Interpreting Middle East Economic News and Analyzing Market Trends

Gulf countries celebrate demise of democracy in Egypt by giving $12 billion in aid, but there are other motives

Egypt Military Coup

Days after Egypt’s military threw out Mohammed Morsi and his cabinet, Gulf countries of Kuwait, Saudi Arabia and the UAE pledged $12 billion in aid to support the country and the economy.  One reason for this quick aid package is to show their displeasure with Morsi, but there are also other reasons…

 

Twelve billion dollars in aid from Egypt’s wealthy Gulf allies have bought Cairo a window of several months to try and stabilise its politics and repair its state finances – or face fresh economic turmoil.

The massive packages of grants and loans unveiled by Saudi Arabia, the United Arab Emirates and Kuwait on Tuesday and Wednesday should boost Egyptian foreign reserves enough to avert a balance of payments crunch that was looming this year.

By replenishing state coffers, they will keep government departments running and may help authorities end fuel shortages that have caused immense public anger and contributed to last week’s military overthrow of elected president Mohamed Mursi.

John Sfakianakis, chief investment strategist at MASIC, a Riyadh-based investment firm, estimated the $8 billion in aid from Saudi Arabia and the UAE could give Egypt a breathing space of four to six months. On top of that, Kuwait has since pledged a further $4 billion.

But the aid will not by itself solve two key problems in the Egyptian economy: a ballooning budget deficit and political instability that is scaring away foreign capital.

If major progress is not made in these areas by the end of this year, Egypt could again risk an economic crisis and be forced to seek large amounts of additional aid from the Gulf, putting itself deeper in debt to governments there.

“Unless there is a resolution of the politics/social schisms, private capital flows will remain elusive and capital flight risks high,” Raza Agha, chief economist for the Middle East at VTB Capital in London, wrote in a report.

The aid from the Gulf “buys time”, he said. “But key at present is whether anything will get the Muslim Brotherhood off the streets.”

Mursi’s Islamist supporters continue to protest at his removal by the army. Dozens were shot by troops on Monday.

The Gulf money may also ease pressure on Cairo to finalise a $4.8-billion loan from the International Monetary Fund. Securing it might impress other would-be lenders and investors, but its conditions might prove too politically painful within Egypt.

The speed with which Saudi Arabia, the UAE and Kuwait announced packages – less than a week after Mursi was deposed – is as important to financial markets as their size. The three Gulf states, which mistrusted Mursi and his Muslim Brotherhood, signalled they are determined to keep a post-Mursi Egypt afloat.

The confidence created by that signal will help Egypt roll over about $5 billion in dollar-denominated Treasury bills maturing by the end of 2013, and could limit or halt further depreciation of the Egyptian pound in coming months.

Cash grants totalling $3 billion from Riyadh, Abu Dhabi and Kuwait – a quarter of their combined $12 billion in loans, grants and donations of oil products – dwarf the $250 million in annual civil aid on offer from Washington.

Read the full story from Gulf Business.

 

There two other reason for this quick aid package.  First, an unstable Egypt will destabilize other countries… specifically in the Gulf.  Second, Kuwait, Saudi Arabia and the UAE were not happy with Qatar’s role in running Middle East politics lately.  It was the largest supporter of Morsi, the rebels in Libya and rebels in Syria.  The $5 billion or so Qatar gave to Egypt has now evaporated.  Qatar itself had a mini-overthrow recently when the Emir handed over power to his son.  Many speculate that he did not give up his seat voluntarily.  Business Insider reported last year of a coup attempt in Qatar.  Now that Qatar is out of regional politics (until further notice), its Gulf neighbors want to make sure they take a more active role in the region and hope that Qatar’s political ambitions are tamed for now.

 

Not only has the Gulf stepped up its support for the overthrow of Morsi, Egypt’s wealthiest person,  has also pledged to invest in Egypt “like never before.”  This begs the question, why didn’t all these supporters come out when Egypt celebrated its first democratic election over a year ago?  Morsi and his Brotherhood were doomed to fail from the start.  With the Brotherhood leadership cleared out, those behind Morsi’s fall can now carry out the rest of their plan.  The paid protesters that jump-started the recent uprising up until Morsi’s fall will now need to find new jobs.

 

On a side note, remember Algeria’s Civil War, which began in 1991?  What sparked this conflict?  The country held elections for the first time only to see that the Islamic party was winning by a landslide.  Elections were quickly cancelled and the people rose up.  This is not the case in Egypt, but there are similarities…