Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
Speaker 1: another episode of the ad Bots podcast. I'm Tracy Alloway
Speaker 1: and I'm Joe Wisenthal. Joe, did you see the big
Speaker 1: headline coming out of Egypt recently?
Speaker 2: Yeah?
Speaker 3: I was kind of blown away by it. So I
Speaker 3: think there's two things that I've seen recently out of Egypt.
Speaker 3: One is they've they're letting the Egyptian pound flow. They
Speaker 3: already have all and so the Egyptian pound has fallen
Speaker 3: to record lows. And then they have this huge deal
Speaker 3: with the UAE to develop a piece of property and
Speaker 3: it almost sounds like, and I don't think it's exactly
Speaker 3: the case, but it almost sounds like when you read
Speaker 3: about it, like the UAE basically just bought a big
Speaker 3: part of.
Speaker 1: Eachypt Ooh that's punchy, But you're right, Like, Noah, wrong,
Speaker 1: I should have specified at the beginning because there have
Speaker 1: been a number of headlines and it's kind of interesting
Speaker 1: because they're all feeding into each other. So I think
Speaker 1: last month the UAE unveiled this announcement that it was
Speaker 1: investing thirty five billion dollars in a place in Egypt
Speaker 1: on the Mediterranean coast called rassel Hekma, and the idea
Speaker 1: was to develop new tourism and real estate. But of
Speaker 1: course that investment comes at a really sensitive time for Egypt.
Speaker 1: The economy hasn't been doing too well, Inflation has been high,
Speaker 1: and so what we've seen since that announcement is that
Speaker 1: the Egyptian Central Bank was able to high crates finally,
Speaker 1: and then to your point, they were able to free
Speaker 1: float the Egyptian pound, and then the IMF felt much
Speaker 1: better about the direction of the Egyptian economy, and so
Speaker 1: they ended up increasing their own financing for Egypt. I
Speaker 1: think it went from like three billion dollars to eight
Speaker 1: billion dollars. And so when you combine all of these things,
Speaker 1: which have basically happened in less than a month, you've
Speaker 1: seen kind of a turnaround in how people are feeling
Speaker 1: about the Egyptian economy. I'm looking at spreads on Egyptian
Speaker 1: bonds right now and they have come in quite a lot.
Speaker 3: Right well, They've gotten a huge injection of cash, and
Speaker 3: I feel as though this story is at the intersection
Speaker 3: of a few different things. As you've mentioned, the Golf
Speaker 3: States seem really into real estate, megaprojects these days, whether
Speaker 3: it's Saudi or the UAE, et cetera. And so this
Speaker 3: is apparently another opportunity to build some gigantic modern city
Speaker 3: of the future. Egypt itself has of course come under strained,
Speaker 3: particularly since I don't know, maybe it's like the triple
Speaker 3: shock of COVID, the war in Ukraine and the surgeon
Speaker 3: wheat prices. We know Egypt is a really big wheat importer,
Speaker 3: and then also obviously strains from the war in Gaza,
Speaker 3: and like many ems, it's just generally been understrained and
Speaker 3: needed help from the IMF. And so this sort of
Speaker 3: feels like a story that sort of multiple things happening once,
Speaker 3: multiple things coming together at the same time.
Speaker 1: Well, it's also happening against a very intense political background
Speaker 1: and the complicated web of I guess influence in this
Speaker 1: particular region is something that we could probably spend hours
Speaker 1: and hours and hours on. You want to hear my
Speaker 1: framework for understanding this, I always think about it in
Speaker 1: terms of mean girls, like everyone's frenemies. But I guess
Speaker 1: Abu Dhabi MBZ is basically Regina George and Saudi Arabia
Speaker 1: NBS is sort of Karen Smith, and that makes Katar
Speaker 1: Gretchen Wiener because her hair is big and full of secrets.
Speaker 1: And then I guess, I guess Egypt is now Lens
Speaker 1: Lohan because people are trying to get her on board.
Speaker 3: Amazing. I love it.
Speaker 1: I think about this a lot weirdly. Okay, so maybe
Speaker 1: we should just bring on our guests. So we do,
Speaker 1: in fact have the perfect guest, someone we've been meaning
Speaker 1: to get on the podcast for a long time. I
Speaker 1: worked with him when I was based in Abu Dhabi
Speaker 1: and I used to go to Dubai quite a lot.
Speaker 1: We are going to be speaking with Bloomberg Economics chief
Speaker 1: Emerging Markets economist Zia Dowd. Zied is one of the
Speaker 1: smartest people I know when it comes to Middle Eastern economics,
Speaker 1: and he has a piece out on Bloomberg our New
Speaker 1: Big Take all about this particular topic. What does this
Speaker 1: thirty five billion dollar injection actually mean for Egypt and
Speaker 1: for the wider Middle East? So Zed, thank you so
Speaker 1: much for coming on all thoughts.
Speaker 2: Thank you Tracy, and thank you Joe. It's a pleasure
Speaker 2: to be with you.
Speaker 1: I'm going to start with the really basic question, which
Speaker 1: is what do we know about this thirty five billion
Speaker 1: dollar injection. So my understanding is that it was divided
Speaker 1: up into tranches. One of those has been paid at
Speaker 1: this point. But what do we know about the intended
Speaker 1: use of this money and whether or not it comes
Speaker 1: with conditions or strings.
