Welcome to the deadliest region in the world

The nature of war is changing in the Middle East and North Africa, and the death toll is increasing day by day. Published in MEED, 1 June 2015

In the first 24 hours after taking control of the Syrian city of Palmyra in May, forces from the jihadist group Islamic State in Iraq and Syria (Isis) executed at least 17 people, according to the Syrian Observatory for Human Rights (SOHR). Several hundred more have been killed since.

Further east, at around the same time as Palmyra fell, the group was carrying out mass executions in the Deir al-Zor province, including one man named as Ibrajim al-Shridah, who was killed by a rocket-propelled grenade fired by an Albanian recruit.

The brutality of the Syrian conflict is often shocking, but it is not only Isis forces who are guilty there. SOHR says 9,000 barrel bombs have been dropped from government helicopters on towns and cities across the country over the past seven months, killing rebel fighters and civilians without distinction.

The civil war in Syria is by far the deadliest conflict in the world, with an estimated 70,000 people losing their lives in 2014, according to data compiled by the London-based think-tank International Institute for Strategic Studies (IISS).

The second deadliest conflict is also in the Middle East, in Iraq, where 18,000 perished last year. Both figures mark a worryingly sharp rise from the year before. In 2013, some 49,000 people lost their lives in the Syrian war and a further 8,500 in Iraq.

The escalating death toll in these two countries is part of a global trend of conflicts getting more deadly. Around the world, the number of wars, insurgencies and other violent conflicts has actually been steadily declining over recent years, from 63 in 2008 to 42 last year, but what they have lost in number they have gained in ferocity. Total fatalities have risen from 56,000 in 2008 to 180,000 in 2014, says IISS.

The wars in Syria and Iraq account for almost half of the global total and mean the Middle East and North Africa (Mena) is today the world’s most dangerous region, with just over 101,000 deaths from eight conflicts last year. The next most dangerous regions are Latin America, where narcotics-led violence was largely responsible for the 30,500 deaths in 2014, and sub-Saharan Africa, where a dispiriting tapestry of ethnic, religious and political violence claimed more than 28,000 lives in seven countries.

Worsening situation

In most parts of the Middle East, the situation has been getting worse rather than better. Last year was the deadliest in the Israeli-Palestinian dispute since the 1967 Six-Day War, for example. The Israeli assault on Gaza, called Operation Protective Edge, which began in June and lasted 50 days, resulted in well over 2,000 deaths.

The number of fatalities also rose in the Sinai Peninsula area of Egypt, where 900 people lost their lives in 2014; in Libya, where 3,000 people were killed; and in Yemen, where the death toll quadrupled to 4,000. Among the main areas of conflict in the region, it was only in the Darfur area of Sudan that the number of deaths declined, from 3,000 in 2013 to 2,500 last year.

The number of refugees and internally displaced people has also been rising as a result of these conflicts, with Syria again at the forefront of the problems. As of early May, the UN High Commissioner for Refugees estimates that there are 4 million registered Syrian refugees in Egypt, Iraq, Jordan, Lebanon and Turkey, as well as 6.5 million internally displaced people within Syria itself.

“It is civilian populations that continue to pay the price of conflicts, both in terms of short-term dislocation but also in respect of longer-term impacts resulting from the collapse of government services, in particular education and healthcare, and economic development opportunities foregone, blighting the prospects of future generations,” says Nigel Inkster, director of transnational threats and political risk at IISS.

Jihadist strategies

There are some other important trends among these conflicts, beyond the merely depressing increase in the number of deaths and displaced people, which could have some far-reaching consequences for the region. Perhaps the most important is the changing nature of the jihadist groups fighting in these war zones and the strategies they are employing.

“Armed conflict has fundamentally changed the nature of jihadism, so that you now see jihadism as a state-building enterprise,” says Alia Brahimi, visiting research fellow at the University of Oxford in the UK. “I think that’s going to be the biggest impact on conflicts that are already going on.

“Jihadist space is geographically expanding, but also systematically deepening. Isis isn’t just exploiting chaos; it’s seeking to impose a long-term order, and that will have a significant effect on conflict.

“In order to compel local populations, you have to continually instill fear, so as a result we’ve seen ever more fanatical discourse, where mass casualty attacks against civilians are now presented as something self-evidently justified. This is a huge change from the days of [Osama] bin Laden.”

The strategy was clearly apparent in May, when Isis fighters captured Palmyra, but it has been going on for some time. SOHR estimates that the group now controls more than half of Syria.

“The capture of Palmyra is significant for several reasons,” says Matthew Henman, head of the terrorism and insurgency centre at IHS Jane’s, a UK research firm. “It further expands Isis’ territorial control, reinforcing its position as the single opposition group that controls the most territory in Syria. Palmyra is very strategically situated and can now be used as a launching pad for further territorial pushes towards Homs and Damascus.”

The more ground Isis controls, the more income it can generate from its territory, particularly from oil resources. This is to some extent a zero-sum game, with the government suffering a fall in its income every time an oil well or gas pipeline changes hands.

“So many states [in the Mena region] are fraying at the seams because of insurgencies and civil wars,” says Valerie Marcel, an associate fellow at UK think-tank Chatham House. “What’s happening in Syria and Iraq is that a fledgling state, previously just a jihadist group, is now acting like a government and controlling oil production.”

This is not just an issue in Syria. The practice of groups taking and holding land is also clearly visible in Yemen, where Al-Qaeda in the Arabian Peninsula (AQAP) occupies a substantial patch of territory in the east of the country, and in Libya.

“The loss of the state monopoly over the control of oil installations, production and marketing further weakens the central state,” says Marcel.

“If you look at Libya, you’ve seen different groups battle it out for territory, but more significantly for control over oil production facilities and export terminals. The more that sub-national groups control the oil infrastructure, the more it gives them the possibility to enrich themselves, but it also undermines the central states’ capacity to take the revenues, pay civil servants and consolidate their own power. So it hastens the weakening of the state.”

In Iraq, meanwhile, Isis forces have consistently shown themselves to be a good match for the under-motivated national army and, as a result, the jihadists now hold vast swathes of territory covering much of the west of the country. It has only been a combination of airstrikes by the US-led coalition and the response of Shia militia organised by Iran that has held them back from even greater gains. Even so, Isis was able to capture the city of Ramadi, little more than 100 kilometres west of Baghdad, in May this year.

Political solution

“What we have seen in Iraq is that the great blitz attack that Isis did last year has, broadly speaking, been contained by the coalition air strikes, but also just as importantly by the mass mobilisation of Shia militia,” says Ben Barry, senior fellow for land warfare at IISS.

“Quite clearly, the [recent events] in Ramadi demonstrate Isis still can counter-attack at the tactical and operational level and it can seize the initiative. It’s displaying tactics of quite a high order. My prediction is that this to-ing and fro-ing in the near future will continue.”

In the case of both Iraq and Syria, it is very hard to see how any side can win an outright military victory any time soon. As is the case in other conflicts such as Libya, Yemen and Palestine, a long-term political solution is needed if there is to be any hope of restoring stability, peace and prosperity. The prospects for diplomacy do not look promising at the moment, however. The Middle East looks set to remain a dangerous neighbourhood for many years to come.

