Economic Stabilization Program
“A multi-pronged review and risk analysis of the post – revolutionary effects on economic stability in the Arab Republic of Egypt and a presentation of various targeted solutions and their respective facilities and resources for consumption and consideration by the transitional government of the Arab Republic of Egypt and the High Supreme Council of the Armed Forces”
This strategic risk analysis and proposal of solutions, resources and facilities, have been prepared under the direction of the Council’s Honorary Chairman Dr. Mohamed Zayed – Chairman of International Consultants Limited LLC (Egypt), with significant contributions from, Belltower Global Finance Corporation (Financial Services), contributing comments and observations from Bank of New York Mellon, Credit Suisse, UBS, Hypo Bank Alpe Andrea, world renown economist, and others. The opinions expressed herein may not be the opinions of the author or solely their personal opinion. This report may not be copied in whole or part without expressed permission of the author copyright 2011
The Egyptian Economy is currently at a Crossroads
Post – revolution Egypt and economic instability, the effects and the solutions, facilities and resources available to offset severe negative impacts on the economy of the Arab Republic of Egypt
During the past six weeks, the Egyptian government, the civil society, and the stability of the Egyptian economy, have all undergone a series of significant transformations, some of which are permanent and others which will be temporary. The focus of this summary is related to post – revolution effects on the economy and its direct effects on the financial equilibrium within the government budget.
The primary sectors experiencing the most significant negative effects in the short term are the tourism sector which has experience an enormous loss of clientele, consequently increasing the unemployment load, complicating the national budget which depends in a large part on tourism revenue for its balance of payments and of course the longer term effects of image and continuity in the competitive global market of tourism.
The author(s) of this report will only offer observations which can enhance the reversals of the negative effects associated with the tourism industry and requisite revenues attributed therefrom, this being the obvious need to achieve a sense of calm and stability within the civil society sectors across Egypt, a clear system deployed immediately in order to safeguard precious Egyptian archeological treasures which serve as one of the predominant drawing power and drivers for the Egyptian tourism market and to develop a clear, comprehensive and specialized plan for security of all touristic areas, hotels and facilities, publicizing such in order for the International Community to become comfortable with the idea of returning to Egypt with their families and children on holidays and vacations once again.
The most sensitive and volatile area of the Egyptian economy effecting investor’s perception and confidence, both domestically and throughout the International Investment Community, have felt the effects of enormous losses during the last days of the stock market (CASE) losses, before the market was eventually closed, to protect further degradation of the market until stability could be achieved once again.
The International Investment Community as well as the domestic investor market, is resilient and understands the risks and rewards during times of instability, revolution or other moments of uncertainty in developing or emerging market economies and Egypt is not different in that the International Investment Community will immediately recognize the opportunities for buying strategic industries and shares in the undervalued stocks who’s fundamentals guarantee their eventual recovery.
However, the initial problem of capital flight, the lack of investor’s confidence and the continuing uncertainty which still abounds in post – revolution Egypt, the market could see wild fluctuations and enormous outflows of capital, especially foreign direct investment during the early days of the reopening of the market scheduled for this past week.
The proper management and regulation of the Egyptian Stock Exchange in the early days of Post – revolution Egypt requires strong action to guarantee near term success and stability of the markets as well as its long term recovery.
Physical policies should be reviewed and modified when needed and when necessary, taken under emergency reviews, employing volume limits, incremental trading halts and other mechanisms designed to reduce the veracity of anticipated capital flight speculation and protection of strategic sectors from abuse by foreign investors who may not all be well intentioned in their respective investment behavior.
In addition to the temporarily increased regulation of the Cairo Alexandria Stock Exchange (CASE) during the early days of economic recovery there is also a considerable need for the non banking financial sectors to be heavily monitored, as was recently ordered by the High Supreme Council of the Armed Forces pursuant to Law No. 20/2009, to be taken under the oversight of the Office of the Prime Minister.
