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25 MAY 2011
                        Egypt’s revolution is remarkable for what it has achieved,
                        overturning a 30-year regime in a few short months. But   the revolution isn’t over. The police are a broken institution
+852 6078 4700          and the streets aren’t entirely safe. Worries about sectarian
Hong Kong               violence between Muslims and Christians will persist. There
                        is also little visibility on both the upcoming elections and
                        what role the Muslim Brotherhood will play.

                           I recently spent a week in Egypt, and what follows is the result of
                        conversations with a range of local academics, journalists, bankers,
                        bloggers, and ordinary Egyptians. I take full responsibility for the
                            I should also provide some context to my observations. I don’t live
                        in Egypt or the region, but this is my third trip to country, and sixth
                        to the Middle East, in the past 6 months. And as an Arabic speaker,
                        I’ve also been following events through the local media, from Al
                        Jazeera to Al Masry Al Youm.
                           Much of what follows examines the short-term risks. However, it’s
                        important to emphasize that like many, I remain bullish about the
                        country’s long-term prospects. The chances of Egypt following the
                        path of Libya or Syria are small. And for investors willing to overlook
                        the short-term volatility, the medium-term gains may yet be signifi-   cant.

GLOOMY BUSINESS CLIMATE                                        portance decisions, for fear of corruption charges. Many
                                                               state-owned firms, especially banks, are in turmoil as
   Egypt’s business community is gloomy about short-
                                                               staff protest against low wages and if not directly strik-
term prospects. Businessmen (as well as politicians) who
                                                               ing are only working part-days.
made money in the past few decades—especially after
buying land, winning state contracts, or acquiring a
former state company—are popularly (and often rightly)         A SECURITY VACUUM
suspected of benefiting from corruption.                          The police are still largely absent from the street and
   The public prosecution office is understaffed and ill-      the army is providing security. This is not ideal. The
experienced. (Ironically as a result of being sidelined by     army is not trained for the routine job of community
the regime for years). Charges can appear random and,          policing, evident in the growing examples of traffic
some have argued, occasionally personal.                       violations and petty theft to more serious jail breaks and
                                                               armed robbery.
   However, successful convictions, such as the 12-year
sentence given to former Interior Minister, Habib Al              Moreover, it is not clear when the police will resume
Adly, are popular, and so public prosecutors will con-         their full duties given the mistrust between the police
tinue to pursue cases, mainly against former regime            and local community. (As one taxi driver said to me
members, but also those who most visibly benefited from        while pointing at a traffic cop, “See that policeman? I
their relations with the regime.                               could slap him and just walk away”).
   When does it end? Most likely when the first busi-             This is a problem as the police are traditionally more
nessman is acquitted of a case. This will help restore         entrenched in the community than the army and so
confidence that the trials are based more on “facts” than      better able to respond promptly to emerging problems,
“payback”.                                                     such as sectarian tensions. (The burning of the church in
                                                               Cairo’s Imbaba being a good example). Until the police
   The economy is meanwhile struggling. I saw few              return, the risk of social unrest is far higher.
tourists on the street and hotel occupancy rates range be-
tween 10-30%. There have been few layoffs in the formal
sector. However, the informal sector, relying particularly     SECTARIANISM WILL REMAIN A
on tourist spending, will have seen their wages slashed.       CONCERN
Poverty levels can be assumed to be rising.                       Sectarianism has long been the Middle East’s biggest
   Egypt’s ability to pay its large imported food bill is      challenge (in comparison, for instance, to more homog-
crucial to social stability, so the fall in tourism receipts   enous North Asia). It is still not clear whether the rise
and direct investment is problematic. Foreign reserves
are certainly falling rapidly. But I remain optimistic that    Egyptian poster with the old regime’s heads photo-
foreign aid, not least a proposed $4 billion IMF package,      shopped onto the Egyptian national football team. It
will help to temporarily plug the gap.                         reads ‘team of the corrupt”.
   The challenge is that even isolated security or sectar-
ian clashes will drive tourists away so long as they receive
enough media attention, and so the risks of a weak
tourist sector will persist through this year, especially
with parliamentary elections not due in September at the
   This leaves Egypt’s business leaders trying to both
defend themselves against any corruption charges and
navigate their firms through a protracted economic
    Officials are meanwhile reluctant to approve land
sales, tender infrastructure projects, or make other im-
                                                               Source: Author’s picture

