Why do Gulf sovereign funds not invest in Egypt?

The Gulf’s support for the Egyptian economy after the dismissal of former President Mohamed Morsi on July 3, 2013, has taken several forms including bank deposits into the Central Bank of Egypt, petroleum derivatives, long-term loans and non-refundable grants. Initially it was announced that the size of this support was $12 billion.

However, during his presidential campaign Al-Sisi told the media that this support reached more than $20 billion in just 10 months. This support rescued many economic indicators of Egypt, such as that seen in the stability of the foreign exchange reserves at $17.2 billion at the end of May 2014, and the relative maintenance of the price of the Egyptian pound from a dramatic collapse. The electricity services have improved their performance and were saved from the threat of the complete collapse of the network due to lack of fuel. The Gulf’s fuel support in Egypt over the past 10 months has been estimated to be an average of $750 million a month.

Immediately following the announcement of Al-Sisi’s presidential victory, the king of Saudi Arabia announced his country’s continued support for the Egyptian economy, as well as his call for a donors’ conference in Egypt, which is expected to take place next August (after Eid Al-Fitr).

Similarly, the UAE foreign minister announced the continued support of his country for the Egyptian economy, and that they have plans to revive the Egyptian economy with the help of strong countries such as Germany and international institutions.

What’s notable in the endeavours of these Gulf States is that their support comes in the form of a painkiller and not in the context of prompt solutions. What does a few billion dollars to support foreign exchange reserves mean, or the shipment of oil, all for a limited period according to the statements of UAE officials who state that their financial support to Egypt will not be forever.

These countries possess solutions which can make Egypt relinquish these painkillers as well as the need to resort to negotiations with the International Monetary Fund or others, and this solution is to inject part of the sovereign funds owned by these countries into the arteries of the Egyptian economy.

Such a solution can, within a few short years, not exceeding five years, recover the rates to a new high which correspond to the rates of population growth. A change in the structure of the GDP of Egypt can also have this affect, such that its economy based on production would be greater than it is now.

Arab investments in Egypt

Over nine years, foreign direct investment from Arab states to Egypt has amounted to approximately $14.5 billion, 24 per cent of the total foreign investment flows to Egypt which, during that period, amounted to $60.5 billion. The average annual flow of Arab investments to Egypt has been $1.6 billion.

The Gulf States (Saudi Arabia, UAE and Kuwait)’s contribution to supporting the Egyptian economy since July 3, 2013, amounted to $11.02 billion, accounting for 76 per cent of the total Arab investments, and 18 per cent of the total foreign direct investment in Egypt during the same period.

The UAE ranked first among the three Gulf countries in foreign direct investment to Egypt during the period, valued at $6.6 billion, and an annual average of $740 million. In second place was Kuwait with a total investment in Egypt estimated at $2.18 billion, and an average annual amount of $242 million. Saudi Arabia, occupying the third place, had a total investment amounting $2.17 billion, with the average annual investment estimated at $241.5 million.

The predominant Arab investments in Egypt have been in providing active services, keeping away from productive activities, since the majority of Arab investments have been targeting the fields of real estate, tourism, financial services, particularly the banks, and telecommunications.

These forms of Gulf investments have received much criticisms over the past years as they do not affect the substantive issues which the Egyptian economy needs.

There is also criticism of other Arab investments as they do not enter their full capital investments in hard currency, but rather enter a proportion of not more than 20 per cent. Furthermore, they ensure the projects get funding from the Egyptian banks, hence mean a loss to the Egyptian economy, thereby Egyptian economics loses an opportunity to obtain new financial resources.

It is known that the Arab investments that have been pumped into the Egyptian economy over the period have mainly been privately-owned by the Gulf States. This can be seen through access to Gulf companies in the Egyptian market where there is no concrete and clear representation of the investments in sovereign funds.

The absence of sovereign funds

There is no doubt that all the alternatives to bridging the funding gap in Egypt, estimated by some at about $47 billion, will have a cost to the Egyptian society at the economic and social levels. In the case of choosing an alternative and signing an agreement with the International Monetary Fund and receiving a loan, the agenda is known, from the imposition of taxes and the removal of subsidies in order to address the budget deficit. This carries a high cost, burdening the poor and the lower middle class with the rise of prices of many goods and services.

The second alternative is to resort to borrowing, whether internally or externally. But prices are expensive and this will lead Egypt into a troublesome spiral from the cost of the debt, with the government burdening the business sector to borrow from the banking system, which reduces opportunities for expansion in investments and creating new jobs.

Therefore, one of the best solutions was for the Gulf States to get involved and support the Egyptian economy with a portion of their own sovereign funds, such as $100 billion, to pump into investments for infrastructure and productive projects, and that it be accompanied by the Egyptian government to provide real reform in the government apparatus, and the rationalisation of public budget expenditures, and management of real economic bodies and public sector companies.

According to estimates of the Sovereign Wealth Fund Institute which specialises in the study of government investments and sovereign funds, the three Gulf countries are one of the largest owners of sovereign funds, with financial asset statistics for January 2014 showing the sovereign state funds of the three Gulf States (UAE, Saudi Arabia and Kuwait) amounted to $1.85 trillion.

The emirate of Abu Dhabi occupies the second place in the world after Norway, in terms of the value of its sovereign wealth fund, and the first in the Arab world, valued at $773 billion, followed by the Kingdom of Saudi Arabia at $675 billion, then Kuwait valued at $410 billion.

This figure would not have any impact on them with this amount representing only five per cent of the total value of the financial assets published for these funds.

It is not necessary to withdraw these funds from other countries, which could have affected ties with its sovereign funds, but it was possible to pump this surplus balance accumulated from the differences in oil prices, which is encountering further increases with the continued political events in the region.

External influences

What is the harm in giving Egypt such funds in light of its critical economic circumstances; especially that it does not affect the distribution of the other investments in non-Arab countries?

Do states that have monopolies of Arab capital, such as Arab oil purchasers, place pressure on the Gulf States so that they re-invest their oil money once again? With the global financial crisis and its repercussions in Europe and America, are the Gulf States required to direct this money to these countries so they do not suffer further economic exposure?

Saudi Arabia has represented its membership of the century, where, during the global financial crisis in 2008, it presented its possession of necessary funding, and was a key asset to resolving the global financial crisis after the collapse of the financial institutions in the US and the West.

Will the local and regional conditions experienced by these Gulf States, with clear instability, allow them to sacrifice $100 billion from sovereign funds for the benefit of the Egyptian economy? The decision is not easy, but the Gulf States are very able. There are, however, many issues which they must take into account guaranteeing political stability of the region according to their own vision – ensuring some regimes survive, while others die – determined by what the regimes represent to the security of or risk to the Gulf States.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.