October 24, 2011

TSG Atmospheric: Egypt: Broken Promises


. Overview

Throughout last week The Soufan Group (TSG) has been tracking the fallout from the Maspero incident which has continued to reverberate.  According to the newspaper 'Egypt Today' (Al-Misri Al-Yawm) on 14 Oct 11, many hundreds of protesters staged a national unity march from Al-Azhar Mosque to the Orthodox Cathedral in Abbasseya after Friday prayers.

A second march from Tahrir Square joined the protesters in front of the cathedral where the crowd called for national unity and shouted, "Muslims and Christians are one hand" and "Down with military rule."  The protesters also raised the Egyptian flag beside the Qur'an and the Christian cross.

This is a welcome sign of inter-sectarian solidarity against a backdrop of extreme inter-sectarian violence, the responsibility for much of which lies with the Supreme Council of the Armed Forces (SCAF), as will be outlined below.

However, earlier on Friday October 14, some individuals attacked protesters who were gathered outside the mosque supporting the march.  Both sides threw stones at each other and those leaving the Mosque chased protesters into Hussein University Hospital where they then chanted in support of SCAF.  The protesters regrouped inside the hospital and then proceeded to the cathedral.

It is clear that the general view is that SCAF has catastrophically mismanaged the Maspero incident, and has damaged its standing with the Egyptian population who hitherto regarded the army as the guarantor of safety and security.

This is setting up tensions between the Egyptian public and SCAF, and this issue needs to be set in the context of increasing sectarian friction between the minority Coptic Christians and the majority Muslims.

Prohibition of Discrimination

TSG noted on October 15, 2011, that SCAF issued a decree prohibiting discrimination, including that based on religion.  Under the measure, discrimination can lead to a maximum three months in prison and a fine of up to 100,000 Egyptian pounds (nearly $17,000).  This will be seen by many as far too little, far too late.  Sectarian divisions are deepening and becoming more tense.

Meanwhile, on 18 October, Gilad Shalit the Israel Defence Forces (IDF) soldier held by Hamas for five years was officially transferred to Israeli custody.  An IDF official confirmed that Shalit passed through the Rafah border between the Gaza Strip and Egypt.

The apparent role played by Egypt in mediating and facilitating the release marks an important point in the Egyptian / Israeli relationship which has been threatened by recent events.

It also highlights interesting dynamics in the relationship between SCAF and Hamas, which is a relationship that has previously caused some concern to Washington, which is already deeply nervous over regional instability.

Finally, the Coptic Church called for a mass three-day fast, to express its dissatisfaction; many Copts have angrily dismissed this as a wholly inadequate response.

It seems much more likely that the Copts and their Muslim supporters will continue to agitate for the resignation of Prime Minister Essam Sharaf's interim government.  This in turn is likely to lead to an escalation in violence against Coptic Christians and other protestors.


The TSG view of Egypt is that it has a government without a strategy, and a people without leadership.

Following the February revolution, in crude terms SCAF could be characterised as trying to please all the people all the time - by being the independent guarantor of the rights of the Egyptian people in the face of a collapsed dictatorship.  However, that has deteriorated over time to where we are now - with SCAF now pleasing only some of the people some of the time.

The Maspero incident has changed the political paradigm once again, and SCAF is in danger of pleasing none of the people none of the time, and this includes the international community which provides much of the Egyptian economic lifeblood.  This links back to the core problem of a lack of real strategic thinking in terms of future political leadership of Egypt.

SCAF had previously declared that it will allow parliamentary and presidential elections in November 2011 and March 2012.   However, on Wednesday night (October 18) two members of SCAF, Generals Mohamed Al-Assar  (left) and Mahmoud Hegazy, appeared in a popular talk show on Tahrir TV and Dream TV, where they said that based on the new timeline for handing over power to a civilian authority, the presidential elections will be held in mid-2013, which means they are even further delayed.