Egypt’s aviation sector benefits from renewed focus

Many of Egypt’s airports have been operating beyond their design capacity for years. Now funds are at last being ploughed into expanding them. Published in MEED, 24 May 2015

Few travellers to Sharm el-Sheikh seem to enjoy their experience at the airport, if the reviews on websites such as Skytrax are anything to go by. Stories abound of chaotic check-in procedures, impolite staff and poorly organised baggage reclaim systems.

Perhaps some of the delegates to the Egypt Economic Development Conference, which was held in the resort town in March, suffered with similar problems. By the end of the conference, the Islamic Development Bank (IDB) had agreed to provide $457m to improve the airport. A month later, the African Development Bank (AfDB) approved a $140m loan for the same purpose. The $670m expansion project involves the construction of a new terminal, runway and control tower.

Stretched infrastructure

Sharm el-Sheikh has an important position in Egypt’s tourism industry and the investment in its airport will increase its capacity from 8 million passengers a year to 18 million by 2025. The money is badly needed. The airport is Africa’s third-busiest, according to the AfDB, but it has been operating beyond its design capacity for years.

The investment is, however, only part of what is needed to bring the country’s aviation sector up to scratch. Some other airports have also been getting an overhaul. According to regional projects tracker MEED Projects, $1.4bn-worth of airport projects are being studied, designed or built at the moment. In December, a $350m overhaul of Hurghada International airport on the Red Sea coast, another important tourist resort, was completed, lifting capacity to 13 million passengers a year from 4.6 million, through the construction of a new terminal and runway.

Other projects include a new terminal for low-cost airlines at Borg el-Arab International in Alexandria. The scheme has a budget of $170m and a main contract award is expected in July next year.

A new passenger terminal is also planned for El-Nozha airport, also in Alexandria, and work is in theory still ongoing to renovate Terminal 2 at Cairo International. A new Cairo airport has also been earmarked as part of the new capital city project unveiled at the Sharm el-Sheikh conference, although whether that ever gets built remains in question.

Most of the major airports in Egypt are controlled by the state-owned Egyptian Holding Company for Airports & Air Navigation, through two subsidiaries: Cairo Airport Company and Egyptian Airports Company. The latter’s remit covers 18 international and domestic airports.

In addition, two airports are operated by private companies under build-operate-transfer (BOT) contracts. Marsa Alam International on the Red Sea coast is run by EMAK Marsa Alam for Management & Operation of Airports, a subsidiary of Kuwait’s MA Kharafi Group. El-Alamein International, on the Mediterranean coast, is run by International Airport Company, part of the local Kato Investment group.

Such BOT contracts are used in other parts of the country’s transport system. For example, tenders were issued last year for new shipping terminals at Damietta, Safaga, El-Tor and Alexandria, all to be built under BOT contracts. However, they have not been used in recent times for airports, and few expect that to change in the near term, given the ongoing difficulties in Egypt.

“Maybe in the medium-to-long term there will be more BOT contracts, but I wouldn’t have said there would be a great deal of appetite among investors in the short term,” says John Strickland, director of JLS Consulting, an independent transport consultancy.

Along with expanding airports, changes are needed at the nation’s main airlines. Tourists and business travellers alike have been put off by the political turmoil over recent years and EgyptAir and its domestic subsidiary EgyptAir Express have been feeling the pain.

According to the Washington-based World Bank, the number of passengers flying on Egyptian-registered airlines fell by 19 per cent in 2011, the year President Hosni Mubarak was unseated, and it is taking time for the situation to improve. OAG, an airline industry data provider, says there was little growth in airline capacity to Egypt between 2011 to 2014, although a recovery of sorts is under way this year, with airlines adding more than 600,000 seats.

International carriers

Most of the growth is coming from international carriers, with the likes of Qatar Airways, Dubai’s Emirates Airline, Turkish Airlines and Russia’s Transaero Airlines all expanding fast. In contrast, EgyptAir has cut 60,000 seats this year in a clear sign that even if the sector as a whole is recovering, not everyone will benefit.

“It’s an interesting picture of overseas carriers putting more capacity on, whereas local carriers are actually reducing capacity,” says John Grant, executive vice-president at OAG.

Egypt’s national carrier needs to reform if it is to compete. Although it was consistently profitable before the revolution, the airline has been making heavy losses in recent years, ending 2011/12 with a £E3.1bn ($406m) deficit and posting a further loss of £E1.9bn the following year.

Other parts of the wider EgyptAir Holding Group are profitable, including the cargo, maintenance, and ground services divisions, and EgyptAir Express, which returned to profit in 2012/13. However, their contributions are nowhere near enough to offset the losses at the main airline.

A process of reform is under way. In December, the airline signed a deal with US travel consultancy Sabre to develop and implement a programme of changes designed to increase revenues and improve efficiency. At the time, Sameh el-Hefny, chairman and CEO of EgyptAir Holding, said the aim was to return the airline to profitability by the end of the fiscal year 2015/16. Doing so will not be easy, although the current low oil price environment should help.

“The losses at EgyptAir are coming down, but they’re still quite high,” says Hatem Alaa, an analyst at local bank EFG Hermes. “This year, with low oil prices, there’s a good chance we’ll see some improvements. Tourism is picking up and fare prices have not come down as much as oil prices, so there’s a chance there will be an improvement.”

Increasing competition

The problem is that pressure from nimbler, better-funded airlines in the Gulf and Turkey is only likely to increase. As well as the likes of Abu Dhabi’s Etihad Airways and Turkish Airlines, these include low-cost airlines such as Air Arabia and Flydubai. To the south, Ethiopian Airlines and Kenya Airways have better reputations and better structured hub operations than EgyptAir these days.

“EgyptAir is surrounded by very good global hubs and airlines with good products and competitive prices,” says Grant. “It could return to profit, but it has got to be commercially oriented. It may be profitable again, but perhaps not at the size they are at today.”

The best option for the airline, according to Strickland, could be to focus its activities on key destinations where there is heavy demand from business travellers, tourists and Egyptian expatriates.

There may also be gains to be found in opening up more to Africa. In a report published in July last year, research firm InterVistas looked at the impact that liberalising the market between 12 major African economies would have, including Egypt. It suggested an additional 318,000 passengers could pass through Egyptian airports as a result of Open Skies deals with the likes of Algeria, Nigeria and South Africa, creating 11,000 jobs and $114m in GDP in the process.

Even so, the country may simply have to accept that it can no longer sustain as large an aviation sector as it might once have hoped.

“Many people see aviation as an economic catalyst and generator of jobs,” says Grant. “Undoubtedly in Sharm el-Sheikh and Hurghada that is the case. But on a country level, continually investing in something such as EgyptAir to try and get it right is going to be a hard task to support.”

Talk of an Egyptian Boycott of Turkish Goods Won’t Do Anyone Any Good

Published by T Over the past few weeks Turkey’s President Recep Tayyip Erdoğan has taken almost every possible opportunity to publically criticize the July 2013 coup that brought President Abdel Fattah al-Sisi to power in Egypt in place of Ankara’s hapless ally, Mohamed Morsi.

