As Egyptians prepare to vote in the upcoming final round of presidential balloting on June 16 and 17, pictures of yet more protests in Tahrir Square are doing little to reassure foreign investors and other observers about the future of Egypt. Bond markets are betting that the Egyptian revolution will end in tears. They may yet be proved wrong.
The most recent round of protests began after what many Egyptians saw as an overly lenient verdict in the trial of former President Hosni Mubarak. Although Mubarak was sentenced to life in prison for failing to protect the life of Egyptian citizens, none of his henchmen were found directly responsible for the deaths of some 900 protesters, nor was Mubarak found guilty of corruption.
The verdicts outraged Egyptians across the political spectrum, from Islamists to secular liberals, and come just days before Egyptians vote in the second and final round of the country’s presidential elections, when they will choose between the Muslim Brotherhood’s Mohamed Morsi and former Air Force chief and Mubarak-era prime minister Ahmed Shafiq.
The verdicts and the reaction to them suggest that the balance may have tipped in favor of Morsi, as the rulings disillusioned secular urban voters who supported Shafiq in search of stability. Now increasingly wary of Shafiq’s ties to the ancien régime, these urban liberals may well shift their support to Morsi in protest or sit out the balloting entirely.
The ensuing negative headlines have weighed on markets. Notwithstanding a small recent rebound, Egypt's reserves are less than half pre-revolution levels, covering just three months of imports. Fears of disorderly currency devaluation pushed the yield on short-term Egyptian government local currency debt above 15 percent, while foreign holdings of T-bills dropped from 25 percent in September to less than 5 percent in March. Futures traders are betting on a 20 percent devaluation, and Moody’s extended its ratings watch on Egyptian debt.
True, the government and the IMF are in advanced negotiations about a $3.2 billion loan to help Egypt avoid a disorderly devaluation. But the military’s refusal to allow the Brotherhood to form a government after its parliamentary victory led the latter to withhold support for the loan. The IMF is, in turn, refusing funds until it’s clear that the successor to the current military-appointed caretaker government will support the loan. Moreover, the IMF package is just a fraction of the $10 billion to $12 billion the Egyptian government and the IMF estimate the country will need to avoid a disorderly devaluation.
It all sounds pretty grim. Yet there are grounds for optimism. Recent bloodshed aside, protests over the past few weeks were mostly peaceful, and tourists—a key source of foreign exchange—are returning. Moreover, Egyptians are likely to choose a relative centrist as their president. First-round voting in May saw Egyptians throw their support behind a handful of relatively centrist candidates, with Morsi and Shafiq winning 24.8 percent and 23.7 percent of the vote, respectively. Significantly, some of the more extreme candidates, including a leading Salafist, were disqualified on various technicalities. While some hard-core supporters took to the streets in protest, many simply moved their support to other candidates, not least since the disqualifications were in accordance with the letter of the law.
All of this suggests that the Brotherhood is more interested in Turkish-style pious capitalism along the lines promoted by the AK Party than in the Muslim theocracy peddled by the Taliban.
Of the two remaining candidates, Shafiq, who is favored by many urban secular voters, is a relatively known quantity, having served for decades in the military and civilian government. Morsi, the Brotherhood’s candidate, is less well known, and many are wary of what a Brotherhood presidency may mean for Egypt. Indeed, detractors are quick to point out that by fielding a candidate in the race, the Brotherhood reneged on an earlier promise not to pursue the presidency.
But a Morsi administration, which looks increasingly likely, may not be a bad outcome after all; it may even be the best option from the perspective of financial markets. The Brotherhood draws significant support from property-owning professionals and businessmen, and is sensitive to their needs. Indeed, the group’s first-choice candidate, Khairat el-Shater, is a multimillionaire businessman who was disqualified at the last minute on a legal technicality, and the party has also taken on internationally respected development economist Hernando de Soto as an adviser on economic reforms. All of this suggests that the Brotherhood is more interested in Turkish-style pious capitalism along the lines promoted by the AK Party than in the Muslim theocracy peddled by the Taliban.
Beyond issues of ideology, Morsi will be best placed politically to enact the economic reforms that Egypt desperately needs in order to unlock economic growth. With the role and powers of the presidency itself unclear pending a final constitutional arrangement, whoever occupies the office will need the support of Parliament in any push for economic reform. Given the prominent role of the Brotherhood in Parliament, a Morsi presidency holds the prospect of more cooperation between the two branches of government. At the same time, the material presence of a range of opposition groups in the legislature, coupled with the watchful eye of a powerful military, will ensure sufficient restraints to the Brotherhood’s power.
Meanwhile, Egypt could yet avoid a disorderly devaluation. Although the Brotherhood-led Parliament recently rejected an economic-reform plan, there are indications that it may blink in its game of chicken with the military and markets, ultimately agreeing to the $3.2 billion IMF loan. The Finance Ministry claims a loan is imminent. Saudi Arabia’s recent deposit of $1 billion with the Egyptian Central Bank—in spite of a recent diplomatic row—shows the availability of bilateral aid.
Indeed, a range of countries, including the U.S. and Israel, has every interest in preventing a disorderly devaluation and financial crisis in a country of 80 million people on Israel’s very doorstep. The $10 billion to $12 billion the IMF estimates Egypt needs would seem a paltry price to pay for regional stability.
Beyond the confusing headlines and ugly pictures, one thus finds reason for optimism about Egypt. Political developments over the last several weeks have on balance marginalized some of the most extreme candidates in the race for the presidency while strengthening two leading centrists.
At the same time, financial developments suggest the country’s looming balance of payments crisis may yet be defused, especially if donors can fund the government through the transition from military rule scheduled for July 1. Those T-bills may not be a bad buy after all.