By Nataša Kubíková and Dalia Mostafa
Financial support can easily become a double edged sword, for individuals desperate for help, and for states alike. Egypt is also experiencing the tricks. Cash inflow from the Gulf countries made the Egyptian government feel victorious. But the taste of it may slowly become bitter.
The Gulf states such as the UAE, Kuwait, Oman and Saudi Arabia had pledged $12.5b in financial package to Egypt at a grand investment conference in March 2015. A half of the amount was deposited in the Egypt’s Central Bank (CBE) to balance out country’s replenished foreign currency reserves that are reported to have tumbled to merely $16b in September 2015. The rest of the Gulf’s financial stimulus was agreed to come into the country as investments. Analysts at Capital Economics believe that given the remaining amount of foreign reserves, Egypt must have burned through the vast majority of the bailout money. Gulf cash help keep Egypt’s economy afloat, yet capacity to sustain the economic decline through similarly designed short-term rapid solutions, may be counterproductive in a long-term projection.
While the package undoubtedly helped ease a series of Egypt’s crises, the future of the funds is uncertain amid the global oil prices decline. The states in the Gulf area are seeing their budget crushing, deficit exploding. Saudi Arabia is not an exception. The International Monetary Fund has warned that Riyadh is likely to run out of cash in five years or less if oil prices rebound to the level as high as $50 a barrel, up from the current $30 a barrel. The Kingdom announced, in an attempt to counter-balance emerging difficulties on the market, that it would opt for measures as unprecedented as selling its Aramco’s assets in IPOs.
Saudi Arabia has been Egypt’s most generous supporter since July 2013. Aid in the form of governmental grants put a smile on the faces of Egyptian officials on countless occasions. Trust in Saudi coffers that would never dry out might have been in place. But imagining that Riyadh’s financial boost would continue for as long as Cairo needs, seems questionable. The form of financial support to Egypt has inevitably been modified, giving less of an optimistic outlook for Cairo’s authorities crashed by ongoing economic hardship.
Saudi Financial Assistance
Open door diplomacy with Saudi Arabia has brought in billions of dollars to Egypt in aid, grants, and cash deposits in the last year and a half. The incoming funds helped buoy the country’s economy and tackle its energy crises caused by the lack of petroleum products, crude oil, or electricity generation.
Riyadh has expressed its willingness and interest in supporting Cairo continuously, despite the global oil prices decline that gradually bit off Saudi foreign currency reserves and decreased Kingdom’s revenues. However, Saudi government’s grants and financial aid deposited previously to the Egypt’s Central Bank directly have come to an end. Saudi’s support suggests a new trend. Money shipped to Cairo is coming as investments and loans.
In September, Egypt had signed an agreement for three-month shipment of fuel products refined in Saudi Arabia. Egypt was to receive 500,000 tons of diesel fuel, 220,000 tons of heating oil, and 150,000 tons of gasoline each month for a total amount of $1.4b. Under the deal, payments for the products are to be made by the end of 2016.
In December, Saudi King Salman has pledged economic assistance to Egyptian President Abdal Fattah Al-Sisi in oil imports, increased traffic by Saudi ships in the Suez Canal and $8b in additional upstream oil and gas projects investments. The oil needs and investments are to extend to a period of the next five years. King Salman said according to Daily News Egypt that the country “will pull a slice of those investments during the first quarter of 2016.” He added that Saudi Arabia was “currently scrutinizing these projects through following up on the status of lands and their permits with the concerned ministries.” “The investments that the Saudi [King] ordered are all new government investments,” Abdallah bin Mahfouz, the Deputy Head of the Saudi-Egyptian Business Council, said, as Al Arabiya wrote. The overall bulk of Saudi investments in Egypt will reach around EGP 60b, according to economics Professor, Hamed Morsi, quoted in an analysis published by Al Arabiya. “This will contribute to stabilizing the value of the Egyptian pound, which has been lately devalued,” Morsi noted.