Speaker 2: Well, we know three things about this thirty five billion dollars. One,
Speaker 2: we know it's a huge amount of money. Thirty five
Speaker 2: billion dollars. Just for perspective, Egypt was trying to agree
Speaker 2: a deal with the IMF throughout last year. The size
Speaker 2: of that was three billion dollars. You know, thirty five
Speaker 2: is much bigger than three. When the IMF deal got
Speaker 2: much larger, it ended up being eight billion dollars. So
Speaker 2: thirty five again, it's huge. Thirty five billion dollars is
Speaker 2: more than Egypt has for an exchange reserve, and even
Speaker 2: for a rich country like the UAE, and it is
Speaker 2: a rich country. Thirty five billion dollars is seven percent
Speaker 2: of GDP, so it's a significant amount of money. So
Speaker 2: that's what we's that's the first thing we know about it.
Speaker 2: The second thing we know about it is that the
Speaker 2: money is arriving over a short period of time. You know,
Speaker 2: when you do an IMFTL, you do it over multi
Speaker 2: multiple years. This one is coming within two months. So again,
Speaker 2: the UAE is shifting seven percent, the equivalent of seven
Speaker 2: percent of the GDP to Egypt in the space of
Speaker 2: two months, and that is fairly fairly rapid. And we're
Speaker 2: talking about real money here. You know, the thirty five
Speaker 2: billion twenty four billion dollars is fresh cash, and eleven
Speaker 2: billion dollars is basically a conversion of existing deposits for
Speaker 2: the UAE at the Egyptian Central Banks that's going to
Speaker 2: be converted into investments. And the third thing we know
Speaker 2: about this is that all these investments are going to
Speaker 2: be real estate investments. So the UAE is going to
Speaker 2: buy a big piece of land on Egypt's north coast
Speaker 2: called Russell Hekma, and on top of this, it will
Speaker 2: invest in other real estate projects. So it's big, it's
Speaker 2: arriving in a short period of time, and it's going
Speaker 2: to be real estate investments.
Speaker 3: I want to get to obviously what the UAE is
Speaker 3: ultimately getting out of this deal or why it's made that.
Speaker 3: But actually I want to ask one more step back question,
Speaker 3: which is, you know, in normal times and I don't
Speaker 3: know what counts as normal times anymore. Let's just start
Speaker 3: out of your like twenty eighteen, like, what is the
Speaker 3: Egyptian economy?
Speaker 1: I didn't say, Joe, that was the last time I
Speaker 1: was in the UAE, So thank you for choosing that
Speaker 1: as your pinnaclet of normal.
Speaker 3: That was the cutoff. When Tracy left, everything started to
Speaker 3: go off the rails.
Speaker 2: But in normal.
Speaker 3: Times, what is the Egyptian economy like? And what has
Speaker 3: happened to it since then that has caused it to
Speaker 3: go into such distress?
Speaker 2: Right, So let's start from the beginning. For a very
Speaker 2: ancient country like Egypt, the beginning to two thousands years ago,
Speaker 2: so we let's not go there. So let's start from
Speaker 2: twenty sixteen.
Speaker 1: Oh, very potent as yeah, many thousands of millennia a girl, Yeah.
Speaker 2: We're not going to do that. So twenty sixteen Egypt
Speaker 2: had the research, it had the recent Politically, it had
Speaker 2: a newly elected president after Fantasti's not in that year,
Speaker 2: but he was elected a couple of years earlier, and
Speaker 2: he had a lot of political capital, so there was
Speaker 2: a lot of political soport for presidency c at the time.
Speaker 2: But it also had an economic reset in late twenty sixteen,
Speaker 2: Egypt almost started on a clean state from an economic perspective.
Speaker 2: It basically devalued the currency by fifty percent. It agreed
Speaker 2: a deal with the IMF, it removed some subsidies on fuel,
Speaker 2: and it became the darling of global financial markets. It
Speaker 2: was the biggest carry trade in the world. So what
Speaker 2: was Egypt doing at the time it devalued the currency.
Speaker 2: There's limited downside risk to carry traders. You know, if
Speaker 2: you're going into Egypt, you get high interest rate in
Speaker 2: a world that was offering zero to negative interest rates,
Speaker 2: and you have limited currency risk because the currency had
Speaker 2: moved a lot, and because the country had ensured that
Speaker 2: carry traders essentially can take their money out of the country.
Speaker 2: So a lot of money flowed into Egypt in terms
Speaker 2: of short term debt, and that lasted between twenty seventeen
Speaker 2: and twenty twenty. And yes, Egypt has been unlucky with
Speaker 2: a few global shocks, Joey, You've mentioned already. There was COVID,
Speaker 2: there was the Russia Ukraine war, and there was there
Speaker 2: is the war in Gaza, and also the US interest
Speaker 2: rate heives which were significant. But also I think there
Speaker 2: were policy mistakes in Egypt. There was the fact that
Speaker 2: there was massive reliance on this hot money influence, and
Speaker 2: these do reverse fairly quickly. There there has been a
Speaker 2: growing role for the army in the economy, which prevented
Speaker 2: more stable funding to go into Egypt and prevented the
Speaker 2: country from exporting more so, it was still running a
Speaker 2: trade deficit that had to finance, and the only source
Speaker 2: of financing that was available was this hot money influence.
