The United Arab Emirates recently unveiled a stunning $35 billion investment in Egypt, snapping up development rights in an area on the Mediterranean coast. The announcement has since paved the way for Egypt to float its currency, easing a currency crisis that's been going on for years now and paving the way for an even bigger bailout from the IMF. But why exactly is the UAE pumping roughly 7% of its GDP into Egypt? What does the deal say about politics in the Middle East region? And what does it mean for the flow of petrodollars — the vast amount of money generated by the Gulf's oil income — in the global financial system? On this episode, we speak to Ziad Daoud, chief emerging markets economist at Bloomberg Economics and a co-author of a new Bloomberg News
Big Take
about the UAE's huge investment. This transcript has been lightly edited for clarity.
Key insights from the pod:
What we know about the UAE’s $35 billion deal with Egypt — 5:14
A concise history of Egypt’s economy — 7:30
The role of Abu Dhabi’s ADQ in the investment — 10:55
What Abu Dhabi gets from the deal — 12:49
Geopolitical motivations — 17:00
Energy considerations — 19:15
Can the mega city plan work? — 22:29
Egypt’s domestic reception of the deal — 24:04
Reforming the Egyptian economy — 26:06
Petrodollars and regional Mideast investment — 29:55
Army dominance in the Egyptian economy — 32:14
Will this time be different in Egypt? — 35:24
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Tracy (00:20):
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe (00:24):
And I'm Joe Weisenthal.
Tracy (00:26):
Joe, did you see the big headline coming out of Egypt recently?
Joe (00:30):
Yeah, I was kind of blown away by it. So I think there's two things that I've seen recently out of Egypt. One is they're letting the Egyptian pound float, they already have… and so the Egyptian pound has fallen to record lows and then they have this huge deal with the UAE to develop a piece of property. And it almost sounds like, and I don't think it's exactly the case, but it almost sounds like when you read about it, like the UAE basically just bought a big part of Egypt.
Tracy (01:00):
Ooh, that's punchy. But you're right, I should have specified at the beginning because there have been a number of headlines and it's kind of interesting because they're all feeding into each other. So I think last month the UAE unveiled this announcement that it was investing $35 billion in a place in Egypt on the Mediterranean coast called Ras Al-Hekma.
And the idea was to develop new tourism and real estate. But of course, that investment comes at a really sensitive time for Egypt. The economy hasn't been doing too well. Inflation has been high. And so what we've seen since that announcement is that the Egyptian Central Bank was able to hike rates finally. And then to your point, they were able to free float the Egyptian pound and then the IMF felt much better about the direction of the Egyptian economy. And so they ended up increasing their own financing for Egypt. I think it went from $3 billion to $8 billion.
And so when you combine all of these things, which have basically happened in less than a month, you've seen kind of a turnaround in how people are feeling about the Egyptian economy. I'm looking at spreads on Egyptian bonds right now and they have come in quite a lot,
Joe (
02:21):
Right. Well, they've gotten a huge injection of cash and I feel as though this story is at the intersection of a few different things. As you've mentioned, the Gulf states seem really into real estate mega projects these days, whether it's Saudi or the UAE, etc. And so this is apparently another opportunity to build some gigantic modern city of the future.
Egypt itself has of course come under strain, particularly since, I don’t know, maybe it's like the triple shock of Covid, the war in Ukraine and the surge in wheat prices. We know Egypt is a really big wheat importer. And then also obviously strains from the war in Gaza. And like many EMs, it's just generally been under strain and needed help from the IMF. And so this sort of feels like a story that's sort of multiple things happening at once, multiple things coming together at the same time.
Tracy (
03:16):
Well, it's also happening against a very intense political background. And the complicated web of, I guess, influence in this particular region is something that we could probably spend hours and hours and hours on.
