Egypt's Power Vacuum Threatens the Economy

Investors cheered after Muslim Brotherhood candidate Mohamed Mursi was declared the winner of Egypt’s presidential election on June 24. The benchmark stock index soared 7.6 percent, the biggest gain since February 2008, and rose another 2.9 percent on June 26. The celebrations may prove premature should a battle over legislative power, currently held by the military, impede Mursi’s ability to follow through with campaign promises to reduce public debt, create jobs, and boost economic growth.

A standoff between Mursi and the military could delay a $3.2 billion International Monetary Fund loan needed to stem the worst decline in foreign reserves since 2004 and to cut record borrowing costs, according to economists at Bank of America (BAC), HSBC Holdings (HBC), and Standard Chartered (STAN). The budget deficit may widen to 10 percent of economic output this year, the highest for any Arab country, according to IMF forecasts. “The current institutional vacuum could jeopardize the very crucial aid and budget support that had been in the making for months now,” Philippe Dauba-Pantanacce, Dubai-based senior economist at Standard Chartered, said by e-mail on June 24. “In the short term, Egypt could be on a verge of a disorderly devaluation, with foreign exchange reserves dangerously low.”

At stake for Mursi, 60, are promises he made to voters who toppled Hosni Mubarak in a popular uprising last year in protest of policies they said swelled the pockets of the rich and left the poor grappling with unemployment, inflation, and police repression. As part of his platform, Mursi pledged to create a fund for unemployment benefits, boost economic growth to 7 percent a year on average, from 1.8 percent, and cut the budget gap to less than 6 percent of gross domestic product by 2016.

Foreign investment in government debt almost vanished after the revolt, and along with it more than half of the country’s foreign reserves. The latter slid to $15.5 billion in May from $36 billion on the eve of Mubarak’s ouster, central bank data show. Egypt’s borrowing costs have soared over the 17 months since the uprising. The average yield on nine-month, local-currency treasury bills rose to a record 16 percent at a sale hours before Mursi was declared the winner on June 24.

The Muslim Brotherhood has vowed to continue a sit-in in central Cairo’s Tahrir Square until the Supreme Council of the Armed Forces, or SCAF, reverses its declaration to take over legislative powers, made after a court ruling effectively dissolved parliament this month. The military retained veto powers over the drafting of a new constitution. The nation’s budget for the fiscal year starting July 1 also needs military approval in the absence of parliament, according to former lawmaker Ziad Bahaa-Eldin.

“We cannot view the election result as establishing a new order in Egypt or ending the power struggle between SCAF and the Brotherhood,” HSBC economists wrote in a June 25 report. At best, Mursi’s win may pave the way for the two groups to work out an “uncomfortable modus operandi that could allow for the formation of a new, Islamist-led coalition government willing to rule within boundaries agreed with SCAF,” they said.

Investors are keeping a watchful eye on developments. “First news seems to be positive for Egypt’s bonds, but the euphoria can be set back quickly” if the ongoing power struggle between the president and the military is not resolved, says Sergey Dergachev, who helps manage emerging-market assets at Union Investment Privatfonds in Frankfurt. “I do regard this risk as real, and still maintain a cautious stance on Egyptian assets.”

Egypt first requested a loan from the IMF last year. The IMF linked its approval to Egypt’s achieving broad political consensus. On June 26 the agency said it’s ready to support the country in the face of “significant immediate economic challenges.” The Muslim Brotherhood had said it didn’t want IMF funds disbursed to a military-appointed government. While that government is on its way out, in the absence of a parliament it is not clear when or if the loan will go through. The “constitutional vacuum and the lack of parliament or clearly defined presidential powers could likely delay the program further,” Bank of America analysts wrote in a June 26 report. “Time is not on Egypt’s side.”

The bottom line: While stocks climbed more than 10 percent after Mursi was declared president, investors are nervous about his ability to govern.

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The Man Behind Egypt's Real Estate Rebellion

By Zainab Fattah and Mahmoud Kassem

Hamdy El Fakhrany didn't set out to strike a blow against Egyptian government corruption when he traveled to a state land auction in 2007. All he wanted was a quarter of an acre to build a house. The auction was canceled, as were the others he tried to attend over the next six months, the 53-year-old engineer says.