Addressing the UN General Assembly in New York on 24 September, Erdoğan questioned the very existence of the UN, when it “defends those who come to power not with democracy but with a coup.” He returned to the theme at a World Economic Forum event a few days later, saying, “A president elected with [a] popular vote was ousted through a military coup and the man who perpetrated this coup was declared the legitimate president afterwards … This man even addressed the UN. Is the UN a platform where perpetrators of coups can make a speech, for God’s sake?”

And he was at it again at the opening of the Turkish parliament on 1 October when he said staying silent in the face of events in Egypt “would be a denial of history and our ancestors, as well as of our own existence.”

The views of Erdoğan are hardly new, but Egyptians appear to be getting increasingly irritated by the constant criticism. In a statement issued on 29 September, the Egyptian Ministry of Foreign Affairs condemned the “series of exaggeration and lies peddled by the President of Turkey,” and questioned his own democratic credentials. A further statement on 1 October called Erdoğan’s remarks to the Turkish parliament “miserable and desperate”.

Some Egyptian commentators have gone further, calling for a boycott of Turkish goods and for Egyptians to stop visiting Turkey on holiday. To date, however, there has been little impact other than perhaps lower viewing figures for some Turkish soap operas on Egyptian television.

Egypt’s economy is showing signs of a slow recovery so its government may feel that it can afford to take a more assertive line against its international critics. Employment levels rose in September for the first time in two and a half years, albeit modestly, industrial production is also expanding, and the local stock market is attracting more investors.

Even so, if the idea of a boycott does pick up momentum – whether officially sanctioned or not – there is very little prospect that it will cause Turkey to change its approach. No one in Ankara appears very bothered by the counter-accusations from Cairo and, when it comes to trade, Turkey is in the stronger position.

Turkey was Egypt’s fifth most important export market in 2012, according to the most recent statistics available from the World Bank, buying goods worth $1.6 billion, equivalent to more than 5 percent of all Egyptian exports that year. It was also Egypt’s sixth most important source of imports, accounting for $3.5 billion or 5 percent of the total.

In contrast, Egypt was only the eleventh largest export market for Turkey that year, buying 2.4 percent of all Turkish exports, and it was the source for just 0.6 percent of all Turkish imports, which means it was not even in the top thirty import markets.

When it comes to investment in each other’s economies, it is a similar story. There is almost no Egyptian direct investment into Turkey – the stock of Egyptian foreign direct investment (FDI) in Turkey amounted to just $1 million in 2012, according to UNCTAD. In the other direction, around $25 million a year has been flowing from Turkey into Egypt in recent years and the total FDI stock stands at around $143 million. While this is not entirely insignificant, it still means that Egypt lies behind the likes of Belgium and Romania and even the Marshall Islands when it comes to Turkish investment overseas.

Egypt clearly needs trade with Turkey more than Turkey needs Egypt and it could do with attracting more investment too. So for the authorities in Cairo to even entertain the idea of a boycott is rather self-defeating.

In any case, while the Egyptian government’s thin skin is hardly unusual in the Middle East, nothing Erdoğan says is going to fundamentally alter Sisi’s position these days. Egyptian attitudes towards Turkey have been on the slide for a couple of years, so the impact of Erdoğan’s speeches is increasingly limited. As recently as 2012, 84 percent of Egyptians had a favorable opinion of Turkey, but by the following year it had slumped to just 38 percent, according to opinion polls carried out by KA Research and the Turkish Economic & Social Studies Foundation.

However, all this does raise the question of whether the Egyptian-Turkish spat could have any ramifications on what is happening in other parts of the Middle East. Sisi’s most ardent supporters are the Gulf states of Saudi Arabia and the UAE. They are already irritated by Turkey’s support for the Muslim Brotherhood and the criticism of Sisi is a further annoyance. That relationship matters because Turkey and the Gulf states could usefully co-operate when it comes to Syria, where they have a mutual interest in defeating both the Islamic State forces and the regime of Bashar al-Assad.

There doesn’t seem to be much prospect of Ankara or Cairo dialling down the criticism of each other anytime soon, but if they could find a way of tolerating each other both sides would probably benefit. On the other hand, if they continue on their current course it’s difficult to see anyone profiting.

Egypt's real estate sector recovery hinges on stability

The political turmoil of the past three years has weighed heavily on the real estate sector in Egypt; rents have fallen and there has been no growth in sales prices. Published in MEED, 20 March 2014

Soon after being asked to form a new cabinet, Egypt’s Prime Minister Ibrahim Mahlab set out his priorities for government. The need to restore security and attract more investment were the two main issues he identified at a press conference on 25 February, but among a host of other items he also mentioned the need to develop real estate finance.

As a former housing minister, Mahlab ought to know the problems in Egypt’s real estate market well enough, but given how quickly prime ministers and presidents have come and gone of late, there can be little certainty he will have time to do much about them.

Affordable housing

The current authorities in Cairo do, however, have some friends with deep pockets. On 9 March, Hasan Abdullah Ismaik, CEO of the UAE’s Arabtec Holding, announced a deal to develop 1 million affordable housing units at 13 sites around the country. Arabtec says the £E280bn ($40bn) cost will be funded by Egyptian and foreign banks, and although the contractor did not name them, it would not be surprising if the Abu Dhabi government or the UAE federal authorities were the ultimate source of much of the financing.

Affordable housing is certainly badly needed, but the reality in other parts of the property market is that there is too much supply, particularly in the capital. Tourists and expatriate businessmen have stayed away because of the turmoil and any substantial and lasting improvement will require political stability.

The continuing problems are clear to see almost anywhere in Egypt. In the fourth quarter of last year alone, rents for villas in New Cairo declined by 12.5 per cent to $3,500 a month, while apartment prices dropped by 18 per cent to $900 a month, according to data from US property consultancy JLL (formerly Jones Lang LaSalle). In 6th of October City, villa rents remained steady, but average apartment prices fell by 28 per cent to just $630 a month.

Sales prices have proved more resilient. The average sales price for apartments and villas in areas such as New Cairo and 6th of October City remained steady in the final quarter of 2013, but there has been no real growth for more than two years.

The political turmoil also helps to explains the dire situation faced by hotels across the country. According to UK consultancy EY, average room rates in Cairo fell to $81 a night in December, down from $88 for the same month a year earlier. That made Cairo by far the cheapest of all the Middle East capitals surveyed by EY. Unfortunately for hoteliers in the city, they also had the lowest occupancy rate, at 26 per cent, meaning room yields were just $21 a night in December. Prices in the Red Sea resorts of Hurghada and Sharm el-Sheikh were even lower, at $25 and $44 a night respectively last year, but occupancy levels were at least higher, at 60 per cent in both places.

Yousef Wahbah, Middle East and North Africa head of transaction real estate at EY, says Cairo had the largest drop in revenues per room in 2013 out of all the markets it surveys around the region. Average room yields fell by more than 41 per cent compared with 2012, due to the twin issues of political uncertainty and security concerns.

New hotels are still being added, however. In the final quarter of last year, the 350-room Le Meridien opened its doors at Cairo International airport, taking the city’s total supply to 27,700 rooms across 161 properties. The Nile Ritz-Carlton, a remodelling of the existing Nile Hilton hotel, is due to open by the end of March, and the St Regis Cairo is due to open in September 2015.