Speaker 2: So there's reliance on hot money. There was the army
Speaker 2: role in the economy. Egypt actually effectively after the fifty
Speaker 2: percent evaluation of late twenty sixteen, almost repecked the currency
Speaker 2: to the dollars, so it didn't allow the exchange rate
Speaker 2: to move in a free way and absorb the shocks.
Speaker 2: So you can buy these policy mistakes with the unfortunate
Speaker 2: global shocks, and Egypt looked very vulnerable starting twenty twenty two.
Speaker 1: So I definitely want to get into the why, and
Speaker 1: I have a feeling the next question probably feeds into
Speaker 1: that anyway. But one thing I wanted to ask you
Speaker 1: about is this investment. This thirty five billion isn't coming
Speaker 1: from the Abu Dhabi Sovereign Wealth Fund that I would
Speaker 1: normally think of making these huge investments, so that would
Speaker 1: be Adia. And I cannot emphasize how big a deal
Speaker 1: Adia was. When I was in the UAE, there was
Speaker 1: this whole sort of mythology built up around it. But
Speaker 1: this investment is coming from a new SWF called ADQ.
Speaker 1: Can you talk a little bit about that and how
Speaker 1: it's supposed to be different to Adia, like what the
Speaker 1: different purposes are.
Speaker 2: So the UAE abu W in particular when you used
Speaker 2: to give tracy has multiple sovereign wealth funds. They have
Speaker 2: different chairpersons sharing them. Mostly they belonged to the ruling family.
Speaker 2: I think the division of labor is not clear to me.
Speaker 2: But what is clear is that this new sovereign wealth fund, ADQ,
Speaker 2: which is different from Adia, different from MOBADERA the other
Speaker 2: two sovereign wealth funds, has been very active in Egypt recently.
Speaker 2: So it was the one which entered this land sale
Speaker 2: d the thirty five billion dollar development deal, but it's
Speaker 2: also has been active in Egypt lately. So in the
Speaker 2: last few years, since twenty twenty two, ADQ has bought
Speaker 2: state stakes and Egyptian firms as varied as insectors like fertilizers, banks, fintech,
Speaker 2: the tobacco company. And actually, if you look at the
Speaker 2: Egyptian stock index and you look at the top three
Speaker 2: companies in that index, the top one is a cib
Speaker 2: A bank and a company that is part of the
Speaker 2: Sovereign Wealth Fund ADQ largest shareholder. The third largest company
Speaker 2: in the Egyptian stock index is Eastern Tobacco Company, and
Speaker 2: again the biggest shareholder is ADQ, and the second largest
Speaker 2: company is a construction company called Talatmostava with a very
Speaker 2: interesting history, especially with relation to the UAE. Is basically
Speaker 2: is the one that is acting as the middleman for
Speaker 2: all these ADQ deals, including the recent thirty five billion
Speaker 2: dollar deal. But also Egypt recently sold a few historic hotels,
Speaker 2: which Palatmostafa Group was a co investor and a middleman
Speaker 2: for these deals. So ADQ seems very active in Egypt
Speaker 2: and its yeah, it's brokering all these deals there.
Speaker 3: So let's talk then about this deal, like how much
Speaker 3: potential is there? What can the UAE get for thirty
Speaker 3: five billion.
Speaker 2: It's a lot of money. And when the Prime Minister
Speaker 2: of Egypt had the press conference when he announced the deal,
Speaker 2: he said, you know what, this is going to be
Speaker 2: a global touristic destination. We will probably get eight million
Speaker 2: people coming to this area of land. It's not just
Speaker 2: going to be a city. It's gonna be gonna have yachts.
Speaker 2: You're gonna have all sorts of things and tourism all
Speaker 2: around the year. But I think it's something.
Speaker 1: I like how you say it's not just gonna be
Speaker 1: a mega city. It's also gonna have yachts.
Speaker 3: I saw this great video, and it's gonna have amusement
Speaker 3: parks and a clean energy corridor and a light industrial
Speaker 3: hub and anyway, sorry, keep going.
Speaker 2: Actually, interestingly, it's also adjacent, actually very close to Egypt's
Speaker 2: nuclear power plant called the Dabba, and he actually mentioned
Speaker 2: it and he said it might provide clean energy to
Speaker 2: the area, megacity, whatever it is. But I think I
Speaker 2: think if you look at it, it's just difficult just
Speaker 2: to see. That's just all about economics. I think the
Speaker 2: first item is if you look at you know, the
Speaker 2: average price of land in that area and what the
Speaker 2: UAE paid. It wasn't a fire sell. If anything, it
Speaker 2: might have been the UAE might have been generous, and
Speaker 2: the money that it paid to Egypt. So that's the
Speaker 2: first item, and I think it's second item. If you
Speaker 2: think about the narrative of why Egypt got into trouble,
Speaker 2: into the slatest crisis, the simplest thing, that one sentence
Speaker 2: sort of narrative is that Egypt borrowed extensively and in
Speaker 2: short term from financial markets abroad and built a new
Speaker 2: capital city that had limited economic critter. Right, So this
Speaker 2: is the one center summary of what happened to Egypt
Speaker 2: between twenty seventeen and today. Now. It is very odd
Speaker 2: and I say that in the Odd Lost podcasts that
Speaker 2: the solution to building a megacity is to build another
Speaker 2: megacity which is even further away from the capital. So
Speaker 2: I think it's not about the economics, and we can
Speaker 2: think about what is there in terms of non economic
Speaker 2: benefits that Egypt can provide, and I think the biggest
Speaker 2: one is basically stability. The region is already unstable. If
Speaker 2: you look at Egypt's west, there is Libya and it's
Speaker 2: completely unstable. Egypt south there is Sudan and again there's
Speaker 2: an internal civil war and Egypt is there is Gaza
Speaker 2: and there's an ongoing war that is that is brutal
Speaker 2: and that's probably going to shape them in the least
Speaker 2: in the coming years. So I think the stability of
Speaker 2: Egypt is important. I think the UAE is very conscious
Speaker 2: about not allowing, for example, Islamist groups to be in power,
Speaker 2: and maybe they think that kind of investment would prevent
Speaker 2: such thing from happening. But it's clearly something beyond the
Speaker 2: economics of this, because the economics, yes, you can, you
Speaker 2: can make a case there, but it's not full. It
Speaker 2: doesn't tell you the full picture. And whatever the economics is,
Speaker 2: we just talked about the size of it. Seven percent
Speaker 2: of GDP, the ue sending seven percent of GDP in
Speaker 2: two months to Egypt to do to invest in Egypt
Speaker 2: real the state. That is significant.
