June 20, 2012

TSG IntelBrief: It Depends: Embracing Instability in Egypt and Elsewhere

As of mid-June 2012, Western governments and businesses face an intriguing calculus as it relates to near-term engagements and investments in Egypt. Simply put, public and private sector enterprises must answer a strategically critical question: whether to pause or proceed in their dealings within a dramatically chaotic Egyptian scenario. Further complicating the matter is that such decisions must be made during a time of worsening global economic and geopolitical forecasts that constrain how these governments and businesses can maneuver around instability.

Specifically, policymakers and corporate strategies must address the following list of key questions:

• Would they benefit from a continued — or even increased — engagement in Egypt during this turmoil without a reliable forecast of how the government and business environment might emerge as the summer unfolds? • Conversely, would it be a more reasonable course of action to take a strategic pause and pull back, thereby limiting some near-term losses, but at the possible cost of diminished long-term opportunities that could be framed at this time.

For governments, businesses, and even non-governmental or nonprofit organizations, the most reasonable answer to both those questions is, "it depends."


A Complex Strategic Calculus

The intriguing calculus mentioned above intractably depends on several fundamental, yet complex issues. Arguably foremost among these relates to the uncertainty about how much Egypt will change — for good or bad — after its revolution stops its lingering echo. While it now might seem like ancient history, it was not long ago that Egypt was the most stable of Middle Eastern countries. But unlike the turmoil in Greece, Spain, or even Tunis, the turmoil in Egypt retains the potential to be transformed into a true revolution instead of merely a less-than-orderly transfer of power. With the military still controlling vast portions of the economy (estimates vary dramatically on this, and range from 20% to 40% of the economy) as well as most of the levers of power even after the fall of former president Hosni Mubarak, many foreign observers believed that, after an initial period marked by a degree of drama, it would soon be back to business as usual regardless of the enterprise, from government relations and foreign aid packages to business investment and tourism. The reality is proving to be quite different.

Despite the initial optimistic forecasts of early 2011, the Egyptian economy, which had averaged around 7% annual growth for over a decade, is at best treading water. The latest 2012 forecast predicted 1% growth, and this was before the latest political upheavals. Similarly, tourism, a significant portion of the economy — and a powerful indicator of the general perception of Egypt's stability — plummeted from over 14 million visitors in 2010 to just over 9 million in 2011. Importantly, a significant portion of those tourists came from Europe, a region with signifiant economic problems of its own that will almost certainly serve to lessen the numbers of people able or willing to travel to Egypt this year and beyond. The question of whether the flow of tourists will continue to decline due to a worsening European economy, even if the situation in Egypt stabilizes (a scenario that might result if the Muslim Brotherhood were to gain political power and instituted new social policies) must be answered, once again, "it depends."

Demographics and a relatively high level of educated workers play heavily in Egypt's favor in weathering the current storm, at least in terms of economics. But the consequential "unknown" is precisely how volatile this storm proves to be. While there is little talk of reversing privatization in parts of Egypt's economy — such as the increasingly prosperous telecommunications sector — there is significant uncertainty as to who will be running these sectors in the near-future. The tension between the Muslim Brotherhood, which appears to have won the presidency (though official results won't come out until Thursday) and the still-ruling military, whose recent moves make it likely that a Muslim Brotherhood president will have substantial limitations on the power he might wield, exceeds what had been forecast only weeks ago.

The conventional wisdom was that the two sides would broker some form of mutually acceptable truce and the country would essentially operate as it always has, with significant, but only sporadic social or political changes. This no longer appears to be a likely scenario, and so the calculus remains unsolved for governments, such as the United States, that want to influence events with the objective of ensuring continued leverage with the individual or group that assumes power. This leads to the question as to whether a government or multinational corporation should maintain its current course regardless of the rapidly changing conditions on the political sea. Prudence — and perspective — would suggest, "it depends."


Complicated Strategic Questions

Should the U.S. withhold some or all of its massive US $1.2 billion annual military assistance to Egypt, or its US $250 million financial assistance in hopes of influencing events? Or should it pursue an alternative course, and proceed with the hope that the aid will secure an acceptable degree of influence to some degree? Similar questions relate to the European Union's financial aid packages. What about the multinational corporations that have been investing $US millions in new hotels, infrastructure, and oil projects? Overarching each of these considerations is the inherent risk/reward assessment that seeks clarity within an exceptionally muddied strategic picture. Should policymakers and corporate executives short the Egyptian geopolitical market for fear of increased volatility or invest their capital — both political and well as financial — out of confidence in the return of stability? Yet again, "it depends."

It depends on how bitter the current electoral and political battle proves to be before one side gives in either from weariness or pragmatism. It depends on the nature and magnitude of the inexorable changes sweeping  Egypt. But more than that, it depends on the risk model employed by each government and business. How invested are they — financially, strategically, and culturally —  in their current model? How quickly and decisively are they able to react, or adapt, to events? And what do they seek to gain from these events?

It is no longer enough for a government or a business to say that all they want is stability — a stable environment in which to build reliable multilateral relations or to generate a consistent and sustainable profit — because that era has passed. Successful governments and businesses will need to enact policies that account for change instead of stability, that are able to reach and influence enough officials or consumers to build and sustain needed growth. Each government and each business will need to construct their own "chaos-based models," because the stability-based models are simply no longer applicable in Egypt, and of diminishing value elsewhere.

Instead of one model or plan, governments and businesses might need three or four, along with the ability to rapidly and seamlessly move among these models as the geopolitical landscape requires. Whether or not governments and businesses will be successful in seeking influence and market share in Egypt — and other countries where the geopolitical foundations are cracking under the tremors of revolution — is primarily contingent upon their ability to play by new and unprecedented rules of engagement.  

On that you can depend.




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