelled economic collapse.

With the float of the EGP implemented, the hard work of building a real economy is only starting, and that’s why we believe 2017 will not be a year where results are attained, but rather a foundational one in which the premise of a new New Deal is laid down and implemented gradually. We believe there is a realization by the powers that be that the economic aspect of the social contract between government and the citizens of Egypt is unsustainable and has to change in 2017. Gone are the days when everyone could expect the government to sustain an artificial exchange rate for political purposes, maintain its role as the single employer in the country, and uphold a system under which commodities are made available on the market at subsidized prices. In its place, as part of the new New Deal, the government will allow more room for the private sector to operate and will lay down the foundations for a system of cash transfers that could be means-tested in the future, something similar to a more generalized Takaful and Karama projects, the World Bank-sponsored welfare programs.

While we do not expect subsidies to go away, the distribution mechanism will differ. Subsidized prices distort the market, but an alternative was not readily available through the banking system given challenges in reaching rural citizens and the very low banking penetration rate. Instead, the central bank will use the penetration success of mobile network operators. Where the banks have failed to expand their clientele, mobile operators have managed to reach practically the entire country with a cumulative penetration rate of over 100%. Earlier this month, the central bank released new regulations governing mobile payment services designed to expand use of the service in Egypt and enhance financial inclusion. Under the regulations, banks will be able to employ agents to deliver services including the establishment and verification of customer identity — and micro-enterprises, organizations and merchants will be able to pay or collect funds through their mobile accounts.

This will likely become the foundation of the new New Deal as the buzzwords for Egypt in 2017 will be “financial inclusion.” The plan would give the government the chance to channel subsidies in cash, rather than in-kind, directly to consumers, replacing the less efficient, distortive systems currently in place. It follows the unremarkable failure of smart card-based subsidy systems that failed to catch on for reasons ranging from poor rollouts (as with the system designed for fuel) or due to poor management and hacking (as with the one designed for bread). Using mobile phones will provide an improvement to the one glimmer of success in this system — the supply ration card piloted in Port Said — by making it operate more smoothly, better targeted, and improve its reach.

At first, we speculate the system would not be means-tested, but would involve extensive data gathering to improve it operationally and make it better-targeted.

Nonetheless, the system would also serve a separate, two-pronged purpose. It would improve access to capital and — critically — consolidate the gray economy into the formal one. This fits in adequately with the (so far unsmooth) rollout of value-added tax that, through collecting taxes throughout the value chain, should bring in more people and firms into the formal economy and expand the tax base. In principle, enhanced financial inclusion should give the historically disenfranchised segment of society access to funds — be it cash subsidies from the government or economic capital — improve the government’s finances by cracking down on leakage in the economy, strengthening its oversight over economic activity, and having the added bonus of drying up sources of funding for illicit activities and terrorism.

Expanded financial inclusion also gives the central bank more ammunition to intervene effectively in the economy. It is generally believed that Tarek Amer and his team’s decisions on interest rates have little impact on the response in consumer prices. The central bank’s actions do not filter through the rest of the economy because of the stubbornly low percentage of banked individuals and the anecdotally large size of the informal economy. Having better tools to manage the country’s monetary policy would be a step towards a more developed economy. This is how we see the government’s new policy fitting in the central bank’s along with programs recommended by the IMF, as part of its USD 12 bn financing package, and the smaller but more widespread ones by the World Bank Group.

All of this, while very promising on the drawing board, is certain to face a number of challenges on the ground. Setting aside threats from geostrategic complications or from international markets, there are four main challenges that threaten this new New Deal, in our view. The first comes from the within the government itself. Some branches of it have often impeded the speed of reform, by delaying issuing the executive regulations of the value-added tax, or arguably moved against the government’s reform agenda altogether in decisions like the one to raise customs on some goods or restore protectionist measures for certain uncompetitive sectors. Having a relatively inexperienced parliament in session could also add a layer of complications as, although we have not seen any evidence of meaningful dissent from government policy during the session, it grandstanding in the House will throw monkey wrenches into the flow of policy making.