In further investments, Saudi Arabia will finance three other projects in the field of petroleum. The first is a project of aromatics and olefins at the Suez Canal axis, at Ain Sukhna, worth $6.85b, and is to be completed in 2021. The second project is the production of styrene at a cost of $593m, which is to be constructed at the Dekhela Port, in Alexandria, and implemented over the next four years. The third project is hydrocracking at the Assiut oil refinery, with an investment of $1.5b, which aims to cover the needs of Upper Egypt for gasoline, diesel and LPG.
From Grants to Loans
These vivid Saudi-Egyptian economic ties are promising to boost foreign investors’ confidence in the country. Following the agreements, Saudi Ambassador in Egypt, Ahmed al-Qattan, told Ahram Online that “the confidence of the Arab and Saudi investor will increase after the announcement of the increase in investments.” He was positive about the mutual prospects, stating that the bilateral relations will improve and become stronger each day.
While Saudi officials are optimistic in pouring funding in the country, the Egyptian government has necessarily become encircled by a cash spell as billions in grants have turned into billions of loans. Even though the official statements indicate advantageous borrowing schemes, which oblige Cairo to re-pay the debt within an extended period of time, lack of details raise further questions.
In December, Egypt was promised a $1.5b Saudi loan to finance the development of the Sinai Peninsula, in addition to a $1.2b loan for purchasing oil products in the next three months, and a $500m loan for importing only Saudi products and services directly from the Kingdom. The loans come as part of Saudi policy to pump $2.5b in total in Egypt’s economy as a stimulus package.
Another deal was concluded in December, under which Saudi Arabia’s state-owned Aramco was to deliver around $20b worth of oil products to Egypt in the next five years. “Negotiations with the oil-rich Kingdom are ongoing to agree on financing Egypt’s oil purchases within the coming five years,” Egypt’s Minister of International Cooperation, Sahar Nasr, said in January, according to Ahram Online. According to available information, the deal grants Egypt easy payment terms, however, no further details were disclosed. It is uncertain what the conditions would mean for the future, but for the time being the deal is beneficial as it will address shortage in oil products and “the prices Saudi offers will be cheaper, which will increase growth rates and be in the best interest of the Egyptian public budget,” Morsi told Al Arabiya.
The financial exchanges between Riyadh and Cairo are believed to substitute for lacking sources for oil and gas exploration and production in Egypt in a foreseeable future. It is also to balance out the Egyptian external debt check. The overall debts to international oil companies for already implemented projects amount to $3b. Although Egypt has paid off a part of its debt already, the government was unable to achieve its goal to straighten the debts altogether by the end of 2015 as planned. This may further suggest how promising the income from the Gulf is for the country, especially when it comes in loans.
Previously, the Kuwait Fund for Development, the Abu Dhabi Fund, the Arab Fund for Economic and Social Development and the Islamic Development Fund, chipped in to give $1.5b in loans to Cairo for country’s Sinai development scheduled over the next five years. To boost its payment capacity, Egypt has also taken on more loans by the end of 2015. The World Bank has granted $3b to be paid in installments over the next three years to overcome US dollar insufficiency.
The key question here may suggest that the currently adopted policy of patching up immediate financial holes with massive burden of loans is unsustainable for a long term. It is not only because generous Gulf coffers are not endless, but also because the granters are re-assessing their profits and payback from the pledged funds. Moreover, the receiver, overwhelmed with incoming floods of financial pledges, seems to see this as a viable path towards prosperity. The management of the funding thus overshadows needs for an economic overhaul.
Towards Economic Reforms
Investments and loans from Riyadh are praised for helping Egypt overcome current financial difficulties and energy deficiency. But a lack of information regarding the terms of re-payment raises concerns about the country’s economic sustainability.