You want to hear my framework for understanding this? I always think about it in terms of Mean Girls. Everyone's frenemies, but I guess Abu Dhabi/MBZ is basically Regina George and Saudi Arabia/MBS is sort of Karen Smith. And that makes Qatar, Gretchen Wiener, because her hair is big and full of secrets. And then I guess Egypt is now Lindsay Lohan because people are trying to get her on board.
Joe (
04:02):
Amazing. I love it.
Tracy (
04:03):
I think about this a lot, weirdly. Okay, so maybe we should just bring on our guest. So we do in fact have the perfect guest, someone we've been meaning to get on the podcast for a long time. I worked with him when I was based in Abu Dhabi and I used to go to Dubai quite a lot.
We are going to be speaking with Bloomberg Economics Chief Emerging Markets economist, Ziad Daoud. Ziad is one of the smartest people I know when it comes to Middle Eastern economics. And he has a piece out on Bloomberg, our new Big Take, all about this particular topic: What does this $35 billion injection actually mean for Egypt and for the wider Middle East? So Ziad, thank you so much for coming on Odd Lots.
Ziad (
04:50):
Thank you Tracy, and thank you, Joe, it's a pleasure to be with you.
Tracy (
04:53):
I'm going to start with the really basic question, which is what do we know about this $35 billion injection? So my understanding is that it was divided up into tranches. One of those has been paid at this point. But what do we know about the intended use of this money and whether or not it comes with conditions or strings?
Ziad (
05:14):
Well, we know three things about this $35 billion. One, we know it's a huge amount of money, $35 billion. Just for perspective, Egypt was trying to agree a deal with the IMF throughout last year. The size of that was $3 billion. $35 is much bigger than three. When the IMF deal got much larger, it ended up being $8 billion.
So $35 again is huge. $35 billion is more than Egypt has in foreign exchange reserves. And even for a rich country like the UAE, and it is a rich country, $35 billion is 7% of GDP. So it's a significant amount of money. So that's the first thing we know about it.
The second thing we know about it is that the money is arriving over a short period of time. When you do an IMF deal, you do it over multiple years. This one is coming within two months. So again, the UAE is shifting 7%, the equivalent of 7% of its GDP, to Egypt in this space of two months. And that is fairly, fairly rapid.
And we're talking about real money here. The $35 billion, $24 billion is fresh cash. And $11 billion is basically a conversion of existing deposits for the UAE at the Egyptian central banks. That's going to be converted into investments. And the third thing we know about this is that all these investments are going to be real estate investments. So the UAE is going to buy a big piece of land on Egypt's North coast called Ras Al-Hekma, and on top of this, it will invest in other real estate projects. So it's big, it's arriving in a short period of time, and it's going to be real estate investments.
Joe (
06:51):
I want to get to obviously what the UAE is ultimately getting out of this deal or why it's made that, but actually I want to ask one more step back question, which is in normal times, and I don't know what counts as normal times anymore, let's just throw out of here 2018, what is the Egyptian economy?
Tracy (
07:09):
I was just going to say, Joe, that was the last time I was in the UAE. So thank you for choosing that as your pinnacle of normality.
Joe (
07:14):
There you go. That was the cutoff when Tracy left, everything started to go off the rails. But in normal times, what is the Egyptian economy like? And what has happened to it since then that has caused it to go into such distress?
Ziad (
07:30):
Right. So let's start from the beginning. For a very ancient country like Egypt, the beginning could be thousands years ago, so let's not go there. So let's start from 2016. I
Tracy (
07:39):
Very Putin-esque. Many thousands of millennia ago…
Ziad (
07:44):
Yeah, we're not going to do that. So 2016 Egypt had a reset. It had a reset politically, it had a newly elected president, Abdel Fattah al-Sisi, not in that year, but he was elected a couple of years earlier and he had a lot of political capital.
So there was a lot of political support for president Sisi at the time, but it also had an economic reset. In late 2016, Egypt almost started on a clean state from an economic perspective, it basically devalued the currency by 50%. It agreed to deal with the IMF. It removed some subsidies on fuel and it became the darling of global financial markets. It was the biggest carry trade in the world.