25 MAY 2011                                                                                                               2

of the urban impoverished and disenfranchised middle-         1971 (simultaneous to Hosni Mubarak) is an obstacle to
class will transcend sectarian (or tribal) divides across     the Christian community’s development.
the region.
    However, Egypt traditionally enjoys greater social        THE UNCERTAINTY OF UPCOMING
and religious cohesion when compared to the rest of the       ELECTIONS
region. It helps that the Sunni Muslim (90%) and Cop-            Parliamentary elections are due in September and
tic Christians (10%) are the country’s only two major         presidential elections three months after. But no specific
sectarian groups. (By contrast with Syria, there are few      date has been set. The Supreme Council of the Armed
Shi’ites, Alawis, Kurds, or Druze).                           Forces (SCAF) may also delay elections in the event of
   For some, the revolution also helped to break down         a major security incident, or dispute over the pace and
sectarian suspicions, as Muslims and Christians protest-      type of political reform.
ed alongside each other.                                          Even seasoned observers feel unsure about who will
    The goodwill between Muslims and Christians is            succeed in the elections. (I’m reminded of an editorial
also more obvious to me in Egypt than in some of the          I read in Egypt’s Al Masry Al Youm ahead of the 2010
region’s other countries. Indeed, the picture below shows     elections, when the author noted that the “opposition
the May 13 demonstration in Tahrir Square calling for         parties spend more time fighting each other than focus-
sectarian unity and support for Palestine. (It had the feel   ing on the regime itself”).
of a family carnival).                                           The main concern among liberals and securalists is
   Nonetheless, sectarian conflict is a potential threat to   that the elections will be dominated by the old regime
Egypt’s stability and the revolution’s success. There are     and the Muslim Brotherhood (although the latter has
a small number of radicals among both the Muslim and          stated it will aim to win no more than 30% of seats), and
Christian communities. And in the absence of a strong         this will be an important source of tension ahead of the
police presence on the streets it is possible for sectarian   September electons.
tensions to worsen.
   Most of the world’s attention tends to focus on Mus-       WHO IS THE MUSLIM BROTHER-
lim radicals. Yet, the Christian community has its own-       HOOD?
radicals, and there are criticisms that the current pope,         The Muslim Brotherhood is the most organized of
Pope Shenouda III, who has ruled the community since          Egypt’s political parties. (Established in the 1920s, the
                                                              group was the target of a regime-led crackdown in the
                                                              1990s. The brotherhood unexpectedly won 20% of seats
May 13 demonstrations in Tahrir Square against
                                                              in the 2005 parliamentary elections, leading the regime
                                                              to rig the 2010 elections).
                                                                   Who is the Muslim Brotherhood? The group has a
                                                              good deal of support among the poor and rural. Howev-
                                                              er, ‘active’ members tend to be university educated (doc-
                                                              tors, lawyers, etc). Members will also volunteer time to
                                                              the movement, such as for charity work, and also make
                                                              donations (up to 8% of monthly income).
                                                                  The implication is that the West’s understanding of
                                                              Egypt’s Muslim Brotherhood is often incorrect. The
                                                              movement is more urbanized and educated than popu-
                                                              larly believed, and it will be important for Western
                                                              governments to establish a dialogue with the movement
                                                              and find common areas of interest.

Source: Author’s picture

25 MAY 2011                                                                                                            3

    The Muslim Brotherhood may even face internal               Gulf and Levant combined, and so its regional influence
divisions after the next elections. There is already a split,   should also be significantly greater.
for instance, between the younger and older genera-                So I am left wondering what happens when Egypt
tions: the older generation discourages dissent, while the      again enjoys economic and political stability, and its
younger generation identifies more with the online activ-       media turns its focus to events in the rest of the region.
ists at the vanguard of the recent revolution.                  Al Jazeera has already had a significant impact on the
                                                                region’s politics in the past decade. Egypt might have an
WHAT ABOUT RISKS FROM EXTREM-                                   even greater effect on the pace of change.
ISTS?                                                               There is also the question how the West responds to a
    Reports of growing Salafi influence are misleading.         newly democratic Egypt that doesn’t agree with Ameri-
The term Salafi (as used by the English-language media)         ca’s stance towards Israel, or a free media that is critical
in fact covers a large range of groups, from the passive or-    of Europe’s policies towards its Muslim population? If
thodox to the active extremist. It is active extremists who     China’s economy is one indication of a resurgent East,
are the greatest risk, but they also represent a minority       then Egypt’s politics may be another.
and are unlikely to form a major political bloc.
   Nonetheless, it only takes a few committed indi-             REASONS TO BE BULLISH ABOUT
viduals to commit an atrocity and, in doing so, further         THE LONG-TERM
discourage tourism and stir sectarianism. So even if the           Egypt’s 80 million population is the world’s 15th
Salafis are not a major political force in the upcoming         largest. Hourly wages are lower than in China. Egypt
elections, they do have the ability to significantly change     also enjoys preferential trade access to markets in Africa
Egypt’s outlook for the worse.                                  and Europe and, to a lesser extent, the United States. It
                                                                can also be expected to receive significant amounts of
EGYPT’S REGIONAL AND GLOBAL                                     aid, especially from Europe.
IMPACT                                                             The latter point is especially important as Egypt is
   Egypt has historically played a leading role in the          fortunate to be both a country that is both strategically
Middle East. However, it’s importance had faded                 important and small enough to save. It’s $220 billion
recently: the ageing Hosni Mubarak was less engaged in          economy is smaller than Hong Kong, or just half the size
foreign affairs, while the regime’s relative support for Is-    of China’s Guangdong province. (That’s affordable for
rael and the United States put it in conflict with popular      even the cash-strapped West).
opinion in both Egypt and the region.
                                                                   There are also political imperatives for supporting
   (The fact the Syrian dialect, not Egyptian, is regularly     Egypt, whether because of its strategic importance to the
being used to dub Turkish soap operas is also symbolic of       region or to discourage immigration to Europe.
the country’s recent cultural decline).
                                                                   There are risks, of course. Labor unions are arguing
   Nonetheless, Egypt’s media had previously enjoyed a          for a minimum wage of EGP 1,200 per month, which
surprising level of freedom in an otherwise authoritarian       would put the country on par with China and above
state. Media freedoms have also grown significantly since       rates found in countries such as Vietnam. Egypt also
the revolution with once ‘blacklisted’ individuals appear-      has to invest heavily in infrastructure, especially ports,
ing regularly in print and on television, and the sector        in order for the country to emerge as a serious export
will again grow in influence.                                   manufacturer.
    It may be that Egypt’s media will play a similar role to
Hong Kong’s media, reporting on stories that go unre-           A PROMISING FUTURE
ported elsewhere. But whereas Hong Kong’s population               Egypt remains a relatively stable society with sig-
is just 6 million to China’s 1,300 million, Egypt’s popu-       nificant economic potential. It does not suffer from the
lation of 80 million is large relative to both the Arab         same sectarian problems as Bahrain, or tribal conflicts as