The non – banking financial sector can be both, a great driving force towards economic recovery as well as a ripe arena for manipulation, money laundering, or other behaviors which could negatively impact foreign exchange rates, national reserves of foreign currencies, and affect both domestic and international businesses, (if not effectively monitored and regulated during the early days of post – revolution Egypt in economic recovery).
Temporary legislative amendments enabling enhanced monitoring, committee review of certain events and an increased deployment of the anti-money laundering task force oversight, foreign exchange rate control mechanism and tightening all technical controls, in order to suppress potentially negative effects within the non – banking financial sectors.
Payments of government salaries, settlements of debts, and balance of payments in the early days of post – revolution recovery, will post significant short term problems for the transitional government cabinet of ministers and during these early days urgently implemented risk management programs and contingency plans should be deployed including the tightening of spending, renegotiation of debts, both domestic and foreign, requesting in some cases debt forgiveness.
Much of post – revolution Egypt’s negative economic effect were a result of not just revolution itself, but also by significant pressure from the media and politically from members of the International Community, primarily Western and European countries encouraging and even demanding change within the Arab Republic of Egypt and other countries within the region during the previous weeks Driving events at a rate that outpaced the ability of institutions to absorb negative impacts associated with the current events.
Therefore, there is a moral and a humanitarian obligation of the International Community to assist Egypt in its moment of need economically through not only the aggressive renegotiation of foreign debt, the purchase of new quality debt instruments both corporate and government, development bonds and other instruments, and the forgiveness of some debts obligations which of course will not critically affect the debt – holders.
The accurate analysis and forecasting of anticipated revenue (or decrease thereof) in all critical sectors of the national economy especially, the government budget, is imperative for appropriate control to guarantee reasonable stability during the early days of post – revolution Egypt.
The effective use of financial modeling software with algorithms modified according to the current unique economic environment, modeling elements effecting stability or deviation from the flow of revenue and obligations, in accordance with the areas of the budget most susceptible, requires practical and critical thinking, as well as the deployment of technical resources and solutions to effectively protect the stability and balance within the government’s budget, especially for critical expenditures, such as government salaries, the purchase and subsidy of commodities, finding ways of effectively reduce subsidies, without increasing prices on strategic commodities, which historically has shown to be one of the most sensitive areas affecting widespread public negative sentiment and animosity toward policy makers.
Besides employing the technical mechanisms and facilities previously mentioned for financial modeling, analysis, forecasting and control, tightening of global physical policy and the general operation of businesses of the government, Analysis, Forecasting and planning, should be undertaken taken with the most conservative view and a general assumption that things may get much worse before they get better, as not to be caught “off guard” during this fluid post – revolutionary period of which the Egyptian economy is undergoing which directly affects the government’s budget and financial balance sheets.
• Renegotiation of short term debts, both domestic and foreign.
• Strong lobby for forgiveness of certain foreign debt facilities on moral and humanitarian grounds.
• New debt issues, targeted and specialized, to obtain the greatest timely impact on the most critical areas of the Egyptian economy and the internal sectors of the government’s budgetary items and obligations.
Unemployment and social inequality is one of the greatest side effects of Egyptian economic growth which during previous years, produced a burgeoning middle class and [from a socioeconomic standpoint] this in turn, created a demand for high paying employment opportunities in sectors of the economy which were not appropriately focused on development matching the taste of this growing middle class demographic and the youth associated therewith, who graduated in the millions over this previous decade, finding an employment deficit, within the sectors of the economy of which they were interested in working, or which their education had prepared them for.