Speaker 1: I appreciate your summary of Egypt's economic situation earlier since
Speaker 1: twenty sixteen slash twenty seventeen, there is an event that
Speaker 1: I think lives sort of rent free in a lot
Speaker 1: of UAE rulers' heads, which is the twenty eleven Day
Speaker 1: of Revolt in Egypt or the Arab uprising elsewhere. And
Speaker 1: I think there is also that element sort of hovering
Speaker 1: in the background. But one thing I wanted to ask you,
Speaker 1: how much of this is coming from geostrategic considerations. So
Speaker 1: the idea that okay, maybe you're going to develop a
Speaker 1: tourist city on the Mediterranean coast in Egypt, but maybe
Speaker 1: you're also sort of building up a trade network in
Speaker 1: a kind of like China Belt and Road type way.
Speaker 1: Maybe you're building up a strategic bulkhead in that area
Speaker 1: as well.
Speaker 2: Perhaps, I think I think there's three elements here. There's
Speaker 2: the commercial side of it, and we've talked about it,
Speaker 2: and there is the trade side of it. But then
Speaker 2: if you think about that, I mean the last G
Speaker 2: twenty in August. I don't know if it's the last one,
Speaker 2: but the G twenty last August, there was a memoranda
Speaker 2: of understanding that was signed to have a trade corridor
Speaker 2: between India, the Middle East and Europe. Right, so that's
Speaker 2: goes from India to the UAE, through Saudi Arabia, Israel
Speaker 2: and all the way to Europe. And that was only
Speaker 2: signed as a memorandum understanding in August. So to think
Speaker 2: about doing another trade route, maybe maybe there's some logic there,
Speaker 2: but you start to make progress on that initial project
Speaker 2: first before you had there. I think there is a
Speaker 2: geopolitical side of this as well, if you think about
Speaker 2: the ongoing war in Gaza, you know that Gaza has
Speaker 2: two borders, one with Israel and one with Egypt, and
Speaker 2: Egypt will clearly play a role in the future of Gaza.
Speaker 2: And maybe this is a way to flex muscle UAE
Speaker 2: muscle in Egypt and to ensure that in case of
Speaker 2: future agreements over the future of Gaza, Egypt will side
Speaker 2: with basically the country that got it out of its crisis.
Speaker 1: There's one other thing I wanted to ask you, and
Speaker 1: I don't think it's verging on conspiracy theory, but it's
Speaker 1: definitely speculative, and it kind of goes back to Abu
Speaker 1: Dhabi making a push into petrochemicals, renewable energy, things like that.
Speaker 1: We've seen it make these moves because it kind of
Speaker 1: wants to diversify away from pure oil extraction and move
Speaker 1: into more value add processing that sort of thing. But
Speaker 1: I think this particular area of Egypt sits kind of
Speaker 1: right above the world's biggest sinkhole, and I have totally
Speaker 1: forgotten its name, but there's been some discussion at various
Speaker 1: points in time of developing that area into either mining
Speaker 1: it for critical minerals or putting like using it to
Speaker 1: generate electricity, or maybe like building a pipeline from the
Speaker 1: Mediterranean or something like that. Do you think those sort
Speaker 1: of energy considerations play into this at all.
Speaker 2: They weren't mentioned, so I think the first when when
Speaker 2: when the deal was announced, a few things were mentioned
Speaker 2: that these beaches are very pristine, they are virgin and undiscovered,
Speaker 2: and it's going to be a touristic attraction. I think
Speaker 2: then doing mining would probably undermine that sort of touristic
Speaker 2: attraction side of it, I think to the broader question
Speaker 2: of energy and and maybe this is just a bit
Speaker 2: of a digression, but I think within the region you
Speaker 2: might see that you know from Afar that the the
Speaker 2: oil monument in the region, places like Saudi Arabia, Ata
Speaker 2: and the UE, and they're very active in their investments.
Speaker 2: You might group all of them as doing the same thing,
Speaker 2: but I think there is sort of a there are.
Speaker 2: There are differences in their visions for different things on
Speaker 2: political issues and economic issues, on market issues, and one
Speaker 2: of the very obvious one is energy transition and what
Speaker 2: that does to oil. You know, this is all coming
Speaker 2: down to the fact that these countries export the GCC.