Saudi investments promise to expand oil and gas industrial projects that would provide employment for Egyptians. Al Arabiya quoted economics Professor Salah al-Din Fahmi as saying that “those new projects will offer numerous job opportunities for Egyptian youths and will increase productivity, which eventually means increasing exports.” But the projects are designed for up to five years. How Egypt’s government plans to create such an economic environment that would maintain the jobs, inflow of investments, and boost export capacity, remains unanswered.
The IMF has advised Egypt to boost tax revenue, improve labor market policies and pursue growth oriented spending on infrastructure, education and healthcare. Without a profitable economic setting, Egypt would face difficulties to attract foreign investors, as it is doing presently. According to Mohamed El Masry, Chairman of EGPC, “international oil partners have decreased their investments by 20-25% due to the oil price restrictions, to protect their initial costs as these expenses would not be covered efficiently otherwise.” While global oil price drop is a major factor, boosting Egypt’s capacity for energy output that would exceed domestic needs and thus aim for export to secure state income, is not being discussed publicly, if such a reform strategy exists.
The largest expenditure of Egypt’s budget is interest payments on debt, wages and subsidies that grew in line with petroleum products import spending. For the period between 2005 and 2014, subsidies accumulated to around EGP 680b ($90b), increasing, in particular, external debt. The government needs to address these issues urgently proposing a reform of structures and processes in the country’s economy. Reducing fuel subsidies has become a buzz word in the Egyptian government’s rhetoric; however, this would be one part of a much needed more complex economic restructuring.
Saudi Investments Focus
Riyadh is not deterred to continue investing in Egypt despite low oil prices. This is other good news for Egypt. However, the investment equation will likely shift further as Saudi Aramco already announced and other Gulf countries stated to follow the suit.
The Saudi Kingdom is to introduce unprecedented cuts in its state budget, consider launching a share listing of Aramco and it is interested to search for diversification of investments by moving away from oil exports. As Aramco Chairman, Khalid Al-Falih said, “our investment in capacity, oil and gas, has not slowed down.” Nevertheless, according to Your Middle East analysis, the Kingdom’s future growth would be further diversified away from oil exports and “more evenly distributed with information and communications technology, healthcare and tourism,” as Al-Falih noted, offering potential for boosting the economy. Third good news for Egypt is that Saudi Arabia considers refining, chemical production and other downstream outputs as a way towards diversification. This will likely help Egypt’s fuel products market to fulfill growing domestic demand. But the prospects end here.
Egypt is therefore further broadening the donor scheme as it recently agreed with China to provide a $1.7b loans to Egypt’s Central Bank and the National Bank of Egypt. In addition Cairo has concluded another agreement for further financial assistance with multilateral development banks to shore up its foreign exchange reserves.
According to an analysis by CPI Financial, risks of external financial support in the form of loans and investment commitments are seemingly mitigated by Egypt’s low levels of total external debt of 15.4% of GDP calculated in June 2015, and general governmental external debt of 8.5% of GDP as of the same date. However, the decline in oil prices and further withdrawal of expenditure and capital investments of foreign firms is limiting Egypt’s prospects by making the country adopt measures attractive for investors, less so for the country’s economic sustainability.
The incoming finances are considered as credit positive for the country to ease the recent budget pressure, according to the international ratings agency, Moody’s, but in the current economic slowdown, prospects are contingent upon further reforms. Low oil prices hit Egypt’s exports dropping to $21.9b, down from $26.1b, while Suez Canal revenues fell on the back of weak global growth and the tourism industry is having a hard time to rebound. Egypt’s net oil imports contribute to expanding structural deficit, drain on foreign currency and inflict further burden on domestic oil production. These factors are negatively affecting the country’s balance of payments.
As the recent trend in the economic support for Egypt shows, the country’s donors are restraining their fiscal aid to loans and short-term investment projects. This assistance coming from the Gulf countries will remain indispensable in the near future; however, it may put strains on industrial, economic and social improvements, if a strategic economic reform is not spelled out.