Investors Beware: Egypt's Revolution is Not Over

In April, Egypt will hold crucial parliamentary elections. Preparations for this are being undertaken against an extremely volatile backdrop of violent protests, a state of emergency in three key provinces, weapons caches discovered in Cairo, and growing calls from radical Salafi forces who think the Muslim Brotherhood has far too moderate an agenda.

All of these should be warning signs for investors, if economic indicators aren't enough.

Popular Uprising, Take II

A number of developments over the past months, weeks and days have triggered country-wide unrest in Egypt, which was already volatile.

•    The Muslim Brotherhood president made a very controversial power grab in order to push through an Islamist constitution that has sparked fears among Christians who have no rights under this constitution, and mass protests by those who originally launched the revolution

•    Muslim protesters attempted to storm a Coptic Christian church in Luxor in the country's south and attacked Christian-run shops and Christian-owned vehicles after rumors that a Christian man had sexually assaulted a 6-year-old girl. Police dispersed the marauders with tear gas. Christians claim the accusations are false and purposefully intended to spark protests and violence, blaming a local Salafi group that is attempting to enforce its own brand of Sharia law in the area.

•    A Coptic man who was an outspoken atheist was sentenced to three years in prison for blasphemy. This particular case has done much to increase the community's fears of what is to come under the new constitution.

•    Trials of security forces responsible for violence against protesters in 2011 have fallen short of the justice demanded by the general population

•    Verdicts were handed down late last week against civilians involved in the violence that broke out at soccer match a year ago. 21 people were sentenced to death, sparking mass protests and clashes with security forces this week. As of 31 January, more than 50 people had been killed and a state of emergency was imposed and the military was deployed the provinces surrounding the three main flashpoints: Port Said, Suez and Ismailiyah.

Forces Line Up Against the Muslim Brotherhood

The secular opposition in Egypt is out in full force, and its power is being boosted by these recent protest developments. The military - which loyally maintains its own Facebook page - has informed the public that the government faces collapse. On another front, radical Salafi figures are plotting the Brotherhood's demise.

While it is the Western tendency to toss the various Salafi groupings and political parties in with the Muslim Brotherhood, the reality is that the Brotherhood has some moderate Salafi allies, but the more radical groups are hoping to make a power grab to sideline the Brotherhood. There is a new figure emerging from the dust of this power play, and that is the dangerously charismatic Hazem Abu Ismail. Abu Ismail is forming his own coalition and has had significant success in luring away the Brotherhood's supporters and forming a radical coalition to challenge the Muslim Brotherhood in April parliamentary elections.

The Muslim Brotherhood and the military have only a very shaky alliance. Despite President Morsi's recent moves to chip away at the military's power by removing key generals and replacing them with someone believed to be more sympathetic to the Brotherhood cause, the president may have underestimated the effect of this move.

Amid these latest, ongoing riots and the state of emergency, the military is attempting to present itself as the savior of the people. It is the military's perception that they are responsible for making the 2011 revolution happen in the first place, but they overlook the population's sense of betrayal when the military aligned itself with the Muslim Brotherhood and hijacked the revolution. For now, the population does not seem to be buying in to the military's attempts to paint itself as the protector of the protest movement, while police clash with demonstrators and deaths, injuries and arrests mount.

The military has a tendency to play a quiet game in the background and hedge its bets. Its statement on Facebook is a clear message, though, that it is ready to step in and take over at the next sign of imminent government collapse. It may even be ready to help that collapse manifest more quickly.

So, the Brotherhood faces mounting opposition on three fronts: the secular opposition, the military (whose loyalty is uncertain), and Salafi radicals coming at them from an entirely different and potentially more dangerous angle.

Economic Disaster

Egypt's tourism revenues-the economy's mainstay-are down from $14 billion annually in 2010 to $6 billion in 2012. Only 7 million tourists visited Egypt in 2011, down from 14 million in 2010. While the first half saw a slight rebound, this will again be reversed due to the current atmosphere of violence and uncertainty.

Foreign direct investment (FDI) has also taken a major hit, which has declined at a rate of over 90% since the revolution and in comparison to 2009-2010. Here's where the math gets really bad: In the first half of 2010 there was new FDI of $4.1 billion. The first half of 2011 saw $100 million in net OUTFLOW of FDI. Again, the first half of 2012 indicated a rebound, but it was only temporary. 

Foreign currency reserves have fallen by $21 billion, and Egypt now has enough reserves for less than 3 months of imports (not enough to get it to elections). Inflation is soaring and full-scale currency devaluation looks imminent. The population is hoarding dollars as the Egyptian pound continues to lose value. This panic was exacerbated in January when the president banned citizens from leaving the country with more than $10,000 in cash, which sparked an immediate run on banks' foreign currency reserves. Austerity measures are necessary, and this will add more fuel to the fires in terms of socio-economic unrest.

Caught Between Libya and Syria: Too Many Weapons, Too Much Meddling

In the meantime, Qatar is using Egypt as a sort of springboard to fame. Qatar is for all intents and purposes the banker of the Muslim Brotherhood, and it has vowed to do whatever it takes to ensure that the Brotherhood does not lose power in Egypt. So far, on the official level, that has resulted in financial aid to stem currency devaluation. This aid has already started coming in, but will not be enough. In return for this Qatari largesse, Egypt has had to throw the Qataris a few perks: 1) it will half to provide "technical support" to the Syrian rebels (and Salafi militants by default) in Syria; 2) Qataris have been exempted from Egypt's new rules governing foreign ownership, which keep foreigners from having sole proprietorships or simple partnerships.

The conflicts in Libya (which should be considered ongoing) and Mali reverberate in Egypt. Both conflicts have opened up a transnational Salafi jihadist pipeline that extends all the way from Libya to Syria (and branches out in numerous places along the way). Egypt is the central venue for that pipeline, and recent weapons caches discovered there were likely bound for the Syrian theater. Libya has created a mini-industry for arms that seems to have no end to supplies.

This all adds a very dangerous element to Egypt's domestic political crisis and the intensifying unrest.

Conclusion

The Egyptian government is facing potential collapse and a re-run of a revolution that has never really ended. The economy is facing total collapse, and Qatari aid efforts will only go so far. The first half of 2013 will produce only worse economic indicators and the market will feed off of this. The regulatory environment in the meantime remains uncertain at best, and much will depend on which group (or combination of groups) comes out on top after the dust settles and if April elections indeed proceed. If this turns out to be a successful power grab by radical Salafi forces, it will not proceed without a great deal of bloodshed, and it will destroy Egypt's investment climate.