Regardless the foregoing, the employment rate of Egypt is nearly in line with the same unemployment rate of the USA for example, and many other developed countries, and taking into account that the economy grew during the international financial crisis between 5 – 7 % respectively while other country’s economies were collapsing throughout the USA and Europe [where the crisis began], the character of our unemployment situation differ somewhat in nature, by virtue of the fact that many of the specific employment sectors were either not adequately developed at an appropriate rate to keep up with the stream of graduates or, “over developed” in areas which the burgeoning middle class youth were not interested in (construction of High-End Villas, Gold Courses or other Upper Class Facilities costing Billion(s) but do not provide long term employment opportunities for the masses of more than 80 million)
While this perspective was a matter of debate among some intellectuals and economists, it is a fact that the solutions to the current economic situation as it pertains to unemployment, which directly impacts socioeconomic stability, requires clear policies and aggressive political will to implement real programs which will slow down and eventually reverse, the negative effects and allow Egypt to once again flourish, with a growing economy and enjoying socioeconomic stability.
One of the most significant techniques which affect the broadest growth sectors of the Egyptian population [which are not part of the middle or upper classes] as pertains to standards of living and employment is the aggressive deployment of both government and private sector micro-credit initiatives.
This financial model has been proven over the past few decades as having the lowest risk of repayment and the highest rate of return for the service providers, enabling jobs creation and expansion of existing employment opportunities, which help the poor the most who are the most sensitive towards price fluctuation, unemployment or other economic instability which directly impact their lives evolution.
Egypt with a developed stock exchange and good standing within the International Investment Community during previous decades, is in an excellent position to take advantage of the benefits afforded by specialized financial products such as micro-credit development bonds which can be easily developed and registered by the public sector
(The government, social funds, as well as the private sector, banking and non banking financial sectors),
These bonds, (Micro Credit Development Bonds (MCDB’s)) have a higher than usual interest rate and lower rate of default potential due to the historical repayment rates of finance being less than 2% as opposed to conventional financing which presents default rates upwards of 5 – 7 % therefore, Arab investors especially would like to take advantage of the opportunities afforded by these securities, for both the economic and for moral reasons, primarily because the rate of return are very good and they help the poor which even qualify them for Islamic financing with some language modifications on rate and profit participation.
Once the funds have been raised from the issue of these types of bonds [which should be envisioned to be at least 2 – 5 billion USD, issue size] the result will be significant economic enhancement of the demographic sector of the poor, who need assistance the most, in addition to small and medium enterprises, which through other types of financial instruments and mechanisms such as IDB’s which will provide additional employment opportunities for hundreds of thousands of graduates by stimulating industrial development, assembling, manufacturing, mining, chemicals industry, pharmaceuticals and food production, stimulated through the registration and issuance from both government and private sector, Industrial development Bonds (IDB),which will be issued in increments of short, medium and long term maturity, having satisfactory interest rates and risk abatement features built–in to enhance their popularity with the foreign direct investment community.
Using the resulting revenues to progressively stimulate industrial expansion programs of the industrial sectors which have the greatest impact on job creation, economic station, self sufficiency as it pertain to strategic commodities.
The Size of initial industrial development bonds in the early days of the post revolution Egypt economic stabilization programs, should be at least 2 – 5 billion USD, expanding as the market will allow and with the appropriate regulatory mechanism to prevent corruption and mismanagement.
Self sufficiency of certain strategic commodities is of paramount importance, using the existing human and natural resources, technology and management, in critical areas such as the agricultural production and industrial refinement of sugar, strategic staple food commodities in which the government of Egypt currently loses more than USD$ 730 million, each year due to subsidies and hundreds of millions of dollars more to inflated market prices and manipulation, further due to the fact that Egypt is currently not self – sufficient in strategic commodities’ production, having a deficit of more than one million metric tons per year (only in Sugar), while some programs have already been deployed at the private sector.
The government has an obligation to step in to this critical arena area and support large scale agricultural development of sugar beets production and the construction of large scale sugar refinery facilities of sufficient size and number to affect self – sufficiency in this critical strategic staple food commodity.
Feasibility studies in this area have already been done, pilot project have already been started in the private sector and are progressing well.