25 MAY 2011                                                                                                                  4

Libya. The country’s large domestic markets and geo-
graphic location also make it an attractive destintation
for foreign investors.
    The biggest challenge for the new government, how-
ever, will be deepening economic reform and ensuring
that income growth accelerates and income disaparities
narrow—the entire population must enjoy the benefits
of growth otherwise a large and growing urban impover-
ised will be a major source of instability

25 MAY 2011                                                5

   Silk Road Associates is a Hong-Kong based consul-          China watches the Middle East’s turmoil
tancy. Founded by Ben Simpfendorfer, we provide eco-          1st April 2011
nomic and political advisory services on the Silk Road
economies.                                                       China’s Prime Minister has ruled out any similarities
                                                              between China and events in the Middle East. He makes
   Follow us through our monthly China Insider report,        a good point. China’s population is, on average, 10 years
ad-hoc Silk Road Economy reports, or online Silk Road         older than in the Middle East. The government also
Economy blog.                                                 recognized the risks of social inequality over a decade
                                                              ago. But there are still lessons to be learnt, not least the
CHINA INSIDER                                                 challenges of stubborn inflation.

The end of “made-in-China”?
4th July 2011                                                 Hotels and their economic secrets

    Shanghai’s GAP superstores doesn’t always buy             1st March 2011
“made-in-China”. It’s too expensive. Better to import             China’s economic data is patchy and unreliable. But
from Pakistan or Vietnam. And that’s no suprise. Facto-       there are other ways to observe growth. Take the ho-
ries are leaving China because of rising wages and other      tel sector. Hotels are found across the country, are big
costs. But how important is the change? Size still mat-       employers, and sell to locals and foreigners. So what does
ters (and China has plenty of it). So do supply chains.       an explosion of cheap hotels say about the state of the
Still change at the margin matters for smaller competi-       economy? Three 30-year hotel veterans also talk about
tors.                                                         recent economic changes and the “return of the iron rice

Inflation might just spoil the party
2nd June 2011                                                 SILK ROAD ECONOMY

    The market’s worries about inflation are justified.         An online blog examining the latest developments
But it’s not next month’s CPI that matters. It’s the grow-    among the Silk Road economies.
ing shortages of land, youth labor, and raw materials,           See
to name just a few. And it won’t be the first time. It was      We will also shortly start publishing a quarterly Silk
shortages that spoiled China’s growth story two centu-        Road Economy report for out corporate subscribers. For
ries ago. History doesn’t always repeat itself, but it does   more details see
hold important lessons.

Vroom, Vroom. Splutter?
3rd May 2011
   China’s auto industry is the new giant. It certainly
helps having the world’s largest domestic market. In fact,
there are remote Chinese cities with more cars on the
road than in some American states. But the industry’s
aggressive expansion might yet stumble. Just like the
housing sector, the auto sector is a pin-up for corporate
imbalances. And exports are not the solution.

25 MAY 2011                                                                                                             6


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25 MAY 2011                                                                                                                                        7

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