February 16, 2011

Reactions to Comments by a Diplomat Based in Egypt

This morning, we were able to join a conference call with a Diplomat based in Egypt in which the Diplomat discussed the situation in Egypt and challenges for the country going forward. The Diplomat's comments were optimistic but cautious, noting a number of positive elements of the transition, but warning that the transfer of power would take time.

The Diplomat began her comments by noting that the process of regime change in Egypt was in its early stages, and that the nation would face enormous challenges. However, she pointed out that Egypt has established, durable political structures, and there seems to have been a commitment to responding to the economic disenfranchisement which encouraged protestors to take to the streets. She emphasized that although the army has assumed control of the government, this was not a coup, and military leaders appear to intend to relinquish power as soon as is realistically possible. She also noted that the military has been sending out communiqu├ęs noting basic elements of what citizens should expect, including the honoring of all domestic and international legal obligations –a major sign of continuity-, the dissolution of parliament, a rapid constitutional amendment process, and free and fair elections in approximately six months.

The Diplomat noted that protesters seem to have confidence in the commitments of the military at this time, however they intend to rally every Friday in order to remind the government that crowds can still be brought to the street. Most likely the next issue in the short term will be labor actions, which will focus on demands for higher wages and greater use of permanent labor terms (in lieu of temporary or contract work). During the protests, the Egyptian government promised a 15% raise to public sector employees, which has engendered demands for similar treatment from the private sector.

In terms of next steps, the Diplomat was cautious in making predictions. She noted that the army did not appear to want to remain in power, but noted the balance between getting things done sooner rather than later, versus taking time to do it right. A telling indicator in the short term will be whether the military is willing to allow sufficient political space to opposition groups for the process to occur.

From an economic standpoint, the Diplomat discussed the challenges faced by the tourist industry and concerns over unemployment, but really did not delve into economic growth during her comments except to note that there is a deep bench of respected Egyptian technocrats that are likely to be able to step in and assist. However, during the Q&A she was pressed for deeper responses about the economic climate and business dimensions of the revolution. One particularly interesting insight was the question of which part of Egypt’s history will come to bear on economic policy. Although the last few years have been dominated by the adoption of free market liberal reforms, there is a sense that much of the country’s success failed to trickle down to its people. In contrast, previous economic policies have focused more on nationalistic policies (home grown industries, for example), and arguably did a better job providing basic services (better schools, higher wages) than recent economic policies have. However, she noted that this period was a disaster, and sent the economy into a downward spiral. Although that was the case, she pointed out that while ministers at a senior level realize that market based reforms should persist, there may be elements that will espouse a more populist view.

However, in terms of business investment the Diplomat seemed optimistic. She noted that there have been no indications from the military which suggest that international investment is anything less than welcome, and although it is difficult to predict the future economic climate, it seems relatively positive.

Finally, the Diplomat made a point of emphasizing the need for countries to respond to the demands of their youth populations. She cautioned that the ‘old ways’ may no longer work for leaders, especially when their people do not feel like their needs are being met. She emphasized that listening and responding to what people are saying goes a long way, and that leaders need to be get in front of their people and respond to what they are being told.

From our perspective, there are a few interesting issues to be gleaned from these comments (which also focused on the role of the US government and its involvement in the forthcoming months):

First, the Egyptian revolution appears to be a positive catalyst. It removed a ruler who had governed for decades, failed to prevent corruption, and did not respond to the needs of his people. Although the future is anything but clear, Mubarak’s departure has cleared the way for a healthier, more open political process to occur. This transition will by definition include more voices in the political process, which will in turn encourage the government to respond to the needs of a wider segment of Egyptian society.

Second, the economic and business climate remains uncertain, but is not likely to take a notable downward spiral. Although we agree that there is a need to assure that people feel that they benefit from economic growth, there seems to be a consensus that reforms which encourage that growth are necessary in the long term. Populist pressure will exist, but in fact there is an opportunity for officials to promote businesses which can more effectively serve the needs of the people. For example, businesses which provide inexpensive and good quality consumer goods such as food, cell phones, cleaning products, and transportation are likely to play a large role, especially as there will likely be an emphasis on improving the average standard of living of the Egyptian people.

Third, contagion to other countries in the Arab world is still possible, and no situation is the same. The Diplomat was careful to point out that each country has its own set of issues, and there was no categorical way to predict how things will play out. At this point, protests of varying severity have spread across the Arab world. Although difficult to compare, frustration over corruption and inclusion in the political process have dominated. To a degree, much of the unrest stems from the cost and availability of food and other consumer goods, which again reinforces the need to provide quality, cost effective products and services. In the face of rising food costs, this will become increasingly important.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com

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