The second threat could be in the rejection of the new New Deal on merit from the people or any subsequent government. The status quo has been in place for generations and, while observers might say it is unsustainable, a leap towards an unknown would also be seen as daunting by people on the street, especially as reforms tend to come with transitionary periods rife with uncertainty and some economic hardship.

Third, some reforms are likely to be stalled by roadblocks, even though the reform plans may not face ‘explicit’ rejection. A particular question is the competence of the state bureaucracy at the sub-ministerial level to deliver on planned reforms. Ensuring that this point is not reached would require a delicate balancing act between the decision makers in government, a public sector that remains bloated, coordination with international institutions, and oversight from parliament, as well as ongoing dialogue with — and continuous feedback from — the private sector.

The fourth risk factor, arguably the most potent threat, is the possibility of wide-scale social discontent. It is the threat flagged by a number of international observers including, for example, in Control Risks’ 2017 RiskMap and in S&P Global’s country risk assessment. The latter notes that sociopolitical tensions remain the major potential threat to economic recovery and that “the sociopolitical environment in Egypt remains fragile.” The report adds that the government is expected to face “considerable challenges from the population’s expectations, especially following the approval of the IMF’s program. Mounting public discontent, especially from vulnerable groups as a result of the rising cost of living, is a concern. At the same time, we understand from authorities that social protection and new compensatory measures are an important component of the fiscal consolidation program.” The main concerns there are from the toxic mix of elevated inflation rates and slow rates of job creation. Security risks are also expected to continue to weigh heavily in 2017.

We share the view that 2017, if successful, would lay the foundations for restoring Egypt’s economy to a growth path from 2018 onwards. Impact on the ground would be felt by the end of the year at the earliest, as job creation would be spurred and markets adjust along with the price level. This is why funding, from the IMF and other sources, is integral throughout the year. It would be the boon to sustaining social spending throughout the transition towards a more efficient and effective system. The best-case scenario has significant capital expenditure taking place in Egypt, with new investment (including both direct and as portfolio inflows) beginning to shape the country’s growth trajectory in 2018, a presidential election year, and driving us into 2019.

What is required from the government now is both policy stability — and a focus on providing the private sector with the support it needs to operate more efficiently, expand, and create new job opportunities. This requires legislative support and incentives to create jobs, which we anticipate from the proposed investment law, a stable tax code, and reduced intervention in the economy that crowds out private investment.

With all the uncertainties, there are still some specific green shoots we anticipate will create positive headlines in 2017. First gas from the Zohr supergiant gas field is expected by the end of the year. Egypt is still moving forward with plans to become a regional energy hub. Before that, around 10,000 MW of electricity from the power stations Siemens is building are also set to be commissioned during the year. Beyond energy, the positive impact of the EGP devaluation and float should support the country’s strongest exports — textiles, garments, and, security permitting, tourism — and help them expand in existing markets and open new ones.

We are keeping a particularly close watch on the tourism sector in 2017. After years of underperforming, the sector could return if Russia removes its restrictions on traveling to Egypt and European countries remove their travel warnings. Our concern is that if the sector does not see this expected revival by the winter season of 2017, it would not be able to recover fully for a number of years to come.

The year of the 4G agreement and NTRA’s shifting goalposts

Egypt took its first steps to get 4G networks in 2016. After reports suggesting opening up the market for new entrants, including an official bid by Kuwait’s Zain — and talks with Saudi Telecom, China Telecom, and Saudi’s Lebara — the first 4G agreement was signed with Telecom Egypt (TE).

On 31 August, state-run fixed-line monopoly TE signed the country’s first 4G agreement with the National Telecommunications Regulatory Authority (NTRA). The license cost it a total of EGP 7.08 bn, half of which was payable in USD. As part of the agreement, TE is to begin providing 4G services by March 2017 (six months after the agreement’s signing), but was also required to reach an agreement with now-rival mobile network operators (MNOs) to use their existing 2G and 3G network infrastructure until it completes its own 4G network within two months of signing.

