Critical New Year for Egypt

Bottom Line: The completion of Egypt's constitution and a planned referendum in early January will determine the security situation for 2014, and tensions will be acutely high for the next month and a half.

Recommendation: We are raising the security risk ranking for Egypt through January due to an expected uptick in violence during the run-up to a referendum on the constitution, which will likely strengthen the role of the military and weaken Islamist freedoms drastically. While the trial of deposed president Mohammed Morsi and 14 others has been postponed until 8 January, this will not be enough to appease Islamist forces.

Analysis: On 4 November, the court postponed Morsi's trial and extended his detention. On 6 November, the appeals court rejected a legal challenge by the Muslim Brotherhood against a September ruling that banned the group's activities and seized its funds. Earlier this week, Egypt's interim prime minister, Aldy Mansour, said that the referendum on the constitution would be held within 30 days. The Islamist alliance has not said it would boycott the referendum, but is rejecting the amended constitution. The previous constitution was Islamist in nature, and the amendments, on the surface, make this constitution look like the best Egypt has had in modern history, but between the lines and the qualifications, it severely limits civil rights, particularly the freedom to peacefully protest.

Interestingly, the coalition of Islamists under the umbrella of the Alliance for the Support of Legitimacy (ASL), is calling for a dialogue with the military-backed government, and its latest calls have dropped the demand for Morsi's reinstatement-a demand that would never have been met at any rate. Support for Morsi is meant for the public Islamist eye, and is meant as a symbol of support for the Muslim Brotherhood as a whole, not Morsi specifically. Dialogue of this nature will become increasingly important in the run-up to parliamentary elections planned for February or March next year. The Islamists may accept new conditions if the military halts its crackdown, but that is not likely at this point. For now, mass protests and arrests continue on a daily basis. The Islamists are out of the game, but a crucial thing for the military-backed government right now is whether its own somewhat hesitant secular supporters are growing disillusioned with their "protectors". If the secularists view the amended constitution as impeaching on their civil rights, this could bode ill for the referendum-which is intended to solidify the military-backed power base. Right now, on the ground, we see signs of growing disillusionment, but not enough to force a "no" vote in the referendum. In three-four weeks, the ranks of the disillusioned could swell, but again, this is likely not enough time to build into enough "no" votes. The secular public largely remains wary of inadvertently opening up a potential window of opportunity for the Islamists and continues to view the military as the lesser evil.

Amidst this growing insecurity, the military-backed government is attempting to convince foreign investors that steps are being taken to improve the business environment. Earlier this month, the government announced it was preparing a new law to reinforce the legal standing of past contracts with the state to project investor interests. On 4 December, Egypt vowed to pay $1.5 billion out of $6 billion in total arrears to foreign oil companies. Most notably, BP Plc, BG Group, Edison SpA and TransGlobe Energy are owed more than $5.2 billion as of the end of 2012.

For now, Egypt is just getting by thanks to its Gulf country benefactors, particularly Saudi Arabia, but this is only a short-term solution and the military-backed government's current shaky hold on power will dwindle if it fails to attract new investment, particularly in the energy sector.