Large scale projects from the private sector should be partnered with public sector financial support and cooperation to make self – sufficiency of strategic commodities a reality within less than 3 – 5 years, this is not a pipe dream but an actual reality based on fundamental facts and real circumstances.
Foreign direct investment is available for these important types of projects if the government takes an aggressive role, having sufficient oversight to protect the market from monopoly, price fixing and corruption.
Reform of the Natural Gas Sector should include policy’s on the diversity of the uses of this precious national resource which belongs to the people of Egypt, an example of this is the conversion of natural gas into valuable polypropylene and polyethylene, thereby transforming a ton of natural gas which has a low market value per MCF, into a completely different commodity which enjoys a much greater value, effectively increasing the global value of Egypt’s natural gas resources, by hundreds of percentage % points, enabling enormous jobs creation potential through the industrial development of this sector, creating methane and natural gas conversion factories, producing polypropylene and polyethylene by simply diverting the flow of natural gas into these facilities, rather than simply exporting all the natural gas resources to foreign countries, in some cases even at a preferential prices outside the market norms and current values for political purposes, this referring to natural gas sales to Israel, which historically has not shown financial benefits for Egypt but rather considerable Loss, significant enough to justify changing the policies or agreements, modified to a more equitable financial arrangement between the countries and/or even withholding the natural resource entirely when there appears to be a lack of progress in the peace process so as not to reward behaviors counter to real peace in the region for which Egypt is intimately involved and due to the fact that post – revolution, Egypt now holds even greater sway, with regards to Palestine and Israeli Peace Process (while this is a political issue, it is also directly tied to the natural gas sector in the minds of some analysts).
In times of economic turmoil and increased unemployment, historically nations around the world have found a safe haven in policies which aggressively enhance the development of a countries critical infrastructure, which in turn, increases growth of the gross domestic product and the standard of living of its inhabitants.
The modernization of Egypt’s rail system, the aggressive development of tunnel projects, both urban, rural or otherwise, the enhanced development roads, bridges and strategic areas such as the Sinai Peninsula, which can benefit from not only enhanced touristic facilities, but also a deep exploration into the possibilities of expanding the mining of natural resources within this critical and strategic area and in addition to economic stimulation, the population of the Sinai Peninsula serves as enhancement of the general national security profile and stability.
Land Reclamation efforts associated with technology to remove Nile Silt, which enhances river flow and also creates new agricultural land for the enhancement of agricultural production and generates considerable revenue while enhancing the overall level of self – sufficiency and economic stability of Egypt which was once known as the breadbasket of the world.
Some reports suggest that in the past there was a grand tradeoff, between hydroelectric power and agricultural self – sufficiency, as it pertains to the creation of Lake Nasr resulting from the construction of a hydroelectric dam etc.
Enhanced research into the peaceful use of nuclear Energy which can provide Egypt with long term energy, lessening the dependence on hydroelectric power sources and also lessening the impact of arguments over water security and political controversies surrounding the Nile water resources is also an important of policy reform.
Enhanced Research into Nano Technology for peaceful and legitimate defense purposes as well as medical uses, materials science applications in construction and production enhancement is an important police reform element.
Entire Industries can be developed around the above technologies creating enormous employment opportunities.
Post – revolution Egypt is seeing fast changes in the geopolitical environment, the balance of power, shifting alliances and influence, which will directly affect [either positively or negatively], exports and trade, in many of the countries of the MENA region including Egypt therefore, aggressively focusing on diversity and trade relations in such areas, as enhancing the existing bilateral relationships with: China, Japan, Russia, India and Latin American countries, offer a wide range of opportunities as opposed to previous trade policies which were predominantly western leaning (USA, UK, Western Europe), considering the previous countries mentioned, as only secondary ,trade partners rather primary ones, in fact, diversifying primary trade partners in the long term provide economic benefits that will last for decades to come.