A high-stakes game of chicken: The MNOs — Vodafone Egypt, Orange Egypt, and Etisalat Misr — however, had at first rejected the terms offered by NTRA for the license. They pointed specifically to the limited spectrum on offer, the high cost, and the requirement to pay a portion in USD. All three of them declined to bid for the license by the deadline set by NTRA in late September, but eventually all had signed 4G by mid-October. Before the end of the year as well, it was announced that TE missed its deadline to sign an agreement with an MNO to use its networks temporarily, but NTRA gave it a two-month extension. Those two episodes give one of the clear themes going into 2017: Deadlines set by NTRA are not set in stone — they are not necessarily binding in a practical sense.

It was clear throughout the negotiations process that the MNOs had a problem with what they perceived to be the preferential treatment TE was receiving, leaving them looking for any leverage. Indirectly, and most likely inadvertently, NTRA provided them with that. Requiring TE to conclude an agreement with at least one of the MNOs to use their networks put time firmly on the MNOs side. By refusing to sign contracts with TE, Vodafone Egypt, Orange Egypt, and Etisalat Misr can now prepare to launch their own 4G services in 2017 without having to worry about competition from a fourth player in the market — for now. Making TE miss contractual deadlines would have also made us question the validity of the agreement, but NTRA’s relaxed attitude towards deadlines and the precedents it already set make this less of a concern.

This leaves us looking forward to 2017 with a number of questions. Will the operators be able to launch 4G services on time? Once they do, the concerns will shift immediately to monitoring the service quality and whether their concerns over spectrum availability were warranted. This concern might be tempered as the CIT Ministry promised to auction off extra spectrum.

Another, seemingly pedantic, question we have is contractual: Will the MNOs accept paying NTRA the USD-denominated portion of the contract as agreed to before EGP float at current market rates? Since the 4G agreements were signed, the value of the EGP dropped by nearly half, creating deep losses for the MNOs, who are contracted to pay a portion of the licence fee’s installments in USD equivalent.

However, our main concern is how TE will adapt to its changing role within the market. It has a lot of work to do to catch up in a market where the penetration rate is over 100% and, while it might have some government support, its rivals hold significant leverage over it operationally. If TE fails to meet its launch deadlines, or suffers from an unsuccessful roll out, who is left to pick up the tab for this state-owned company?

Foreign Policy

The “Sisi doctrine” in foreign policy

Since taking office in 2014, President Abdel Fattah El Sisi had adopted a multipolar approach to foreign policy, taking a decisive shift away from dependence from Egypt’s traditional base of support of the US and the GCC.

By the start of this year, El Sisi has moved Egypt beyond the traditional positioning as a “trusted interlocutor between Israel and Palestine.” The country has diversified arms suppliers (diluting the US by adding Russia and France to the list), re-engaged with Africa in general (and, critically, the Nile Basin countries), deepened ties with Europe, and returned the relationship with China to a strategic partnership. The guiding principle of El Sisi’s foreign relations policy in the Middle East has been centered on combating fundamentalist groups and the sovereignty of nations.

2016 would be the year in which that his multi-polar foreign policy doctrine would be tested, considering a world that is becoming much more polarized. Egypt’s warming ties with Russia came at the expense of its traditionally solid relationship with Saudi, whose increased involvement in the region did not sit well with Egypt’s stance on the absolute value of sovereignty, a concern born out of international reaction to the 30 June 2013 revolution. Egypt’s export-focused trade policies caused some friction with the European and Turkey, particularly over its exporters registry, which saw the involvement of the World Trade Organization. It’s also weathered crises including the furor in key trade partner Italy (over the murder of graduate student Giulio Regeni) strained ties with Russia after terrorists downed a flight operated by Russian airline Metrojet over the Sinai.

Moving into 2017 with the coming of the new Trump administration and its stated position on “regime change,” friendly overtures of support for Egypt’s war on terrorism, Egypt will be looking to strengthening cooperation. It may try to repair a rift in Egyptian-Saudi relations, but success on that front will not be entirely in its hands.

East Africa

Egypt’s top priority on re-engagement in East Africa has to be water security. After months in which talks went nowhere, Egypt, Ethiopia and Sudan signed agreements with consultancy firms to conduct impact studies on the Grand Ethiopian Renaissance Dam (GERD). Risks to progress on this include Ethiopia’s accusations that Egypt is meddling in its affairs vis-a-vis the Oromo issue, and perceived involvement of Saudi Arabia and Qatar. With the support of parliament, El Sisi went on the charm offensive with Nile basin countries. These overtures signal that Egypt may be going back to the Nile Basin Initiative, after strongly opposing it since 2010.