Finally, an employee at the Housing Ministry took him aside and told him how things worked in then-President Hosni Mubarak's Egypt. "'You are not Hisham Talaat Moustafa,' he told me," referring to the billionaire whose family founded the country's biggest property developer, Talaat Moustafa Group Holding. "'If you were, you would have been given 33 million square meters [355 million square feet] of land without an auction, and for nearly nothing.'"

El Fakhrany left the meeting determined to learn as much as he could about the Talaat Moustafa purchase, which occurred in 2005. He was initially barred from reading the contract. Even so, by relying on handwritten notes slipped to him by someone else at the ministry, El Fakhrany was able to build a case that persuaded a court in September to annul the land sale underpinning the 120,000-home Madinaty project on Cairo's outskirts. An appeals court is set to review the ruling on June 21.

The size of the Madinaty deal and the government's attempts to override the September court ruling fed into broader public criticism directed at Mubarak, his family, and corruption in Egypt. A popular uprising forced Mubarak to resign in February after 30 years in power.

The publicity surrounding Madinaty, Egypt's biggest property development, prompted people to provide El Fakhrany with evidence of other suspicious land deals. He says he's now the plaintiff in more than a dozen lawsuits targeting state officials and developers. "I'm not against private companies working, but why can't they pay fair prices?" he says. "Those companies should not be an excuse to loot Egypt."

El Fakhrany has already scored another legal victory. On Apr. 26 a court reversed a 966,000-square-meter land sale to Palm Hills Developments, Egypt's fourth-biggest publicly traded developer, based on a suit brought by El Fakhrany that claimed the price was significantly less than the market value.

The panel of judges that annulled the transaction said that former Housing Minister Ahmed El Maghraby signed the Palm Hills sale document. El Maghraby owned a 4.6 percent stake in Mansour & Maghraby Investment & Development, which in turn holds 55 percent of Palm Hills, according to a company filing. El Maghraby has been arrested on charges of squandering public funds and profiteering in connection with the case. He could not be reached for comment.

El Fakhrany is preparing additional lawsuits, saying he has received enough documents to file 76 cases that challenge 126 projects. The contracting business owner says he is working with his daughter, Yasmin, a dermatologist, and using his own income to cover legal costs.

El Fakhrany's campaign, along with the uncertainty stemming from the toppling of the Mubarak regime, has thrown Egypt's real estate industry into turmoil. Stocks of publicly traded developers have tumbled as sales plummet and customers cancel deals. Shares of Talaat Moustafa are down 50 percent this year. In December, El Fakhrany was named "Egypt's First Fighter of Corruption" for 2010 in an event organized in part by the syndicate of journalists in Egypt. He received a prize of 5,000 Egyptian pounds ($840).

As for the Madinaty project that started El Fakhrany on his quest, a court order finally made the development's land contract available for review. While El Fakhrany knew some of the details, he was shocked when he read the document closely. Under the 2005 deal, which was completed without a public auction, El Fakhrany says, the state was entitled to 7 percent of the residential properties built, while Talaat Moustafa would get 93 percent. The government also agreed to exempt the developer from all taxes and fees incurred during construction, including import duties on construction materials, and relinquished rights to any commercial or retail space. "The deal couldn't have been any more slanted on the side of the developer and against Egypt," El Fakhrany says. "It was like it was drafted by an enemy of the state." While investigating the Madinaty case, El Fakhrany discovered that a Cayman Islands-based fund called Horus Private Equity Fund III was a shareholder in Talaat Moustafa Group and lists Mubarak's son Gamal as one of its owners.

Jihad Alsawaftah, chief financial officer at Talaat Moustafa, didn't respond to calls and e-mails seeking comment. Construction on the site continues while the case is in court. Hisham Talaat Moustafa, the former chairman of Talaat Moustafa, was convicted in May 2010 of paying a former police officer to kill his former girlfriend, Lebanese pop singer Suzanne Tamim. His sentence was reduced from death to 15 years in prison after a retrial that ended in September.

During an interview in a Cairo cafe, a woman approached El Fakhrany and asked if she could contact him and provide some documents to review. She thanked him for his work. "All the land, which was acquired through corruption, must be returned to the country, or those companies must pay the fair value for it," El Fakhrany says. "Only then we will settle and let the projects go on."

The bottom line: El Fakhrany's challenges to land deals in Egypt are uncovering corruption and upending the real estate market.

Fattah is a reporter for Bloomberg News. Kassem is North Africa bureau chief for Bloomberg News.

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