Political situation

Ayman Sami, head of JLL’s Egypt office, says room rates are unlikely to fall further, but any growth hinges on the political situation.

“We would not expect to see any further softening in room rates or yields in Cairo as the current rates are already extremely low,” says Sami. “In our view, the hotel market is close to the bottom of the cycle and the next move is likely to be towards higher occupancies and room rates. The timing of this improvement will be related to the security situation in the coming months. The upcoming parliamentary and presidential elections could result in further demonstrations and protests. The scale of these and the response of the security authorities will have a major impact on tourism levels and therefore hotel performance.”

In contrast to the additional hotel rooms, no new grade A office space was added in the final quarter of 2013 and the total stock in Cairo remains at 819,000 square metres, most of which is outside the city centre. Some 127,000 sq m of new space was scheduled to be completed before the end of December, but many schemes were hit by construction delays. That work has been carried forward into this year and as a result, some 177,000 sq m of office space is due to come to the market in 2014.

Commercial demand

The lack of new space did at least help occupancy levels to rise slightly towards the end of 2013, and vacancies declined from 26 per cent in the third quarter to 22 per cent in the final quarter of the year. Prime office rents in the more sought-after Nile City Towers remained stable at about $35 a sq m. In other areas, rents were also steady, at $18-25 a sq m in New Cairo and $18 a sq m in West Cairo. JLL says it is aware of potential demand for more than 90,000 sq m of office space from foreign firms that are slowly finding their nerve once again. It says the most significant amount of demand is coming from companies in the oil and gas sector, followed by pharmaceuticals, chemicals, telecoms and IT.

The fact that some investments are being made and there are tentative signs of demand from some quarters offers a glimmer of hope for the real estate sector, but it would be unwise to be too optimistic. Sami points out that there are fewer demonstrations on the streets these days, saying “2014 could mark the beginning of the recovery of the Cairo real estate market, providing the progress that has been made on the political roadmap during late 2013 is continued”.

Foreign support

For now, however, the only people that appear willing to invest heavily are from the Gulf. The UAE, Saudi Arabia and Kuwait have been providing billions of dollars in aid to the country after the army overthrew the leadership of Mohamed Mursi in July 2013, and where those governments are leading other private firms are following, as the deal with Arabtec shows.

Among other investors, Dubai’s Emaar Properties claims its local subsidiary, Emaar Misr for Development, is the largest single foreign investor in Egyptian property, with a project portfolio worth about £E43.3bn. Its schemes include mixed-use developments such as the 3.8 square-kilometre Mivida and the Uptown Cairo district, as well as the Cairo Gate shopping complex on the Desert Road north of Alexandria.

But for such schemes to do well in the longer term, they will need tourists, foreign businessmen and other expatriates to return. That will require political stability, which, for now, looks elusive.

Cairo struggles to attract power and water sector investment

Egypt is trying to attract a larger number of private developers to invest in its power and water sector, but continued political upheaval is causing projects to be delayed. Published in MEED, 8 January 2014

As Egypt’s military and civilian leaders vie for control of the levers of political power, the rest of the population is left wondering if the country’s political classes will ever be able to sort out their electrical power needs. Over recent years, power outages have been all too common, particularly during the summer months when locals turn to their air-conditioning units for relief from the heat.

According to Egyptian Electricity Holding Company (EEHC), the state-owned body in charge of production, transmission and distribution systems, Egypt had about 29,074MW of installed capacity at the end of June 2012, compared with peak demand of 25,705MW. However, a combination of ageing networks and rapidly rising demand means that rolling blackouts and service interruptions have become a fact of life for many people.

Capacity targets

Demand is currently growing by more than 7 per cent a year and the authorities have been struggling to bring additional capacity online at a similar rate, although there is no shortage of plans to add more generating units.

Under EEHC’s current five-year plan, which covers the period from mid-2012 to mid-2017, 12,400MW of thermal generating capacity is due to be added, of which 11,100MW will be commissioned during the five-year period itself and the remaining 1,300MW will be commissioned during the following fiscal year, 2017/18. The plan also includes further investment in the country’s transmission and distribution networks.

Data from other sources suggests that even more capacity could be added in the coming years. According to the Ministry of Electricity & Energy, the planned capacity increases by mid-2017 amount to 17,840MW, including close to 3,000MW from renewable sources, principally wind power. One industry source suggests that as much as 45,000MW could be added to the system in the decade after that, at a cost of some $72bn.

Having plans is one thing, but getting the projects off the ground, particularly at a time of political upheaval, is proving to be a more difficult task. The latest setback came in December, when the ministry announced it was extending until March the bid deadline for the build-own-operate contract on a planned 2,250MW combined-cycle power plant at Dairut, in the central Assiut governorate. The scheme entails three 750MW units being built on the site at an estimated total cost of $2.2bn.

The Dairut project was originally launched in early 2010, but has suffered a series of delays. In June 2010, 10 firms or groups were prequalified for the scheme, with bids due to follow soon after and an award scheduled for November that year. Prior to the latest delay, the bids had been due for submission this month.

It is not clear what has caused the latest delay to the project, but the slow progress is illustrative of the power sector as a whole.

International funding

One significant issue has been the difficulty in obtaining funding for new power plants. Traditionally, the government has relied on financing from international institutions. In July 2005, for example, the African Development Bank approved a loan of E175.9m ($240m) to co-finance the Kureimat power plant near Cairo and it has since agreed to provide a further $1.2bn to support a series of other power generation schemes around the country.

More recently, in June, the Washington-based World Bank approved a $585m loan to support the 1,950MW Helwan South power plant, a project that is also being supported by the Kuwait Fund for Arab Economic Development. Additionally, in October, the European Investment Bank agreed to provide E205m to support the E413m cost of converting an existing open-cycle gas turbine power plant at El-Shabab to a combined-cycle facility, increasing its generating capacity from 1,000MW to 1,500MW in the process.

But perhaps wary of having to rely too heavily on such multilateral institutions, Cairo appears keen to widen its sources of funding and has been trying to attract more private developers by launching several independent power projects (IPPs).

“Most schemes are financed through international financial institutions and the appetite for these is becoming more limited now, so Egypt is pushing towards IPPs,” says one senior industry executive in the country.

Under EEHC’s five-year plan, close to half of the new capacity is supposed to come from private providers. The state-owned body will build and operate 6,900MW of the planned 12,400MW increase, but the private sector will provide the remaining 5,500MW. Dairut is one component of this private sector provision, alongside a 1,300MW facility at Qena in Upper Egypt and a 1,950MW plant at Beni Suef, to the south of Cairo. When these three projects were announced by the ministry in March 2013, it claimed they would help to end the problem of power outages.

The Egyptian authorities have previously attracted private firms to build, own and operate three power plants, at Sidi Krir in the West Delta region and at Suez Gulf and Port Said East in the East Delta region. These units came on stream between 2001 and 2003.

Lacking appeal

However, it may be harder to arrange such projects now, given the attitude of international banks towards the country in light of the political instability of recent years. “We consider Egypt as uninvestable until all the political constituencies are engaged,” says one senior US banker, speaking in general terms about the opportunities at the moment.