Speaker 2: By that I mean export a lot of oil and
Speaker 2: that gives them a lot of wealth and a lot
Speaker 2: of firepower. But there's different visions on how to deal
Speaker 2: with that and how to manage this in the context
Speaker 2: that the world is going to transition away from fossil
Speaker 2: fuel towards cleaner energy. And I think the two pillars
Speaker 2: of these different visions are basically have Saudi Arabia on
Speaker 2: one side and the UAE on the other. The UAE
Speaker 2: is basically pushing for it, actually it is expanding it's
Speaker 2: all production capacity. It is pushing for it's OPEC quota
Speaker 2: to increase, and it wants to produce more today so
Speaker 2: that it doesn't end up with the stranded assets when
Speaker 2: all prices drop in the future. Saudi Arabia is the
Speaker 2: other sort of end of the spectrum where it has
Speaker 2: large funding needs which requires it have a high oil
Speaker 2: price and as a result there it's strategy towards the
Speaker 2: oil markets is to restrict supply now, not to increase.
Speaker 2: Supply restricted in order to get that high price and
Speaker 2: allows it to funds domestic investments. And these disputes at times,
Speaker 2: you know, sometimes they surface and a oppect meetings, and
Speaker 2: they did a couple of years ago, but sometimes they
Speaker 2: just you know, they're they're they're they're in the background
Speaker 2: when when the OPEC discussions happen. So maybe it's not
Speaker 2: I digress quite a bit, but maybe it's not related
Speaker 2: to the to the clean energy. But I think the
Speaker 2: deal speaks to the fact that there's also competition between
Speaker 2: these oil monument and ages. Is one area where they
Speaker 2: compete over Now.
Speaker 3: I mentioned in the beginning or early on that there
Speaker 3: just seems to be an endless stream of stories about
Speaker 3: the development of big new real estate project megacities, and
Speaker 3: there are all these visions, particularly Saudi obviously, and like
Speaker 3: there will be these videos that I see on Twitter,
Speaker 3: like here's how they're one hundred kilometer city is going,
Speaker 3: and here's how they're city that's going to be have
Speaker 3: a mayor that's an AI bought or something like that.
Speaker 3: Like it's always like this sort of wild stuff. But like,
Speaker 3: what is the track record here setting aside whether the
Speaker 3: UAE is going to fully get the sort of economic
Speaker 3: returns that maybe would justify a thirty five billion dollar deal,
Speaker 3: is there reason to think that there's a good chance
Speaker 3: of turning this part of Egypt into sort of a
Speaker 3: booming industrial and tourist area.
Speaker 2: The short answer to this is that the regional track
Speaker 2: recit of developing and making profitable new cities megacities is
Speaker 2: not great if you look at itself. I've just mentioned
Speaker 2: the reason why it got into this most recent crisis.
Speaker 2: It built a new it has built a new administrative capital,
Speaker 2: which has limited economic critics. Actually, in the late nineteen nineties,
Speaker 2: eighty two thousands, Egypt tract to build another city which
Speaker 2: was in southwest of the country, away from then All Valley,
Speaker 2: and the president was at the time was fully invested
Speaker 2: in that. They were hoping that millions of people would
Speaker 2: live there. Today, very few people reside there. Saudi Arabia
Speaker 2: obviously is building a mega city in Neon Way to
Speaker 2: see if that's going to succeed or not. But Saudi
Speaker 2: itself had a number of cities and developments. There were
Speaker 2: mega developments that didn't work out, there were King Abdal
Speaker 2: economic cities, and there's a bunch of other stuff. So
Speaker 2: the track lockt in the region of building these cities
Speaker 2: away from where you have the cluster of the population
Speaker 2: hasn't been great, and that doesn't bode well for this
Speaker 2: new investment.
Speaker 1: So Joe mentioned in our intro that there could be
Speaker 1: a sense that Egypt is kind of selling part of
Speaker 1: itself to the UAE. What's been the domestic reception within
Speaker 1: Egypt around this steal? So obviously it seems to have
Speaker 1: led to something of a recovery in financial markets, but
Speaker 1: people on the ground, how do they feel about it?
Speaker 2: Not great? I think if you think about it, inflation
Speaker 2: in Egypt is above thirty percent, and that is before
Speaker 2: the recent floatation of the pound, which moved by forty
Speaker 2: percent weekend, by forty percent. So even before that weakening,
Speaker 2: inflation was very high. And that's the second, you know,
Speaker 2: if you think about the currency itself, and the last
Speaker 2: since presidencies it came to power in mid twenty thirteen,
Speaker 2: the currency has lost about eighty six percent of its
Speaker 2: value against the dollar. So that obviously eats up into
Speaker 2: people's real incomes, that increases living costs. And I think
Speaker 2: while there was a lot of sort of understanding that
Speaker 2: twenty sixteen was an accumulating the devaluation, the fifty percent
Speaker 2: devaluation that happened in twenty sixteen was a result of
Speaker 2: previous policy mistakes that had to be corrected. At one
Speaker 2: point in time. I think there is a realization now
Speaker 2: that what is happening now is partly, maybe mostly, a
Speaker 2: result of policy mistakes. There is an arctive that is
Speaker 2: a series of unfortunate shocks that happened globally that affected
Speaker 2: the whole global economy, and Egypt is one of it.