So what was Egypt doing at the time? It devalued the currencies. So there's limited downside risk to carry traders. If you're going into Egypt, you get high interest rate in a world that was offering zero to negative interest rates and you have limited currency risk because the currency had moved a lot and because the country had ensured that carry traders essentially can take their money out of the country.
So a lot of money flowed into Egypt in terms of short-term debt and that lasted between 2017 and 2021. And yes, Egypt has been unlucky with a few global shocks. Joe, you've mentioned already there was Covid, there was the Russia-Ukraine war, and there is the war in Gaza and also the US interest rate hikes, which were significant.
But also I think there were policy mistakes in Egypt. There was the fact that there was massive reliance on this hot money inflows and these do reverse fairly quickly. Well, there has been a growing role for the army in the economy, which prevented more stable funding to go into Egypt and prevented the country from exporting more. So it was still running a trade deficit that [it] had to finance and the only source of financing that was available was this hot money inflows.
So there's reliance on hot money. There was the army[’s] role in the economy. Egypt actually effectively after the 50% devaluation of late 2016, almost repegged the currency to the dollar. So it didn't allow the exchange rate to move in a free way and absorb the shocks. So you combine these policy mistakes with the unfortunate global shocks and Egypt looked very vulnerable starting 2022.
Tracy (
10:08):
So I definitely want to get into the why and I have a feeling the next question probably feeds into that anyway. But one thing I wanted to ask you about is this investment, this $35 billion, isn't coming from the Abu Dhabi Sovereign Wealth fund that I would normally think of making these huge investments, so that would be ADIA. And I cannot emphasize how big a deal ADIA was when I was in the UAE. There was this whole sort of mythology built up around it. But this investment is coming from a new SWF called ADQ. Can you talk a little bit about that and how it's supposed to be different to ADIA, what the different purposes are?
Ziad (
10:55):
So the UAE, Abu Dhabi in particular, where you used to live, Tracy, has multiple sovereign wealth funds. They have different chairpersons chairing them. Mostly they belong to the ruling family. I think the division of labor is not clear to me, but what is clear is that this new sovereign wealth fund, ADQ, which is different from ADIA, different from Mubadala, the other two sovereign wealth funds, has been very active in Egypt recently.
So it was the one which entered this land sale deal, the $35 billion development deal. But it's also been active in Egypt lately. So in the last two years since 2022, ADQ has bought state stakes in Egyptian firms as varied as in sectors like fertilizers, banks, FinTech, the tobacco company. And actually if you look at the Egyptian stock index and you look at the top three companies in that index, the top one is CIBA bank and a company that is part of the Sovereign Wealth fund. ADQ is the largest shareholder, the third largest company in the Egyptian Stock Index is Eastern Tobacco Company. And again, the biggest shareholder is ADQ.
And the second largest company is a construction company called Qalaat Mustafa with a very interesting history, especially with relation to the UAE basically is the one that is acting as the middleman for all these ADQ deals, including the recent $35 billion deal. But also Egypt recently sold a few historic hotels, which Qalaat Mustafa group was a co-investor and a middleman for these deals. So ADQ seems very active in Egypt and yeah, it is brokering all these deals there.
Joe (
12:40):
So let's talk then about this deal. How much potential is there? What can the UAE get for $35 billion?
Ziad (
12:49):
It's a lot of money. And when the prime minister of Egypt had the press conference, when he announced the deal, he said ‘You know what? This is going to be a global touristic destination. We will probably get 8 million people coming to this area of land. It's not just going to be a city, it is going to be going to have yachts, you're going to have all sorts of things and tourism all around the year.’ But I think it's something beyond that.
Tracy (
13:13):
I like how you say it's not just going to be a mega city, it's also going to have yachts.