Another executive at a large Asian bank that is heavily involved in the Middle East says putting money into Egypt’s power sector is too risky at the moment, as is the case for neighbouring Libya. “We are not lending into Libya and Egypt at the moment,” he says. “IPPs are heavily reliant on what the government has to offer and their willingness to step in in case of problems. We struggle with sovereign risk with Egypt, even with guarantees from the Ministry of Finance. The situation will have to improve [before we change our approach]. We’re still in a wait-and-see mode.”

Egypt needs as much external investment in its power sector as it can get because the government’s own finances are in such a parlous state. In the past financial year, which ended on 30 June, the government ran a deficit equivalent to 14 per cent of gross domestic product (GDP). The US’ Fitch Ratings expects that to fall slightly to 12 per cent of GDP in the current financial year and to drop again the year after. However, even with these improvements, the agency points out that the government’s room for manoeuvre is still very limited, with interest payments, wages, salaries and subsidies accounting for 75 per cent of total spending.

International donors, most notably the Gulf states of Saudi Arabia, Kuwait and the UAE, have helped to ease the situation. Some $15bn has been pledged in deposits, grants and project spending since Mohamed Mursi was thrown out of office in a coup in July last year, and $10.7bn of that has already reached Egypt. That has helped to fund a number of stimulus packages, but it is not clear how much of it will go to shoring up the country’s power sector.

Alongside the planned increases in generating capacity, the government has also been trying to tackle rising demand and the high costs of subsidies. In January, it announced the latest price increases intended to help curb electricity use. However, almost all households still benefit from electricity subsidies and residential users account for the biggest share of demand, at 42 per cent of the total. They are also not always prompt payers of bills. The UK-based Economist Intelligence Unit says a combination of subsidies and payment arrears by consumers has left EEHC with a major revenue shortfall and has affected its own payments for natural gas, the fuel used for about 80 per cent of Egypt’s power generation needs.

Cross-border links

While the country struggles to match its generating capacity with rising demand in the short term, in the longer term there will be further help from its allies and benefactors in the Gulf. Late last year, Riyadh formally agreed to build a 3,000MW, 1,500-kilometre transmission cable to Egypt to supply it with electricity. That followed a memorandum of understanding to build a cross-border connection, which was signed on 1 June last year.

Some financial support for the scheme has already been secured from the Kuwait-based Arab Fund for Economic & Social Development. In its final board meeting of 2013, held in early December, it approved a KD45m ($160m) loan for the interconnection project. That will be a welcome, albeit small, contribution to the total cost of the scheme, which has been estimated at $1.6bn-2.1bn.

A survey of the route has already been completed. Tenders for the construction contract are expected to be launched in the first quarter of 2014, with work due to begin the following year.

Egypt already has interconnection agreements with Jordan and Libya, and the link with the Gulf will add to its electricity security. However, the interconnection scheme with Saudi Arabia could yet fall foul of the political upheaval in Egypt. The project has already been delayed several times and the uncertain political situation means that industry figures are having to take a realistic if not pessimistic approach to the future.

“The government changes have had an impact on power projects,” says the senior industry executive. “We hope things will improve, but before that happens we might see more problems.”

New M&A paradigm emerges for Egyptian dealmaking

QInvest bid for EFG Hermes collapses; New buyouts show what is possible. Published in Euromoney, June 2013

For some observers, the collapse of QInvest’s bid for Egyptian investment bank EFG Hermes indicates the difficulty of completing any M&A deals in post-revolutionary Egypt.

On May 1 the Qatari firm abandoned a plan to invest $250 million for a 60% stake in the bank, after the Egyptian Financial Supervisory Authority (Efsa) failed to approve the deal. Regulators in the UAE, Qatar, Saudi Arabia and Jordan had all agreed to the transaction.

But in the year after the EFG Hermes deal was first announced in late March 2012, other M&A transactions moved ahead. According to Dealogic, the volume of M&A transactions in Egypt either pending or completed between April 1 2012 and March 31 2013 were, at $8.2 billion, almost double those in the previous 12 months. The number of such deals jumped around 50% to 105.

Gulf buyers

In the biggest such deal, in late March, Qatar National Bank (QNB) completed its $2.7 billion buyout of NSGB, previously part of France’s Société Générale. Morgan Stanley and local player HC Securities & Investments advised on the sell side. JPMorgan advised QNB.

Another deal involving a French bank – the $500 million purchase of BNP Paribas’ Egyptian commercial bank by Dubai’s biggest bank, Emirates NBD – is also expected to close this month (Perella Weinberg and HC advised Emirates NBD).

Sources in the region’s financial community say these transactions demonstrate deals can be negotiated, as the Muslim Brotherhood under president Mohamed Morsi has consolidated its control, although political considerations clearly have to be astutely weighed in.

Angus Blair, president of Cairo-based research firm Signet Institute, says: "It is absolutely clear the regulators didn’t want to make a decision [on EFG Hermes] without the prime minister or the president intervening and saying what should happen." Other observers say it might have been too early for the bid, because of EFG Hermes’ alleged past activities and connections, under the former regime.

Gamal Mubarak, son of former president Hosni Mubarak, has a 17.5% stake in EFG Hermes’ private equity business. Furthermore, Gamal Mubarak and EFG Hermes’ former co-CEOs, Hassan Heikal and Yasser El Mallawany, are fighting allegations – which they deny – of insider dealing in 2007 worth $400 million in the shares of Al Watany Bank (now owned by National Bank of Kuwait).

Efsa’s official reason for not approving the QInvest deal was that the company taking over the assets, EFG Hermes Qatar, was not sufficiently experienced. But informally, doubts had also been raised as to the deal, almost as soon as it was announced, partly because it would mean an important Egyptian-owned asset falling into foreign hands (not the case with recent commercial bank acquisitions, as these were already foreign-owned).

Despite mixed reaction to the state’s handling of the EFG Hermes deal, international interest in Egypt, the Arab world’s most populous nation, appears to persist. QNB’s purchase follows the Qatari state’s provision of support to Egypt’s sovereign finances. The Qataris have also been getting involved in other sectors in Egypt, such as energy.

Amsterdam move

The BNP Paribas deal shows Gulf interest is not just from Qatar. And there is interest from outside the Middle East. Among other Egyptian transactions still pending as Euromoney went to press were deals, for example, between various US companies and Orascom Construction Industries (OCI), and between Orascom Telecom and Altimo Holdings, run by Russian oligarch Mikhail Fridman.

Altimo’s bid was approved by Efsa on April 15. On May 14 Orascom Telecom urged shareholders to reject the $1.8 billion offer, saying it undervalued the company. A spokesman for Orascom Telecom told Euromoney in mid-May that fewer than 1% of shares had been sold to Altimo. The tender offer was due to expire on May 27.

Yet OCI appears to be pressing on with moving its stock market listing from Cairo to Amsterdam, with advice from Barclays, Citi, Rabobank, and local firm CI Capital.

The OCI deal – if motivated by a desire to disassociate the company from an Egypt still in flux – is supported by a $1 billion investment from Bill Gates’s Cascade Investments, and US-based Southeastern Asset Management and Davis Selected Advisers. The Sawiris family (which founded Orascom) and Dubai private equity group Abraaj Capital will also participate in the tender.

