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Middle East Economy
UAE hires advisers to help Egypt reforms
From the Financial Times of Thu, 19 Jun 2014 17:13:31 GMT
A handout picture made available on June 8, 2014 by the Egyptian presidency shows President elect Abdel Fattah al-Sisi delivering a speech after signing the handing over of power document in Cairo. Sisi was sworn in as Egypt's president, formalising his de facto rule since he deposed the elected Islamist last year and crushed his supporters. AFP PHOTO / HO / EGYPTIAN PRESIDENCY == RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT "AFP PHOTO / EGYPTIAN PRESIDENCY" - NO MARKETING NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS ==-/AFP/Getty Images©AFP

Abdel Fattah al-Sisi during swearing-in ceremonies as Egypt's new president

The United Arab Emirates is shifting its assistance to Egypt from direct aid to private sector development as the Gulf state seeks to help build stronger economic foundations in the pivotal Arab country.

Seeing Egypt as the frontline in their battle against Islamism, Abu Dhabi and neighbouring Saudi Arabia are focusing on keeping the country financially stable through the summer.

People aware of the matter say Abu Dhabi has hired Lazard to advise Cairo on debt management as well as consultancy Strategy&, previously Booz, which is helping to develop investment strategies in various economic sectors.

The UAE, which has emerged as the leading regional voice against political Islam, has with Saudi Arabia and Kuwait, underwritten aid worth at least $16bn to newly-elected president, Abdel Fattah al-Sisi, who overthrew the Muslim Brotherhood government last year.

“We need to help Egypt to protect stability in the region,” said one Abu Dhabi official.

Some of the Gulf aid has been in the form of free petroleum products to help stave off fuel shortages and power cuts in the hotter months. But analysts and western officials say the Gulf states are now moving from grants to project-based assistance and loans.

One option being considered is guaranteeing Egyptian bond issuance instead of any further direct loans, but Egyptian officials say this would not be implemented before the end of the year.

A western official said a call earlier this month for an Egypt donor conference by King Abdullah of Saudi Arabia signalled an unwillingness to shoulder the burden of bankrolling the country alone and in perpetuity.

“They are eager to broaden the scope of supporters,” he said. “The international community is looking to Egypt to start with the reforms, and then tell us how we can support them.”

The UAE government is also encouraging its own private sector to develop commercial projects in Egypt. But some UAE-based companies have reservations about Cairo’s faltering assurance to overseas investors.

Etisalat, the UAE’s largest telecommunications company, has raised concerns about perceived favouritism for fixed-line incumbent Telecom Egypt in the award of a fourth mobile licence.

Al Futtaim Group, which has plans to invest hundreds of millions of dollars in a new mall, is waiting for the government to provide assurances over dropped corruption charges before it commits to new developments.

Egyptian officials counter that they have been working to improve the business climate and say they have implemented some reform measures, introducing new taxes and an upper band for high earners.

But reducing the fiscal pressure from subsidies – which could trigger political unrest – remains their biggest challenge. Analysts, officials and businessmen say that with a projected 12 per cent deficit in the fiscal year starting in July, Egypt cannot afford to evade reforms by relying on Gulf funding to shield it from difficult decisions.

Chief among these is reducing the costly fuel subsidy, which accounts for more than a fifth of government spending. The government has budgeted a 22 per cent reduction in the subsidy for the new fiscal year, but it is not clear when implementation would start.

The Gulf donors would want to see progress on reform and will work with the Egyptians to engage international financial institutions

- Alia Moubayed, Barclays

“The no-reform scenario is not an option.” said Alia Moubayed, senior economist at Barclays Bank. “The pace of reform implementation will depend on the ability of the new government to build consensus and mobilise further donors’ support. I think the Gulf donors would want to see progress on reform and will work with the Egyptians to engage international financial institutions and other donors for additional support in the months ahead.”

Businesses and officials say it is unlikely that any difficult reforms will be implemented until a new parliament has been elected in the autumn to give a political anchor to tough measures. Some also argue that any subsidy reform will have to be phased in over several years.

Mohamed Abu Basha, Egypt economist at EFG Hermes, said that at 7 per cent of gross domestic product the subsidy system is “just too big to be removed all at once”. He expected that a programme to reduce subsidies would have improved targeting to the poor and would be phased in over four to five years.

“We will know a lot more by September or October,” said the western official. “But I am cautiously optimistic.”

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