The continent of Africa and the countries of the Middle East have seen an exponential growth in previous years, for academic advanced studies and facilities in the area of security sciences, police sciences, peace force building sciences, which includes all of the academic subsets such as, criminal psychology, counterterrorism, humanitarian law, cultural sensitivity skills, advanced and modern, humane and professional, police crowd control, monitoring and the abatement of civil disobedience, while protecting the rights of civilian populations, have become of paramount importance, consequently, the development of existing institutes of higher learning, such as police academies, police or security training academy’s, should be an area of policy in need of considerable attention and reform and support for investment in the development of educational capacity, which can bring considerable employment opportunities as well as revenues in the form of tuitions from officers and students, foreign governments, and from both public and private sectors, which desperately need increased capacity in these academic facilities and training facilities which use real modernization and reform techniques.
Foreign policy as a tool to enhance Suez Canal revenues, protect the free flow of trade across the region which is currently being threatened by piracy emanating from the Horn of Africa
MANY AREAS OF WHICH ARE NOT COVERED WELL IN THE MEDIA
OR CONSIDERED IN POLICY PLANNING (Suez and Trade)
The insurance sector, as it relates to all risk insurance, performance bonds, connected to the timely delivery of commodities, liability and losses involved with the harm to the vessels themselves, crew and other insured elements of hijacked, pirated vessels) Loss of “good will” accumulated by shipping companies, importers and exporters over the years of their operations, as being “secure and timely in their business operations”, all of which are disrupted and harmed by piracy and hijacking which affects their businesses relationships and operations and accumulates an indefinable loss on their balance sheets relating to loss of “good will” (credibility, brand value , trust and other valuable features of a company), as well as the many other, financial losses and damage caused by this ominous threat to the worlds vital shipping lanes are a threat to national security.
Supply chain disruptions and the losses involved in the delays of goods to market and just-in-time-deliveries, in critical industries, as a direct result of pirate attacks and hijacking which creates a domino effect, for entities in supply chains, from the export of goods, throughout the business chain to the importers, end users, distributors, factories, etc., accumulating losses down line that cannot be easily quantified but are surely great, considerable, and reaching towards more than a billion dollars by year’s end and are a great threat.
Ransom payments, in the tens of millions of dollars, significantly weighing on ship owners and shipping company’s balance sheets, as well as destroying the credibility of the Firms reputations to customers, of having secure vessels, able to transport on a timely basis their cargo to or from markets.
Loss of lives, which cannot be “quantified” as the life of a human being, is priceless.
Health costs related to the “psychological trauma and post traumatic stress disorders” affecting many crews, whom have been victims of the Enhanced level of engagement in the Horn of Africa are enormous.
Foreign Policies which more aggressively support land based piracy suppression initiatives in compliance with international laws are of paramount importance towards safeguarding Suez Canal revenue and guaranteeing the unfettered passage of cargo as matter of national and economic security is very important to consider.
Previous policies associated with piracy and Somalia have been isolated towards the “sharing and dissemination of information” and very limited support, either directly or through the UN contact group on anti-piracy (Contact Group No. 4);
The Resources and Facilities to enable implementation of the policy suggestions herein, shall be presented under separate cover as well
This is an Economic Stabilization Program Report Summary and therefore Technical Papers supporting the operative nature of the solutions and Resource contacts and information for the provisions of actual technical, human resources, facilities, funds, political support and related actual resources shall follow, in confidential “resource sheets, technical support papers and proposals”
This strategic risk analysis and proposal of solutions, resources and facilities, have been prepared under the direction of the Council’s Honorary Chairman Dr. Mohamed Zayed – Chairman of International Consultants Limited LLC (Egypt), with significant contributions from Belltower Global Finance Corporation (Financial Services), contributing comments and observations from Bank of New York Mellon, Credit Suisse, UBS, Hypo Bank Alpe Andrea, world renown economist and others. The opinions expressed herein may not be the opinions of the author or solely their personal opinion. This report may not be copied in whole or part without expressed permission of the author copyright February 28, 2011
2013 update to be published in December and annual updates via hard copy.