Joe (
13:19):
I saw this great video and it's going to have amusement parks and a clean energy corridor and a light industrial hub. Anyway, sorry, keep going.
Ziad (
13:28):
Actually, interestingly, it's also adjacent or actually very close to Egypt's nuclear power plant called El Dabaa. And he actually mentioned it and he said it might provide clean energy to the area, mega city, whatever it is.
But I think that if you look at it, it's just difficult just to see that it's just all about economics. I think the first item is if you look at the average price of land in that area and what the UAE paid, it wasn't a fire sale. If anything, it might have been, the UAE might've been generous in the money that it paid to Egypt.
So that's the first item. And I think a second item, if you think about the narrative of why Egypt got into trouble into its latest crisis, the simplest thing, the one sentence sort of narrative is that Egypt borrowed extensively and in short term from financial markets abroad and built a new capital city that had limited economic return, right?
So this is the one sentence summary of what happened to Egypt between 2017 and today. Now it is very odd -- and I say that in the Odd Lots podcast -- that the solution to building a mega city is to build another mega city, which is even further away from the capital.
So I think it's not about the economics and we can think about what is there in terms of non-economic benefits that Egypt can provide? And I think the biggest one is basically stability. The region is already unstable. If you look at Egypt's West, there is Libya and it's completely unstable. Egypt south there is Sudan, and again there is an internal civil war. And Egypt's East there is Gaza and there's an ongoing war that is brutal and that's probably going to shape the Middle East in the coming years.
So I think the stability of Egypt is important. I think the UAE is very conscious about not allowing, for example, Islamist groups to be in power and maybe they think that kind of investment would prevent such things from happening.
But it's clearly something beyond the economics of this because the economics, yes, you can make a case there, but it's not full. It doesn't tell you the full picture. And whatever the economics is, we just talked about the size of it, 7% of GDP, the UAE is sending 7% of its GDP in two months to invest in Egypt real estate. That is significant.
Tracy (
16:04):
I appreciate your summary of Egypt's economic situation earlier, since 2016/2017. There is an event that I think lives sort of rent free in a lot of UAE rulers’ heads, which is the 2011 day of revolt in Egypt or the Arab uprising elsewhere.
And I think there is also that element sort of hovering in the background, but one thing I wanted to ask you, how much of this is coming from geostrategic considerations? So the idea that okay, maybe you're going to develop a tourist city on the Mediterranean coast in Egypt, but maybe you're also sort of building up a trade network in a kind of like China Belt and Road type way. Maybe you're building up a strategic bulkhead in that area as well?
Ziad (
17:00):
Perhaps. I think there's three elements here. There's the commercial side of it and we've talked about it and there is the trade side of it. But then if you think about that, I mean the last G20 in August, I don’t know if it's the last one, but the G20 last August, there was a memorandum of understanding that was signed to have a trade corridor between India, the Middle East and Europe.
So that goes from India to the UAE through Saudi Arabia, Israel and all the way to Europe. And that was only signed as a memorandum of understanding in August. So to think about doing another trade route, maybe there is some logic there, but you start to make progress on that initial project first before you head there.
I think there is a geopolitical side to this as well. If you think about ongoing war in Gaza, Gaza has two borders, one with Israel and one with Egypt. And Egypt will clearly play a role in the future of Gaza and maybe this is a way to flex muscle, the UAE muscle in Egypt, and to ensure that in case of future agreements over the future of Gaza, Egypt will side with basically the country that got it out of this crisis.
Tracy (
18:14):
There's one other thing I wanted to ask you, and I don't think it's verging on conspiracy theory, but it's definitely speculative and it kind of goes back to Abu Dhabi making a push into petrochemicals, renewable energy, things like that. We've seen it make these moves because it kind of wants to diversify away from pure oil extraction and move into more value add processing, that sort of thing.