Speaker 2: But I think the true narrative is that there was
Speaker 2: a series of policy mistakes which were exposed by these
Speaker 2: global shocks.
Speaker 3: You know, if you're getting an IMF deal, then obviously
Speaker 3: the country is expected to make all of these reforms
Speaker 3: and privatizations and ending fuel subsidies and all the things
Speaker 3: that we sort of associate you know, reducing the size
Speaker 3: of government, all these things that we associate with IMF conditionality.
Speaker 3: A thirty five billion dollar injection for a piece of
Speaker 3: land is very nice, Like, is there any sense that
Speaker 3: beyond the sort of capital injection that Egypt is going
Speaker 3: to make any changes to sort of its fundamental economic
Speaker 3: structure to improve the I don't know, sustainability, or competitiveness
Speaker 3: or just the health perhaps of its economy outside of
Speaker 3: the new cash injection.
Speaker 2: Right, So, I think this is where the IMF deal
Speaker 2: comes in, and it's conditionality. So I think if the
Speaker 2: country is to learn from its latest crisis, there are
Speaker 2: a few things that they need to do. They need
Speaker 2: to float the currency, and the IMF seems intent on
Speaker 2: that happening. Egypt has a credibility sort of gap there
Speaker 2: because in twenty sixteen they said they were floating the currency.
Speaker 2: They didn't. They just repegged in twenty twenty two because
Speaker 2: they said there was floating in twenty sixteen and twenty
Speaker 2: twenty two they said it's going to be a durably
Speaker 2: flexible exchange, right, they had to add the world the
Speaker 2: word durably, and again they didn't. And now they said
Speaker 2: they're going to let market forces determine basically the currency.
Speaker 2: And since the currency moved on the sixth of March,
Speaker 2: it's been mostly it's basically there's very little volatility. That
Speaker 2: telling us probably market forces are not that smooth. So
Speaker 2: the first thing is they need to do is as
Speaker 2: a floating of the exchange rate in I think the
Speaker 2: IMF is pushing for this. The second thing is the
Speaker 2: reliance on hot money, and yes, as global interest rates
Speaker 2: are about to fall, egyptis devaried the currency significantly is
Speaker 2: hiking interest rates. It might become again an attractive place
Speaker 2: for carric traders and hot money. But again the lesson is,
Speaker 2: don't just rely on this because this is unstable and
Speaker 2: they can escape in the space of weeks, as had
Speaker 2: happened recently. But I think there's I think beyond that
Speaker 2: this sounds all like Washington consensus stuff. I think the
Speaker 2: biggest lesson that we've learned from this and I think
Speaker 2: just it just it's not just for Egypt, for the
Speaker 2: whole region. It's the whole region is trying to find
Speaker 2: sort of technical economic solutions two big questions, and you
Speaker 2: realize that the technical economics can get you only so far,
Speaker 2: and there are political decisions to be made. The biggest
Speaker 2: issue that Egypt can't get money, which is not hot money,
Speaker 2: can't get direct investments into the country, not from some
Speaker 2: one of the fun from several wealth funds, but from
Speaker 2: other players. Is that the army plays a dominant role
Speaker 2: in the economy and it's very difficult to compete with
Speaker 2: the army, and you know, the IMF, it's very difficult
Speaker 2: to the IMF to change that. The reason why Egypt
Speaker 2: runs a persistent trade deficit, yes, because it keeps free
Speaker 2: fixing the currency and includes competitiveness. Competitiveness, but also I
Speaker 2: think the internal dynamics within the Egyptian market lacks competitiveness
Speaker 2: because you have this big player at the army which
Speaker 2: doesn't need to be efficient to export abroad because it
Speaker 2: captures the domestic market. So I think the big either
Speaker 2: there are technical lessons, economic lessons that Egypt should implement
Speaker 2: and hopefully will implement this term around, and they have
Speaker 2: learned from past mistakes. But I also I think that
Speaker 2: is which the IMF actually can intervene and make conditions on.
Speaker 2: But there's a political dimension to this which is very
Speaker 2: difficult for the IMF to go in and decide how,
Speaker 2: you know, who plays what role within the economy.
Speaker 1: Zooming out a little bit and going back to the
Speaker 1: oil theme, you know, we used to see a lot
Speaker 1: of the excess money from places like the UAE and
Speaker 1: Saudi Arabia from their oil production end up in Western
Speaker 1: financial assets, so you know, they would buy a bunch
Speaker 1: of treasuries, or they would buy they would make investments
Speaker 1: in tech companies and things like that. Does it feel
Speaker 1: to you like we're seeing a little bit of a
Speaker 1: shift where maybe more of those petro dollars are ending
Speaker 1: up in these kinds of regional projects or other strategic
Speaker 1: long term investments around the region.
Speaker 2: Yes, absolutely so, we've actually we've looked at this and
Speaker 2: written a few pieces on this actually on the terminal.