The shares have been trading below the original offer price since a tax dispute emerged earlier this year over the sale of a cement business in 2007. But that dispute, at least, was resolved when OCI agreed in April to pay close to E£7 billion ($1 billion) in settlement.

With travel bans on OCI chief Nassef Sawiris and his father Onsi lifted after the agreement on the tax dispute, it is perhaps another sign that deals can be done in Egypt – as long as Morsi’s government gives its go-ahead.

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A military stalemate in Egypt

Protests look likely to continue unless Cairo’s army makes the concessions they want, casting a shadow over forthcoming elections. Published in MEED, 25 November 2011

More than nine months after Hosni Mubarak was forced from office, protesters and security forces are once again engaged in battles in Tahrir Square. Makeshift clinics are treating the wounded, while teargas swirls in the air. Many hundreds of protesters are reported to have been injured and dozens killed.

With just days to go before the first round of parliamentary elections, it is clear that the military junta is finding it harder to impose its will on the country. The Supreme Council of the Armed Forces (Scaf) has been slow to hand power to a civilian government and the inertia has meant that the trust between the army and the public had gradually been seeping away.

What prompted the latest protests was the attempt by Scaf to protect the military from future parliamentary scrutiny, in a series of supra-constitutional principles released in early November.

Unpredictable consequences

“The anger and distrust with the military was very clear among the activists,” says Emile Hokayem, senior fellow for regional security at the International Institute for Strategic Studies in the UK. “What tipped the balance was the publication of that list of supra-national principles that the army wanted to impose.”

The results of that are now being played out on the streets, with unpredictable consequences. The scale of the recent protests means that there are now doubts about whether the elections can start as planned on 28 November. If they do not, there is the risk of greater protests.

“Unless the military makes some real concessions, I think there’s probably going to be a climate of violence that will make it difficult to hold the elections,” says Marina Ottaway, senior associate at the US’ Carnegie Endowment for International Peace. “This can spiral into more violence because people will say the military wants to hold on to power indefinitely. Unless the military makes a significant move there is going to be real trouble ahead.”

The military has tried to defuse the situation by bringing forward the date for a presidential election, now to be held by June 2012. Field Marshall Mohamed Hussein Tantawi also said, in a television speech on 22 November, that Scaf had accepted the resignation of the cabinet, which had offered to step down a day earlier.

However, he made no mention of whether the supra-constitutional principles would be withdrawn or amended and the concessions do not appear to be enough for many of the protestors. Tahrir Square remained full following his speech, with many demanding that he leaves power immediately.

When it took over in February, Scaf said it would run the country for six months or until the parliamentary and presidential elections were held. However, the electoral timetable they have laid out indicates that parliament will not convene until March, more than a year after Mubarak was ousted.

Military stubbornness in Egypt

Over the course of this year, Scaf has, at times, appeared to bow to pressure from opponents, for example, promising to pardon civilians who had been convicted in military courts. Whether it is willing to make further, more meaningful concessions now is not clear.

“Everything we’ve seen since Mubarak leaving has been confirmation of how the military has been trying to hang onto power,” says Laleh Khalili, senior lecturer in Middle East politics at the School of Oriental & African Studies in the UK. “The military is too entrenched. They are very much invested in power and won’t give it up too easily.”

Outside influences may yet increase the likelihood of concessions being made, particularly if the US was to suggest that the $1.3bn in military aid it gives to Egypt every year was at risk. To date, although the US and other countries have been pressing Scaf to hand over power in a timely fashion, none have threatened any reprisals if they do not.

The comments of White House press secretary Jay Carney on 21 November were typical of the moderate tone Western governments have been using. “We call for restraint on all sides,” he said. “It’s important that Egypt continues to move to make that transition to the democracy that the people of Egypt demanded. I don’t want to dictate specifics to Egypt, but we do believe that the process needs to move forward.”

Domestic pressure

The key area of pressure is domestic, however. Changing the dates of the presidential poll is clearly more palatable to Scaf than allowing future parliamentary scrutiny of the military’s budget. But the protestors look increasingly entrenched and the longer the standoff lasts the more tense the atmosphere is likely to get.

Whether it is willing to speed up the transition process even further will also expose how serious Scaf is about holding on to power or whether it really is content to hand over the reins to a civilian administration as it claims. Scaf’s record, to date, does not give cause for optimism though.

“The military wants its cake and to eat it,” says Ottaway. “They want the democratic process, but they also want to make sure that the constitution that comes out in the end is the one that they like. In addition, they are politically naive. I don’t know how anyone thought, in the present political climate, that they could come out with a document that says the military is not subject to civilian oversight and get away with it without a major pushback. The fact is, that has always been the situation in Egypt, but they were stupid enough to want to [write it into law].

“The military could try to diffuse the situation and make it clear they do not intend to stay forever. They need the screen of a civilian authority. Without that, I really doubt they can put an end to the violence. They are not going to put an end to this protest by using teargas.”

In the meantime, the economic situation in Egypt is only likely to worsen. An economy going through a revolution generally takes a few years to recover, but the uncertain nature of political developments in Egypt indicates that it could take far longer.

In late October, Egypt’s credit rating was downgraded by the US-based Moody’s Investors Service by one notch to B1 from Ba3. At the time, Tom Byrne, senior vice president in Moody’s Sovereign Risk Group, blamed the downgrade on the country’s ongoing economic weakness, the continued unsettled political conditions and the uncertainty over the transition to a stable civilian government.

Since then, the situation has only deteriorated. The prospects for the country are all the harder to gauge due to the opaque nature of Scaf. The military council is possibly considering making serious concessions that address the protesters’ concerns, but if that does not happen, there are any number of scenarios that could take place.

Field Marshal Mohamed Tantawi, who leads Scaf, could be forced aside in a cosmetic change at the top. Alternatively, in what would be a more serious development, some elements of the military could refuse to continue with the crackdown on civilians. Equally, some opposition political groups could try to form an alternative government, the protest movement could splinter, or the army could find that they lack the level of popular support they had earlier in the year.

“There are divisions within the opposition,” says Hokayem. “The Muslim Brotherhood has an interest in very early elections and they don’t want a delay. [However], other political parties are not sure that this is the right way to go. They would prefer to have a civilian government immediately and then have the elections.

“There is a possibility that the majority of Egyptians are going to turn against the demonstrators because they feel they’re unruly and they create disorder. Any revolution is led by a minority. Most Egyptians are either too risk-averse or apathetic or they are simply inclined to support the current order out of fear of uncertainty and chaos, and that’s true for the current situation.”

Meaningful elections

If enough people can be convinced that the forthcoming elections will be meaningful however, it is still possible that the situation will calm down.

“The problem is not having elections, it’s having meaningful elections,” says John Chalcraft, a reader at the London School of Economics in the UK. “The reality is that the military are trying to undermine the elections by inserting these supra-constitutional principles into the constitution before it has even been written. The army has been moving to make the elections less substantive and people have been reacting against that.”

There is much at stake and the coming days could determine whether the military council will be able to deliver the new Egypt that was promised in February, or whether it too will be overtaken by events. The question of whether Egypt’s uprising should be thought of as a true revolution or simply a stealthy coup may soon be answered.