But I think this particular area of Egypt sits kind of right above the world's biggest sinkhole, and I have totally forgotten its name, but there's been some discussion at various points in time of developing that area into either mining it for critical minerals or using it to generate electricity or maybe building a pipeline from the Mediterranean or something like that. Do you think those sort of energy considerations play into this at all?
Ziad (
19:15):
They weren't mentioned. So I think the first, when the deal was announced, a few things were mentioned: that these beaches are very pristine, they are virgin and undiscovered and it's going to be a touristic attraction. I think then doing mining would probably undermine that sort of touristic attraction side of it.
I think to the broader question of energy, and maybe this is just a bit of a digression, but I think within the region you might see that from afar that the oil money men in the region, places like Saudi Arabia and Qatar and the UAE, and they're very active in their investments. You might group all of them as doing the same thing, but I think there is are differences in their visions for different things on political issues and economic issues on market issues. And one of the very obvious one is energy transition and what that does to oil.
This is all coming down to the fact that these countries export, the GCC. By that I mean export a lot of oil and that gives them a lot of wealth and a lot of firepower. But there's different visions on how to deal with that and how to manage this in the context that the world is going to transition away from fossil fuel towards cleaner energy.
And I think the two pillars of these different visions are basically have Saudi Arabia on one side and the UAE on the other. The UAE is basically pushing for, actually it is expanding, its oil production capacity. It is pushing for its OPEC quota to increase and it wants to produce more today so that it doesn't end up with stranded assets when oil prices drop in the future. Saudi Arabia is the other sort of end of the spectrum where it has large funding needs, which requires it to have a high oil price.
And as a result, its strategy towards the oil markets is to restrict supply now, not to increase supply, restrict it in order to get that high price and allows it to fund its domestic investments. And these disputes at times, sometimes they surface in OPEC meetings and they did a couple of years ago, but sometimes they're in the background when the OPEC discussions happen.
So maybe it's not, I digress quite a bit, but maybe it's not related to the clean energy, but I think the deal speaks to the fact that there's also competition between these oil money men and Egypt is one area where they compete over.
Joe (
21:37):
So I mentioned in the beginning or early on that there just seems to be an endless stream of stories about the development of big new real estate project mega cities. And there are all these visions, particularly Saudi obviously, and there'll be these videos that I see on Twitter of ‘Here's how their hundred kilometers city is going and here's how their city that's going to be. Have a mayor that's an AI bot or something like that.’
It's always like this sort of wild stuff. But what is the track record here, setting aside whether the UAE is going to fully get the sort of economic returns that maybe would justify a $35 billion deal, is there reason to think that there's a good chance of turning this part of Egypt into sort of a booming industrial and tourist area?
Ziad (
22:29):
The short answer to this is that the regional track record of developing and making profitable new cities, mega cities is not great. If you look at Egypt itself, I've just mentioned the reason why it got into its most recent crisis, it has built a new administrative of capital which has limited economic returns.
Actually in the late 1990s, early 2000s, Egypt tried to build another city which was in southwest of the country away from the Nile Valley. And the president at the time was fully invested in that. They were hoping that millions of people would live there. Today, very few people reside there.
Saudi Arabia obviously is building a mega city inNeom. We'll wait to see if that's going to succeed or not. But Saudi itself had a number of cities and developments. There were mega developments that didn't work out. There were King Abdullah economic cities, and there's a bunch of other stuff. So the track record in the region of building these cities away from where you have the cluster of the population hasn't been great and that doesn't bode well for this new investment.
Tracy (
23:38):
So Joe mentioned in our intro that there could be a sense that Egypt is kind of selling part of itself to the UAE. What's been the domestic reception within Egypt around this deal? So obviously it seems to have led to something of a recovery in financial markets, but people on the ground, how do they feel about it?
Ziad (
24:04):
Not great. I think if you think about it, inflation in Egypt is above 30%, and that is before the recent flotation of the pound, which moved by 40%, weakened by 40%. So even before that, weakening inflation was very high.