Speaker 2: So what do you see in terms of the petro
Speaker 2: dollars sort of investments from the soil wealth funds and
Speaker 2: the countries more broadly? You're seeing two changes. One change
Speaker 2: is that countries in the GCC, like the Arabia cut out,
Speaker 2: like the UAE are investing more domestically, building new cities,
Speaker 2: building new infrastructure, hosting the World Cup, hosting the Asian
Speaker 2: Games and so on. And if you invest more domestically,
Speaker 2: that means your imports are higher, and that means you
Speaker 2: have a smaller sort of trade surplus to invest externally
Speaker 2: to begin with, so you have more domestic investments. And
Speaker 2: then once you have that smaller pool from your trade surplus,
Speaker 2: how is it invested? And there's a clear shift if
Speaker 2: you look at how they allocate between risky assets like
Speaker 2: stocks like real estate in neighboring countries or even abroad,
Speaker 2: versus what they traditionally did, which is basically part the
Speaker 2: money in central bank reserves that ends up in US
Speaker 2: treasuries or even just cash or safe deposits. This has
Speaker 2: actually been a shift. It's a visible shift that the
Speaker 2: GCC is allocating more of their wealth towards riskier assets
Speaker 2: like stocks like real estate lack direct investment, and away
Speaker 2: from you know, US treasuries and simple deposits and cash.
Speaker 2: And that shift is very visible and you could just
Speaker 2: see it in the data.
Speaker 3: I'm going to go back on Egypt, just sort of
Speaker 3: focus on something you said about the Egyptian economy. So
Speaker 3: this idea that the army is a big player in
Speaker 3: the domestic economy, A like, what does that mean specifically?
Speaker 3: Is it just that mean that that is the big
Speaker 3: employer and that's sort of how stability is maintained, And
Speaker 3: then be like okay, clean slate, Let's say that weren't
Speaker 3: the case. What ideas do people have for where Egypt
Speaker 3: could theoretically grow it's economy. We seem to be in
Speaker 3: this age of everyone thinking about like, you know, rising
Speaker 3: up the you know, the manufacturing value chain and capturing
Speaker 3: a greater share of that, or or exploiting some sort
Speaker 3: of domestic resources and trades that you talked about. But
Speaker 3: what does that mean? This army dominance of the economy
Speaker 3: and like what other alternative models could there be?
Speaker 2: Right, So, in terms of the army dominance, basically what
Speaker 2: that means is that the army has companies and different
Speaker 2: sactics in hospitality, in construction and food supply chains and
Speaker 2: all sorts of things. And traditionally some of these companies
Speaker 2: have existed for decades, but the role has definitely increased
Speaker 2: in recent years. Certainly in the second half of the
Speaker 2: two Andy tens, the number of Army link companies that
Speaker 2: have been formed has increased. And what that does is,
Speaker 2: as I said, if you're a foreign investor, you wouldn't go.
Speaker 2: And the army has an advantage in terms of getting land,
Speaker 2: it gets cheap labor, it's very it has the regulation,
Speaker 2: it's very difficult to compete with that, and that handers
Speaker 2: each of growth and development because if you I think
Speaker 2: the model for growth and development remains that, you know,
Speaker 2: you're a country, try and basically export more and that
Speaker 2: generates more wealth and that generates more domestic demand. And
Speaker 2: you do this and if that's the case, and you
Speaker 2: have an entity that is very big that is essentially
Speaker 2: apps as a local monopoly, it has limited interest in
Speaker 2: trying to expand abroad, and therefore it ends up being
Speaker 2: inefficient and therefore ends up being you know, unable to
Speaker 2: increase exports. And this is where probably it's worth thinking
Speaker 2: about this and why Egypt keeps getting into a currency
Speaker 2: crisis almost once a decade. So there was a currency
Speaker 2: crissis in Egypt two thousand and three, I mentioned the
Speaker 2: twenty sixteen one and the recent one twenty twenty three.
Speaker 2: I think the main reason is that you always had
Speaker 2: basically politically connected entities that acted as local monopolies that
Speaker 2: captured the domestic market and didn't increase exports. In the
Speaker 2: two thousands before the twenty eleven protests that Tracy mentioned
Speaker 2: used to be businessmen that linked to the then president
Speaker 2: Mobarak's son, Gaman Mobarak. These guys had, you know, monopolized
Speaker 2: the steel industry, the cement, tourism and so on, and
Speaker 2: again there was very limited interests in expanding abroad. After
Speaker 2: twenty thirteen, the army became more prominent. And that makes
Speaker 2: you think that if you're replaced now the army, if
Speaker 2: the army starts selling sales, selling shares and stakes in
Speaker 2: his companies, just GCC, several wealth funds actually doesn't change
Speaker 2: the competitive dynamic of the Egyptian economy. All you're doing
Speaker 2: is replacing one local monopoly that is the army, with another.
Speaker 2: There are the GCC Social Wealth funds. So again this
Speaker 2: goes back to the political economy side of it and
Speaker 2: how each we could get out of it.
Speaker 1: So putting it all together, as you explained, there have
Speaker 1: been these sorts of false starts when it comes to
Speaker 1: the Egyptian economy and reform before. Is there something here
Speaker 1: that makes you think it might be different this time?
Speaker 1: Like how optimistic should people be about this particular you know,
Speaker 1: thirty five billion dollars and the ensuing increase in IMF
Speaker 1: financing and things like that. How much of a difference
Speaker 1: is it going to make? Is Egypt going to follow
Speaker 1: through on this one?
Speaker 2: I think that's a short term and there's a long term.