The response was immediate: Hamada Al-Kashef, a member of the Revolution Youth Union said that this timeline is unacceptable as it was issued without consulting political powers. ""If they want to delay the presidential elections, they should hand over power to a civilian presidential council,"" he said.

General Mohamed Hegazy also said that that the police will secure the electoral process and will be supported by army personnel - this is hardly a reassurance following the events of Maspero.

Further, to encourage youth to participate in the elections, General Mohamed Al-Assar said that SCAF will cover the cost of election campaigns for candidates under 40.  However, this is cynical, as such candidates are unlikely to attract as much political support as the established political characters.  Unclear at this stage is what will happen during those elections, and SCAFs' reaction if political entities or individuals which they do not approve seem close to taking power.

If SCAF reacts as the Algerian army did when the Islamic Salvation Front (FIS) seemed close to taking control of the Algerian government in 1989, then the outcome could be a serious surge in politically motivated violence.  The conflict between the Algerian army and FIS led to 200,000 deaths and a decade of violence and political strife.

Such violence would inevitably impact disastrously on the four core economic drivers of Egypt: the Suez Canal, tourism, agriculture, and the oil sector - all of which are struggling for one reason or another.

The lack of clear social, political, and economic strategy has forced SCAF to be reactive rather than active - it is being forced to fight fires on a case by case basis rather than manage the stewardship of the country.  This is concerning the international community, as will be seen in the following section.

The Economic Impact of a Lack of Policy

The lack of economic policy is worrying the outside world: on October 18, the Financial Times reported that Standard & Poor (S&P) had cut Egypt's credit ratings deeper into junk territory, saying the transition from the Mubarak regime to the temporary SCAF had increased risks to macroeconomic stability.

Egypt's foreign-currency rating was cut to BB-minus from BB. The local-currency rating was cut by two notches, to BB-minus from BB-plus and all the ratings have a negative outlook.  S&P further warned that another downgrade was possible if the political transition was less smooth than expected, making it more difficult to finance the government's borrowing requirements or the country's external needs.

The risk assessment by S&P - with which TSG agrees - judges that violence may continue until parliamentary elections take place in the next few months, a constitution is agreed by August 2012, and a president is elected.  Meanwhile SCAF is likely to run high general deficits to appease the population, mainly through food and fuel subsidies. Government revenues are also expected to be low.

S&P noted that Egypt's net international reserves have fallen by $12B to $24B, since the uprising to September – a result of current account deficits and capital outflows.

Unfortunately the poor economic situation is likely to be exacerbated by unrealistic demands by some unions who are using the ouster of Mubarak as an excuse to indulge in some free-market economy activity themselves – namely, trying to extort higher salaries from international companies under the pretext of being poorly paid.

This can therefore affect social stability if further strikes take place: SCAF would be in an extremely difficult position - any use of force to try to compel workers to return to work will immediately cause the protesters to accuse SCAF of being no different than Mubarak's regime.  A secondary effect will be to impact upon foreign direct investor (FDI) confidence at a time when Egypt urgently needs FDI funding.

As reported earlier, Egypt turned down a $3B loan from the International Monetary Fund, a potential FDI injection which is desperately needed both to kick start the economy, but also to pay Egypt's bills - those of the international oil companies in particular.  The U.S. has a lot of skin in this game.

This lack of cash in turn links to the announcement on October 18, that the state-owned Egyptian General Petroleum Corporation (EGPC) will hold its first oil and natural gas bidding round since the fall of Mubarak. EGPC invited international firms to bid for a production sharing agreement that would allow oil and natural gas exploration in Egypt. The deal offers 15 exploration blocks in areas that include the Gulf of Suez, the Eastern and Western Deserts, and Sinai sedimentary basins (above).  The bidding deadline is January 30, 2012.  The strategic issue is: who will risk a bid, given the fragile economic, political, and security conditions in Egypt?


This is an excerpt from the full report released to clients.


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