And that's the second [thing]. If you think about the currency itself, since President Sisi came to power in mid-2013, the currency has lost about 86% of its value against the dollar. So that obviously eats up into people's real incomes. That increases living costs. And I think while there was a lot of understanding that 2016 was the devaluation, the 50% devaluation that happened in 2016 was a result of previous policy mistakes that had to be corrected at one point in time. I think [there] is a realization now that what is happening now is partly maybe mostly a result of policy mistakes.
There is a narrative that’s a series of unfortunate shocks that happened globally that affected the whole global economy and Egypt is one of it. But I think the true narrative is that there was a series of policy mistakes which were exposed by these global shocks.
Joe (
25:24):
If you're getting an IMF deal, then obviously the country is expected to make all of these reforms and privatizations and ending fuel subsidies and all the things that we sort of associate reducing the size of government, all these things that we associate with IMF conditionality, a $35 billion injection for a piece of land is very nice.
Is there any sense that beyond the sort of capital injection that Egypt is going to make any changes to its fundamental economic structure to improve the, I don't know, sustainability or competitiveness or just the health perhaps of its economy outside of the new cash injection?
Ziad (
26:06):
Right. So I think this is where the IMF deal comes in and its conditionality. So I think if the country is to learn from its latest crisis, there are a few things that they need to do. They need to float the currency and the IMF seems intent on that happening.
Egypt has a credibility sort of gap there because in 2016 they said they were floating the currency. They didn't, they just repegged. In 2022 because they said it was floating in 2016, in 2022 they said it is going to be a durably flexible exchange rate. They had to add the word “durably” and again, they didn't.
And now they said they're going to let market forces determine basically the currency. And since the currency moved on the 6th of March, it's been mostly … it's basically there's very little volatility and that telling us, it's probably market forces are not that smooth.
So the first thing they need to do is a floating of the exchange rate and I think the IMF is pushing for this. The second thing is the reliance on hot money. And yes, as global interest rates are about to fall, Egypt has devalued the currency significantly, is hiking interest rates. It might become, again, an attractive place for carry traders and hot money.
But again, the lesson is don't just rely on this because this is unstable and they can escape in the space of weeks as has happened recently. But I think beyond that, this sounds all like Washington consensus stuff. I think the biggest lesson that we've learned from this, and I think it's not just for Egypt, [but] for the whole region, the whole region is trying to find technical economic solutions to big questions. And you realize that the technical economics can get you only so far and there are political decisions to be made.
The biggest issue [is] that Egypt can't get money, which is not hot money, can't get direct investments into the country, not from sovereign
wealth funds, but from other players, is that the army plays a dominant role in the economy and it's very difficult to compete with the army and the IMF.
It's very difficult to the IMF to change that. The reason why Egypt runs a persistent trade deficit, yes, because it keeps re-fixing the currency and it loses competitiveness. But also I think the internal dynamics within the Egyptian market lack competitiveness because you have this big player, the army, which doesn't need to be efficient to export abroad because it captures the domestic market.
So I think there are technical lessons, economic lessons that Egypt should implement and hopefully will implement this time around and they have learned from past mistakes. But also, I think that is, which the IMF actually can intervene and make conditions on, but there's a political dimension to this, which is very difficult for the IMF to go in and decide who plays what role within the economy.
Tracy (
29:12):
Zooming out a little bit, and going back to the oil theme, we used to see a lot of the excess money from places like the UAE and Saudi Arabia, from their oil production, end up in Western financial assets. So they would buy a bunch of Treasuries or they would make investments in tech companies and things like that. Does it feel to you like we're seeing a little bit of a shift where maybe more of those petrodollars are ending up in these kinds of regional projects or other strategic long-term investments around the region?