Speaker 2: In the short term, Egypt's getting thirty five billion dollars
Speaker 2: from the UAE, is getting eight billion dollars from the IMF,
Speaker 2: from other entities getting twelve billion dollars. The total is
Speaker 2: we're talking about fifty five billion dollars arriving in Egypt
Speaker 2: over the next few years, and that is enough to
Speaker 2: is the dollar shortages in the country in the short
Speaker 2: In the short term, I think in the long term,
Speaker 2: the stuff I've mentioned about changing the role of the army,
Speaker 2: about floating the exchange rate, about the reliance on hot money,
Speaker 2: these things need to change. And unless we see a
Speaker 2: change in there, I don't know, maybe Egypt will enter
Speaker 2: in another currency crisis. Further down the road. I think
Speaker 2: if it takes zoom out a little bit, and if
Speaker 2: you think about the region as a whole, I think
Speaker 2: that is the summary of the critical economy in the
Speaker 2: region is that you have every country relies on what
Speaker 2: economists call rents, right, which is basically rent is an
Speaker 2: income that you get without working. And you know, if
Speaker 2: you think about the Gulf and Iraq, they rely on oil.
Speaker 2: If you think about Egypt, it relies on the Sewers Channel.
Speaker 2: If you think about a place like Jordan, it relies
Speaker 2: on aid from abroad. And everyone's trying to transition out
Speaker 2: of that. But it's very difficult to transition out of
Speaker 2: that because that kind of rent basically creates not just
Speaker 2: an economic structure, but also a political and social structure.
Speaker 2: And trying to address that with technical economics without addressing
Speaker 2: the political side of it is bound to end in.
Speaker 1: Failure, all right, Zia dud Are, Chief Emerging Markets economist
Speaker 1: over at Bloomberg Economics. The big take is out right now.
Speaker 1: You can find it on Bloomberg dot com and on
Speaker 1: the terminal of course. Thank you so much for coming
Speaker 1: on all thoughts.
Speaker 2: Thank you.
Speaker 3: Yeah, that was great. That was so good, so good,
Speaker 3: Thank you so much.
Speaker 1: Joe.
Speaker 3: That was so clear.
Speaker 1: That was such a clear explanation, and I think, like
Speaker 1: I have to emphasize here how complicated the sort of
Speaker 1: political backdrop often is when it comes to these sort
Speaker 1: of developments in the Middle East. And Ziad did such
Speaker 1: a good job of explaining all.
Speaker 3: Of them totally. That was so good and so interesting,
Speaker 3: you know, starting for there were a few things that
Speaker 3: really stood out, but that I had not realized that
Speaker 3: at all, about the army's dominance of the domestic economy
Speaker 3: and the various local monopolies and retail locations and real
Speaker 3: estate project etcetera that are army backed. And when you
Speaker 3: think about, like, well, what is a challenging domestic reform thing.
Speaker 3: I mean, every country in the world has issues with
Speaker 3: like the challenge of military reform and military spending and
Speaker 3: stuff like that. And so when you think, well, how
Speaker 3: do you like, you know what what like I can't
Speaker 3: that must be an unimaginable challenge if like that really
Speaker 3: needs to be reformed in some way.
Speaker 2: Well.
Speaker 1: I also liked his characterization of a lot of the
Speaker 1: countries in the region as sort of rent seeking economies,
Speaker 1: where the primary mode of making money is either extracting
Speaker 1: stuff from the ground or charging people to travel down
Speaker 1: your canal. That sounds weird, but then the idea that
Speaker 1: the entire region is sort of trying to transition its
Speaker 1: way out of that move to that value add economy,
Speaker 1: that was super clear. The one thing I will also
Speaker 1: say is it's weird that so much of it has
Speaker 1: to be megacities, right, because surely, I mean, there is
Speaker 1: a relativity at play here where if one one country
Speaker 1: is successful at building a mega city, whether it's Saudi
Speaker 1: Arabia or the UAE, there's only so many tourists that
Speaker 1: can go around, right, There's only so many yachts that
Speaker 1: can be positioned in these really fancy cities. So I
Speaker 1: do wonder about that. But that said, I mean people
Speaker 1: said this about Dubai ages ago that eventually Dubai growth
Speaker 1: would sort of peter out, and instead, over the past
Speaker 1: couple of years following Russia's invasion of Ukraine, that economy
Speaker 1: has been absolutely booming. So who knows.
Speaker 3: Yeah, no, that's really interesting on that point about rents.
Speaker 3: And just to sort of further your observation, that stuck
Speaker 3: out at me too. And you see the challenge, like
Speaker 3: everyone wants to diversify and everyone wants to like we're
Speaker 3: gonna be an ai hub and we're going to be
Speaker 3: a clean energy hub or whatever it is, right, Like
Speaker 3: that's the goal because yeah, you make all this money
Speaker 3: from rents you're blessed to have in the ground or
Speaker 3: natural gas resources, but you want to like make something
Speaker 3: that people want or you want to be able to
Speaker 3: climb up the value chain in some way. And I
Speaker 3: don't know our mega cities and real estate, Like, I mean,
Speaker 3: real estate is a valuable thing, but it does seem tricky.
Speaker 1: Yeah, all right, Well, I'm glad we finally.
Speaker 3: Had on Yeah, we got to have them back. That
Speaker 3: was great.
Speaker 1: All right, shall we leave it there, Let's leave it there.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3: I'm Jill Wisenthal. You can follow me at the Stalwart,
Speaker 3: follow z ed At at zed Sorry, follow zi ed
Speaker 3: at At zed m Daud and of course check out
Speaker 3: his big Take now on Bloomberg dot Com and the Terminal.
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