We expect continued overtures in 2017 and for the Sisi administration to try to deepen ties with East Africa in part through trade, helping the nation’s trade deficit by taking a long, hard look at natural export markets. As part of its strategy, Egypt’s Export Subsidies Fund issued incentives to companies looking to export to the continent, with the Kenya-Tanzania, West Africa (by way of Cote D’Ivoire) routes getting preferential treatment. Exporters to Africa will receive a 2% top-up on top of the base subsidy, with the fund covering 50% of expenses.


China played a key role in helping us close the USD 12 bn IMF loan through a currency swap agreement with China. With that, China moved beyond being a key economic partner, to a strategic ally. The currency swap would be for a total amount of CNY 18 bn (equivalent to around USD 2.62 bn) against the equivalent in EGP. For Egypt, the three-year agreement (with an option to extend) was vital in meeting the USD 6 bn in third-party funding required by the IMF to approve the loan.

The agreement was the crowning achievement in a year which saw Cairo and Beijing grow increasingly close. President Abdel Fattah El Sisi signed 21 bilateral agreements and MoUs with Chinese President Xi Jinping during El Sisi’s state visit in January, potentially worth up to USD 15 bn. These projects would be primarily geared towards electricity and transportation projects. On the banking front, China has signed a USD 1 bn financing agreement with the CBE and will lend USD 700 mn to National Bank of Egypt. Earlier this month, Banque Misr closed in on USD 1 bn in financing agreements with Chinese institutions.

Over 100 Chinese firms pledged to invest as much as USD 2.5 bn in the Suez Canal Economic Zone. Among the largest agreements signed in 2016 for China Fortune Land Development to invest USD 20 bn to develop and manage 14,000 feddans in phase two of the New Administrative Capital. Furthermore, Egypt signed on to the China-led Asian Infrastructure Investment Bank, a key Chinese foreign policy initiative, and Asian power’s One Belt, One Road economic and trade cooperation initiative.

Saudi Arabia

The same progress could not be said about Saudi Arabia, as our status went from ‘in a relationship” to “it’s complicated.”The year ended on a low note for the traditionally strong strategic partnership. It wasn’t always so, as the first half of the year saw progress when Saudi shifted its aid strategy by focusing more on investments and soft loans. This became apparent during King Salman’s visit to Egypt in April: Egypt signed a USD 23 bn, five-year fuel supply agreement with Aramco, netted USD 2 bn deposit to the central bank (which went towards securing the IMF loan) as well as USD 2.5 bn in grants, USD 1.5 bn in funding for Sinai development from the Saudi Development Fund, a SAR 60 bn Saudi-Egyptian Investment Fund, with pledges of Saudi private sector investments with the potential to double current levels to USD 60 bn.

Everything seemed on the up and up until the announcement that Egypt had ceded sovereignty to Saudi of the two Red Sea islands of Tiran and Sanafir — a very unpopular decision domestically that sparked rare protests. The Administrative Court blocked the agreement, a decision which the government is appealing.

It all came tumbling down when Aramco unceremoniously announced that it would suspend fuel shipment agreement, sparking speculation at the reason. The suspension, which continues to this day (Egypt considers it terminated), follows Egypt voting on two rival resolutions (one backed by Saudi and the other by Russia) on Syria in the UN Security Council, which could be seen as Egypt prioritizing its relationship with Russia. The rift continues to worsen with Saudi engaging in passive aggressive behavior, solidifying relations with Qatar followed by both countries thumbing their noses at Egyptian sensitivity to GERD, by sending high-profile delegations to visit the dam. While reasons for the rift remains a mystery, it may have more to do with Saudi’s defeats regionally than a specific policy decision by Egypt. Its roll backs in Syria and Yemen may be pushing it to close ranks with allies to ensure loyalty. Egypt’s multipolar politics does not play into that. Reconciliation efforts, spearheaded by the United Arab Emirates, have thus far not led to an end in the rift, and overtures by Iran will not help.