Ziad (
29:55):
Yes, absolutely. So actually, we've looked at this and I've written a few pieces on this actually on the terminal. So what you see in terms of the petrodollar sort of investments from the sovereign wealth funds and the countries more broadly, you're seeing two changes.
One change is that countries in the GCC, like Saudi Arabia, like Qatar, like the UAE, are investing more domestically, building new cities, building new infrastructure, hosting the World Cup, hosting the Asian games and so on. And if you invest more domestically, that means your imports are higher and that means you have a smaller sort of trade surplus to invest externally to begin with. So you have more domestic investments
And then once you have that smaller pool from your trade surplus, how is it invested? And there's a clear shift if you look at how they allocate between risky assets like stocks, like real estate in neighboring countries or even abroad, versus what they traditionally did, which is basically park the money in central bank reserves. That ends up being US Treasuries or even just cash or save deposits.
There has actually been a shift, there's a visible shift that the GCC is allocating more of their wealth towards riskier assets like stocks, like real estate, direct investment, and away from US Treasuries and simple deposits and cash. And that shift is very visible and you can just see it in the data.
Joe (
31:24):
I want to go back on Egypt, just sort of focus on something you said about the Egyptian economy. So this idea that the army is a big player in the domestic economy, A) what does that mean specifically? Is it just that that is the big employer and that's sort of how stability is maintained? And then B) like, okay, clean slate, let's say that [wasn’t] the case. What ideas do people have for where Egypt could theoretically grow its economy? We seem to be in this age of everyone thinking about rising up the manufacturing value chain and capturing a greater share of that or exploiting some sort of domestic resources as Tracy talked about. But what does that mean? This army dominance of the economy and what other alternative models could there be?
Ziad (
32:14):
Right. So in terms of the army dominance, basically what that means is that the army has companies in different sectors, in hospitality, in construction, in food supply chains, in all sorts of things. And traditionally some of these companies have existed for decades, but the role has definitely increased in recent years. Certainly in the second half of the two 2010s, the number of army-linked companies that have been formed has increased.
And what that does is, as I said, if you're a foreign investor, you wouldn't go in. The army has an advantage in terms of getting land. It gets cheap labor, it has the regulations. It's very difficult to compete with that. And that hinders Egypt's growth and development because if you, I think the model for growth and development remains that you're a country, you try and basically export more and that generates more wealth and that generates more domestic demand.
And you do this and if that's the case and you have an entity that is very big, that essentially acts as a local monopoly, it has limited interest in trying to expand abroad and therefore it ends up being inefficient and therefore it ends up being unable to increase exports.
And this is where probably it's worth thinking about this and why Egypt keeps getting into a currency crisis almost once a decade. So there was a currency crisis in Egypt 2003, I mentioned the 2016 one and the recent one, 2022, 2023. I think the main reason is that you always had basically politically connected entities that acted as local monopolies that captured the domestic market and didn't increase exports.
In the 2000s, before the 2011 protests that Tracy mentioned, [there] used to be businessmen that linked to the then-President Mubarak's son, Gamal Mubarak. These guys had monopolized the steel industry, the cement tourism and so on. And again, there was very limited interest in expanding abroad.
After 2013, the army became more prominent. And that makes you think that if you replace now the army, if the army starts selling shares and stakes in its companies to GCC sovereign wealth funds, actually [that] doesn't change the competitive dynamic of the Egyptian economy. All you're doing is replacing one local monopoly — that is the army — with another, that
are the GCC sovereign wealth funds. So again, this goes back to the political economy side of it and how Egypt could get out of it.
Tracy (
34:51):
So putting it all together, as you explained, there have been these sorts of false starts when it comes to the Egyptian economy and reform before. Is there something here that makes you think it might be different this time? How optimistic should people be about this particular $35 billion and the ensuing increase in IMF financing and things like that? How much of a difference is it going to make? Is Egypt going to follow through on this one?