Egypt banks wait for stability to return

Having survived the political and economic crisis at the start of the year, Egypt’s banks now face a period of reduced growth and lower profits as they await recovery. Published in MEED, 20 May 2011

In late January and early February, when the political turmoil in Egypt was at its height, the country’s banks repeatedly shut their doors to customers amid fears there could be a run on deposits. After a year of strong growth in 2010, their prospects suddenly looked bleak. When they were allowed to reopen on 6 February, restrictions were put in place to limit the amount customers could withdraw.

Three months on and the measures imposed by the Central Bank of Egypt seem to have worked. The sector has emerged from the turbulent period weakened, but intact, with little sign of depositors rushing to remove their money. But with the country still facing substantial economic and political problems, it will be some time before Egypt returns to normal. As with the economy as a whole, banks are now facing up to a period of lower growth and reduced expectations.

Confidence dented

“Bank liquidity was strong so they were able to manage customer demands for cash earlier this year,” says Nicolas Hardy, credit analyst at US ratings agency Standard & Poor’s. “All in all, we haven’t seen any major disruption to the banking system. Now the major issue is confidence, the speed with which the economy will recover and what happens next on the political front.

“The economy is much less dynamic. Banks won’t grow fast this year. There will be lower revenue opportunities and lower profits. Growth in the balance sheets will be in line with gross domestic product (GDP) growth at best. In terms of profitability, it will be much less, due to the lack of opportunities and some additional provisions [for non-performing loans].”

Others share that analysis. In mid-April another US credit ratings agency, Moody’s Investors Service, changed its outlook for the entire Egyptian banking sector from stable to negative. Among the reasons it cited for the downgrade were the economic impact of the continued political unrest in the country and the wider region, as well as banks’ high levels of exposure to Egyptian government debt.

With a military council still in charge of the country, it is clear that the aims of the protesters, who filled Cairo’s Tahrir Square in early February, have not yet been fully achieved. There have been regular, if smaller, protests since then and some sporadic incidents of violence. Full political stability is unlikely to return until the military council hands over power to a freely elected civilian government. This is not due to happen for several months, with parliamentary and presidential elections scheduled to be held in September and November.

Until the political situation is resolved, economic uncertainty will continue. The impact on the country’s economy has already been significant, with receipts from the vitally important tourism industry expected to be sharply down, in tandem with foreign direct investment. Domestic economic activity has also been heavily affected, particularly in the first quarter of the year.

In its most recent statement, released on 28 April, the central bank’s Monetary Policy Committee cautioned that “the current political transformation will continue to have ramifications on both consumption, as well as investment decisions, adversely weighing on key sectors within the economy.”

It is not just internal events that are hurting the local economy. Egypt is also suffering from the unrest in neighbouring countries, in particular Libya. Remittances from the many thousands of Egyptians who had been living and working in Libya have all but dried up.

Results for the first quarter of the year have yet to be released by banks, but when they do emerge they are expected to show the initial impact of all these effects.

“The banks are saying the current situation is manageable,” says Nondas Nicolaides, a senior analyst at Moody’s. “The damage is not so significant, so you will not see a huge impact on the results. What will be impacted will be loan growth and their business prospects during 2011. It will not be the same as in 2010.”

Revised outlook

The bigger question for banks is what the longer-term impact will be and how quickly the wider economy might recover, which would allow them to make up for the ground lost in the first quarter. So far, the indications for the rest of this year are not positive.

Predictions for GDP growth have been reduced across the board, with the Washington-headquartered International Monetary Fund (IMF) among the most bearish. In its most recent assessment of the economic health of the region, published in late April, it says the unrest will have ‘a substantial economic cost’ for Egypt. The IMF predicts that real GDP will rise by just 1 per cent this year, compared with 5.1 per cent in 2010.

Egyptian banks are heavily focused on the domestic market for both their funding needs and in their loan activity. This was a significant advantage during the recent global economic crisis as they had little exposure to the problems that afflicted so many of their international peers. At the moment, however, it means there is little they can do to escape the country’s economic and political uncertainty.

“It was really a strength of the Egyptian banks during the global downturn to be focused on local opportunities,” says Hardy. “They weren’t lending outside the country and weren’t exposed to toxic assets.”

So far, banks appear to have convinced depositors it is safe to keep their money inside the country, although data from the central bank suggests that some locals have been moving their deposits into foreign currency accounts.

“As a whole, the deposit base did not shrink,” says Nancy Fahmy, banking analyst at the local Beltone Financial. “However, the banks saw some movement from local currency deposits to US dollar deposits, so there has been some dollarisation. Switching currencies might harm the banks’ margins.”

Repayment difficulties

Of potentially greater concern are the loan portfolios. These are likely to take a hit as some customers will struggle to repay existing loans in an economy that is barely growing, particularly those exposed to the worst affected sectors, such as tourism and real estate.

The banks already suffer from relatively high levels of non-performing loans (NPLs). Across the sector as a whole, it was about 15 per cent in mid-2010, with most of the problems concentrated in the state-owned banks. Several wrote off a large proportion of their bad debts late last year, according to Moody’s, reducing the overall figure for the sector to about 11 per cent, but the ratio may now start rising again.

“Provisioning costs [for NPLs] will go up,” says Nicolaides. “By December 2011, the NPL ratio might creep up to 12 or 12.5 per cent from around 11 per cent in December 2010, but we also expect banks to agree some sort of rescheduling or restructuring of loans with customers facing temporary liquidity problems.”

It will take time for the impact of this to become apparent as there needs to be several months of missed payments before a loan can be classified as non-performing. But even if they can keep the proportion of NPLs under control, the banks are likely to find fewer opportunities to make new loans to customers.

“Banks are likely to be much more cautious this year in their lending activity and so profits will not be the same as in 2009/10,” says Nicolaides.

The poor economic outlook has led to Egypt’s sovereign rating being cut and concerns over the government’s ability to support the banking system, coupled with the high level of government debt held by the country’s banks, have led to a series of downgrades on banks.

This may dissuade some international investors from holding shares in listed banks, but otherwise it is unlikely to have a major impact on day-to-day operations. Instead domestic economic issues will be the critical factor.

“Maybe foreign investors may not be compelled to invest, but the challenges lie here in the country,” says Fahmy. “The growth, the liquidity - that’s the real challenge, rather than what the credit ratings agencies say.”

All this stands in marked contrast to the largely healthy growth rates that Egyptian banks posted in their financial results for 2010. Bank of Alexandria, which is majority owned by the Italian group Intesa Sanpaolo, posted a 22 per cent year-on-year rise in profits to $113m. The rise would have been even stronger were it not for the changes in the value of the local currency against the dollar. In Egyptian pound terms, the bank saw a rise of 30 per cent year-on-year. Similarly, Commercial International Bank saw its profits increase by 12 per cent over the same period to $433m. Both of these banks and others also reported double-digit rises in the value of their assets and customer deposits.