If ties with Beijing are perhaps the most economically critical in the longer term, Egypt’s relationship with Russia could prove to be its most immediately important, with tourism and security cooperation being the lynchpin of the relationship. Egypt had seen success on the later. The two countries held joint anti-terror drills, while Russia (alongside France) positioned to become one of Egypt’s biggest arms suppliers by providing a warship and an R-32 missile corvette. Russia also gave a tacit nod of approval to Egypt acquiring two Mistral class helicopter carriers from France, with the vessels having originally been fitted-out to Russian requirements.

Cooperation extended on the economic front, with Russia expanding its industrial zone, and Rosneft buying a 30% stake in the Zohr natural gas field, a move Russian media is speculating might lead to a gas pipeline to export to Europe. The Presidency has also been assuring that the USD 29 bn Dabaa nuclear power plant contracts will be signed in 2017.

The relationship was complicated by a few hiccups. Cairo’s flip-flopping on ergot contamination in wheat shipments led to Russia imposing a brief ban on fruit and vegetables from Egypt. But the key issue remains the end of the Russian flight ban which followed the Metrojet disaster and continues to cripple the tourism industry. Egypt raced to meet Russia’s stringent security measures, which were met with a combination of praise and non-committal on restoring flights and prodding to do more. Restoring the tourism industry and its sustainable revenues meant Egypt had taken a practical view in prioritizing its relationship with Russia over the short-term aid from Saudi Arabia. And it appears to be working: as the Russian President took note that Egypt beefing its security could see regular flights restored in the near future. We will continue to see Egypt buddying up with Russia in 2017 regardless of the effect it could have on other ties.

Impact of the disasters on tourism

A number of security setbacks hit our already ailing tourism sector hard: We hadn’t recovered from the Metrojet attack last year when Paris-Cairo MS 804 flight crashed on 19 May. The Civil Aviation ministry announced explosives traces on bodies of the victims, though nothing conclusive had been reached to the causes. The attack on St. Peter and St. Paul church which killed 27 threatened to jeopardize all efforts to prove Egypt is safe this year. Coupled with the Cyprus’ EgyptAir flight “lovejacking” and fallout from the Regeni killing, 2016 continued to look dismal for the sector. Latest figures show over 44% drop in arrivals year-on-year in October 2016 to 506,200 tourists. Tourism receipts halved in FY15-16 reaching USD 3.77 bn.

What is the government doing about it? The government pursued a multi-pronged approach to tourism: beefing up security, incentives, diversifying target markets, and ratcheting up the promotions campaign. Diversification looked to markets outside Western Europe and Russia and will focus regionally on the GCC, with a number of agreements with Saudi having been signed. Egypt also moved to strengthen domestic tourism to fill the gap. Incentives which will be put in place will include figuring out a way to implement an electronic visa system. More importantly, incentives to charter flights were amended, with the government offering to payouts and fee exemptions to flights with an 80% seat occupancy rates who bring in regular tours from the EU. JWT announced in September they are targeting 12 countries with their USD 20 mn tourism campaign. The government hopes to attract 9 mn tourists by the end of 2017 and up to 10 mn by the end of 2018

Some (brief) good news: Egypt was marked safe last month by the US State Department in its next-to-last travel advisory, only to have a warning re-imposed earlier this week. A few direct flights were back like direct flights from Heathrow to Luxor in October. The World Travel and Tourism Council and the UN’s World Tourism Organization urged last month UK Prime Minister Theresa May to lift the ban on flights to Sharm El Sheikh for UK-based airlines. And EgyptAir passed late last month the International Civil Aviation Organization’s inspection with a score 20% higher than the global average.

Things to look for in 2017: The lifting on flight bans from Russia, the UK, and Germany will be rely on a concerted diplomatic effort on Egypt’s part, but will ultimately depend on how successful Egypt is at getting the security situation under control and minimizing these incidents. How successful Egypt is at allowing international airlines to repatriate their profits will be crucial to stop them from exiting Egypt as KLM has shown us with its announcement to pull out next year. The industry will continue to push for more debt-relief from the CBE and the Finance Ministry and will continue to lobby the latter to postpone implementing the value-added tax on the sector.