Ziad (
35:24):
I think there's a short term and there's a long term. In the short term, Egypt's getting $35 billion from the UAE. It's getting $8 billion from the IMF, from other entities [it’s] getting $12 billion. The total is, we're talking about $55 billion arriving in Egypt over the next few years. And that is enough to ease the dollar shortages in the country in the short term.
I think in the long term, the stuff I've mentioned about changing the role of the army, about floating the exchange rate, about the reliance on hot money, these things need to change. And unless we see a change in there, I don't know, maybe Egypt will enter in another currency crisis further down the road.
I think if you take, zoom out a little bit, and if you think about the region as a whole, I think there is the summary of the critical economy in the region is that you have every country relies on what economists call rents, which is basically, rent is an income that you get without working.
And if you think about the Gulf and Iraq, they rely on oil. If you think about Egypt, [it] relies on the Suez Canal. If you think about a place like Jordan, it relies on aid from abroad and everyone's trying to transition out of that. But it's very difficult to transition out of that because that kind of rent basically creates not just an economic structure, but also a political and social structure. And trying to address that with technical economics without addressing the political side of it is bound to end in failure.
Tracy (36:55):
Alright, Zia Daoud, our chief emerging markets economist over at Bloomberg Economics, the Big Take is out right now. You can find it on Bloomberg.com and on the terminal of course. Thank you so much for coming on Odd Lots.
Ziad (
37:09):
Thank you!
Joe (
37:09):
Yeah, that was great. That was fascinating.
Tracy (
37:11):
It was so good.
Joe (
37:11):
So good. Thank you so much!
Tracy (
37:26):
Joe, that was so clear. That was such a clear explanation and I think I have to emphasize here how complicated the sort of political backdrop often is when it comes to these sort of developments in the Middle East. And Ziad did such a good job of explaining all of them.
Joe (
37:42):
Totally. That was so good and so interesting starting. There were a few things that really stood out, but I had not realized that at all about the army's dominance of the domestic economy and the various local monopolies and retail locations and real estate projects, etc., that are army-backed.
And when you think about, well, what is a challenging domestic reform thing? I mean, every country in the world has issues with the challenge of military reform and military spending and stuff like that. And so when you think, well, that must be an unimaginable challenge if that really needs to be reformed in some way.
Tracy (
38:24):
Well, I also liked his characterization of a lot of the countries in the region as sort of rent seeking economies where the primary mode of making money is either extracting stuff from the ground or charging people to travel down your canal. That sounds weird. But then the idea that the entire region is sort of trying to transition its way out of that, move to that value-add economy. That was super clear.
The one thing I will also say is, it's weird that so much of it has to be mega cities, right? Because surely, I mean there is a relativity at play here where if one country is successful at building a mega city, whether it's Saudi Arabia or the UAE, there's only so many tourists that can go around. There's only so many yachts that can be positioned in these really fancy cities.
So I do wonder about that. But that said, I mean, people said this about Dubai ages ago, that eventually Dubai growth would sort of peter out, and instead over the past couple of years following Russia's invasion of Ukraine, that economy has been absolutely booming. So who knows?
Joe (
39:38):
Yeah, no, that's really interesting. On that point about rents and just to sort of further your observation, that stuck out at me too. And you see the challenge, everyone wants to diversify and everyone wants to like ‘Oh, we're going to be an AI hub and we're going to be a clean energy hub,’ or whatever it is.
That's the goal because you make all this money from rents. You're blessed to have oil in the ground or natural gas resources, but you want to make something that people want or you want to be able to climb up the value chain in some way. And I don't know, mega cities and real estate, I mean real estate is a valuable thing, but it does seem tricky.
Tracy (
40:17):
Yeah. Alright, well I'm glad we finally had Ziad on.
Joe (
40:21):
We got to have him back. That was great.
Tracy (40:22):
Alright, shall we leave it there?
Joe: (40:24)
Let's leave it there.
You can follow Ziad Daoud at
@ZiadMDaoud
.