Patience needed

Even during the banking shutdown at the start of the year, there was some optimism that, in the long run, the prospects for the economy and the banking sector would improve with the removal of the old regime. Hisham Ezz al-Arab, chairman of Commercial International Bank, told MEED at the time that the uprising could ultimately prove positive. “Change is healthy,” he said. “Change keeps an institution fresh and that applies for a country as well. Egypt has changed forever and for the better. Now we want accountable people and accountability brings excellence. But we have to be patient.”

Optimism appears to be in shorter supply these days, but patience will certainly still be needed in the coming months. The underlying strength of the banks enabled them to deal relatively comfortably with the political and economic disruption at the start of the year, but the longer problems persist, the harder it will be for them to bounce back and return to high levels of growth.

Egypt's bankers hoping on an economic change for the better

Egypt’s bankers hope the political crisis will result in a more open economy. Published in MEED, 11 February 2011

Egypt’s banks passed their first major test of the country’s political crisis on 6 February, when they reopened their doors after a week of enforced closure.

There had been concerns it would mark the start of a run on the banks as skittish investors emptied their accounts. In the event, the reduced opening hours and cash withdrawal limits of E£50,000 ($8,400) imposed by the central bank helped to ensure the long queues remained orderly and confidence held.

“Things are way better than we expected,” says Hisham Ezz al-Arab, chairman of Commercial International Bank, one of the country’s largest. “We thought of the worst case scenario: a run on the banks, a massive number of people finishing transactions. That did not happen.

“Things were extremely busy on the first day and busy for the first couple of hours on the second day and now there are no queues outside. What we did on the first day was the backlog from the week before and now things are getting back to normal.”

Future threats to Egypt’s banking sector

The smooth reopening of the banks does not disguise the fact that they continue to be damaged by the crisis. Profits will be lower for this quarter and bad debt levels could rise. The relative health of the banking sector means it has been able to withstand the shocks to date, but whether banks can maintain the confidence of investors and depositors in the coming weeks depends to a large extent on how the political environment develops.

“The duration of the crisis in the economy will be the single most important determinant for the amount of bank profitability you will see in this quarter and the next one,” says John Sfakianakis, chief economist at Banque Saudi Fransi, part owned by France’s Credit Agricole Group, which has a large presence in Egypt. “If this is a long, drawn-out event, which takes many months to resolve and demonstrations go on this is going to have a severe impact.”

Prior to the crisis, banks in Egypt were generally viewed as solid prospects, with high liquidity and good capital adequacy ratios. But they now face two key risks, which could undermine those strengths: investors pulling out of the country and reduced domestic economic activity which could lead to far more non-performing loans.

“The main risk for banks is liquidity,” says Nondas Nicolaide, senior analyst at credit ratings agency Moody’s Investors Service. “If withdrawals and capital flight continue to significant levels then this is a threat. The other possibility is rising levels of bad debts.”

In any political crisis, investors are likely to move money out and signs of nervousness have not been hard to spot over the past few weeks across the stock, bond and currency markets.

International investors were net sellers on the Egyptian Exchange through January, cutting their portfolios by E£647m over the course of the month, with most of that coming in the last three days of trading before the market shut on 27 January. Since then, the Egyptian government sold E£13bn in a planned E£15bn auction of treasury bills on 7 February, paying an average interest rate of 10.97 per cent on 91-day notes, the highest rate since 2009.

The cost of credit default swaps on Egyptian government bonds, which are used by investors to insure against the risk of default, are also far higher than at the start of the year. On 3 January, the cost was 237 basis points and rose as high as 430 basis points by 28 January, although the figure subsequently fell back to 347 basis points by 7 February.

The Egyptian pound has been just as volatile. The currency fell in value in the wake of the Tunisian revolution and lost even more ground on 7 February, as investors withdrew money from the country and others moved their deposits into international currencies.

All these issues around investor confidence will harm the position of Egypt’s banks. The second major problem they face – the slow-down in economic activity – is also under way, although its full impact is hard to gauge.

Trade levels dropped by 6 per cent in January compared to the previous month, according to Trade & Industry Minister Samiha Fawzi Ibrahim. Given that the demonstrations only started in the final seven days of the month that is a significant fall. In addition, the tourism industry, a mainstay of the economy, has suffered a sharp slowdown as visitors left early and others stayed away.

Any company involved in international trade or tourism will obviously be feeling the pinch, but companies in other areas have also been finding it hard or impossible to operate normally because of the curfews and other indirect effects of the protests. If this pattern of economic inactivity continues, there could be a large rise in bad debts, as firms struggle to repay loans.

“If there is a continuous decline of economic output due to demonstrations and protests, SMEs [small and medium-sized enterprises] will be the first to suffer,” says Sfakianakis. “If the private sector sees a decline in activity and output that will reflect on non-performing loans increasing.”

It will take several months for data to emerge on just how big a problem this will be, however, as loans are usually only classified as non-performing if they have not been serviced for three months.

All this has lead to credit ratings agencies queuing up to downgrade the country’s sovereign debt and its largest banks. To date, there have been 16 downgrades affecting nine banks, with Commercial International Bank and National Bank of Egypt the most widely hit.

Further downgrades will follow if the political and economic instability continues. Even once these problems are resolved, it could take a year or more for tourists and foreign investors to regain confidence, although domestic economic activity is likely to recover faster.

“Local economic activity could get back on track relatively quickly, [but] it’s going to take some time for tourists and foreign investors to regain confidence,” says Nicolaides. “They’ll have to feel the situation has normalised. It might take a year or so, provided there is a smooth political transition.”

Egypt remains a promising market for some companies, however, not least because of its large population and well diversified economy. Indeed, some investors are apparently still intent on entering the market despite the current crisis. Alchemy Investments, a local investment bank, says a deal it is working on, involving the sale of an Egyptian food firm worth more than $100m, is still going ahead. “We received investor offers from the US and Europe in mid-January and were supposed to initiate the due diligence phase in early February,” says Ahmed Samir, managing partner of the bank. “We thought things would stop but the investors say they are still interested in pursuing the acquisition and would be ready to close as soon as we think the time is right.”

Long-term private equity opportunities for investors

Others in the market seem just as determined to be optimistic and to look beyond the current instability. “In the coming period, we see very compelling opportunities for long-term private equity investors in Egypt and beyond,” said Cairo-based Citadel Capital in a statement released on 3 February, citing the large, young workforce and low labour and energy costs, among other things.

“Economic activity will come back,” says Al-Arab. “When you’re talking about a country of 82 million people, a week or two of the 52 weeks of the year is not really a big issue.

“Egypt has changed forever and for the better. Every single investor we spoke to over the past two years said their main issue was the transition of power [once Mubarak leaves]. This is now out of the way. Now I have a smile on my face, but we have to be patient because we have an interim government until September.”

The current expectation is that elections due in September will usher in a new government intent on reform. Between now and then, however, the political situation will remain fragile and banks will continue to be affected by wary investors and lower domestic economic activity.

At the time of writing, President Hosni Mubarak appeared determined to stay in office until his term officially ends, while protestors in Tahrir Square were equally adamant they would continue until he stepped down. But even as that standoff continues, the successes which the protest movement have already achieved has engendered a sense of optimism for the long-term prospects of the country.

“A democratic state and an uncorrupted regime is better for the economy and better for society,” says Samir.