Human rights

Egypt’s reputation on human rights took major hits in 2016, the most prominent of which was the murder of Italian graduate student Giulio Regeni in Cairo early in the year. Regeni’s death nearly causing a diplomatic rift with Italy, a valuable trading partner. After denying that its security forces were implicated in the death, relations warmed a bit on the promise of cooperation between both Italian and Egyptian authorities, with Egyptian prosecutors planning to indict Egyptian policemen. Egypt largely came out of the year having weathered the death of Regeni.

On the human rights issue as a whole, the government ramped up its efforts to convince European and other partners that security takes precedent. Numerous delegations by the Egyptian parliament to Europe also stressed this point.

Timeline of events

The Enterprise 2016 Egypt timeline

** Tap the graphic to visit our interactive 2016 timeline on our website, with links to our coverage of individual news events. The graphic will look just fine on your tablet or smartphone, but will be most attractive on a laptop / desktop.

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EGX30 (Monday): 12,182.04 (-0.56%)
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Domestic: Net short | EGP -37.3 mn

Retail: 80.6% of total trades | 85.0% of buyers | 76.2% of sellers
Institutions: 19.4% of total trades | 15.0% of buyers | 23.8% of sellers

Foreign: 2.9% of total | 3.7% of buyers | 2.0% of sellers
Regional: 11.1% of total | 12.1% of buyers | 10.1% of sellers
Domestic: 86.0% of total | 84.2% of buyers | 87.9% of sellers


Enjoyed the Santa Claus Rally? Wait for the January Effect.

The US Dollar has been the unicorn of 2016, strengthening against major currencies, the most of which is against the EGP. Now, the mn USD question is: When and Where will the EGP Settle? Well, the EGP will settle and potentially strengthen when demand and supply fundamentals return to “the norm.”

Demand is currently overstated due to (1) the backlog of demand that has been piling up since the currency crisis in early 2016; (2) repatriation of profit by “some” foreign investors in Egypt, where some have refused to transfer profits at an exaggerated exchange rate; and (3) excess demand from raw material importers, in an attempt to build up inventory of raw materials to lock up costs and price the products accordingly. Most industrial producers import 70-90% of their raw materials, which represent around 60-70% of their total cost. Egypt’s importation bill is almost three times exports.

Supply is also currently understated due to (1) the weakness in the sustainable sources of foreign currency in Egypt, namely: FDIs, FPIs, Tourism, net exports and remittances; (2) Some hoarders are still holding on to the USD, because the scarcity is obviously not over yet, and (3) the high interest rates on the EGP certificates of deposit have not been the most efficient tool to induce the exchange of USD into EGP, since banking penetration in Egypt is still around 10%.

Will the EGP settle? We would not be surprised if the EGP continues with its gradual weakness, up until 1H2017, after which we expect the trend to start reversing. The question is where. For our thoughts on that, tap here to read the full noteby Pharos Head of Research Radwa El Swaify.


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29 December (Thursday): Central Bank of Egypt’s Monetary Policy Committee meets to review rates.

29-30 December (Thursday-Friday): Cairo’s 5th International Conference on Business, Economics, Social Science, and Humanities (BESSH-2016), Intercontinental Citystars, Cairo.

01 January (Sunday): New Year’s Day, bank holiday

07 January (Saturday): Coptic Christmas, national holiday.

13 January (Friday): Egypt to attend Africa-France Summit 2017 in Mali.

25 January (Wednesday): Revolution (police) day, national holiday.

30 January – 2 February 2017 (Monday-Thursday): Arab Health Exhibition, Dubai International Convention & Exhibition Center, UAE.

14-16 February 2017 (Tuesday-Thursday): Egypt Petroleum Show 2017 (EGYPS), CIEC, Cairo.

31 March – 03 April (Friday-Monday): Cityscape Egypt conference, Cairo International Convention Centre, Cairo. Register here.

16 April (Sunday): Coptic Easter Sunday.

17 April (Monday): Sham El Nessim, national holiday.

27 May (Saturday): First day of Ramadan (TBC)

26 June (Monday): Eid Al-Fitr (TBC)

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