01 June 2012 - Peter Leger
The many years of Mubarak rule will not be remembered for its economic reform and societal development; the words ‘cronyism’ and ‘selective repression’ would spring to mind long before. Yet as stagnant as the economy was pre-revolution, the subsequent vacuum and power interplay has stalled the economy. Egypt has been witnessing an exercise in leadership abdication with the military arm-wrestling any potential threat into submission, using a variety of pressure points. These have ranged from strong-arming judicial decisions that have required trawling the statutes for obscure laws, funding political opposition to force engagement, and the more classic use of force, even raiding human rights offices in their pursuit of appropriate attitude alignment.
Like any good piece of political theatre, the middle act is only as good as the quality of the story foundation set-up in the first act. If a suitable number of threads of yarn are spun early on, this makes for a rich backdrop against which a story can then unfold. The first act has been a corker as the scene was set with the dramatic toppling of the existing regime; court room scenes of a dictator on trial from his sick bed and nascent political parties being rushed through infancy and the toddler stage to prepare for democratic battle. The end of act one reached a zenith as the courts banned a clutch of potential presidential candidates at the eleventh hour, with some being banned for previous political imprisonment, which in our view makes more for a qualifying criterion! This was followed by the Supreme Constitutional Court dissolving the elected parliament, widely seen as a directive from the Egyptian military. Act one ends with a photo-finish run-off between the Muslim Brotherhood candidate (Mursi) pitted against the ex-regime candidate (Shater), with Mursi prevailing after a delayed election result announcement. Cue curtain for end of act one.
The middle act starts in a dramatic fashion with the new president annulling the parliamentary dissolution and suggesting the military return to their normal role of defending the country’s borders. A clear line drawn in the sand. Another issue at stake is who gets the greater role in writing the new constitution with the constituent assembly also dissolved. Should the assembly remain dissolved, the military gets a far greater say, and should the assembly remain as is, the Muslim Brotherhood gets to set the terms. He who writes the constitution sets the powers of parliament and the president and is politically key. We think that much of the middle act will be dominated by this standoff, with the courts featuring more than Tahrir Square.
What does the final act hold? The largest conflict that the Egyptian protagonists will still have to resolve will be the tussle between the military and the natural conclusion of the democratic process currently under way. Much is made of the ideological differences in Egypt and the stresses associated with these. As an issue, our view is that these are very much a secondary storyline, and heightened more by fear and ignorance than a clear risk. The issue is that the Egyptian armed forces wish to retain their role as the source of authority and legitimacy. This will allow it to retain its economic interests and steer their view of social cohesion in Egypt. In doing so, they’re trying to finesse concessions demanded from Tahrir Square. A democratic process will result in an inevitable collision with this. In a democratic society the people are the source of authority and legiti-macy. This act will see, in our view, a fight by the military generals for political and criminal immunity at the very least, and a desperate effort to protect all their interests. However, as the political process becomes increasingly reflective of the will of the people, the friction points will increase. This will have longer-term benefits that we know and expect of democratic institutions.
Given that this is a great piece of political theatre, the exact unfolding of the story is difficult to predict. However, from the tensions present and the narrative so far revealed, we have the view that Egypt is well on course for an economy that will be characterised by much higher accountability and transparency. This is a very good thing. Short term, there are some real issues, largest of which is the currency. A managed currency can be extremely unpredictable in times of great stress. A well-telegraphed fact is that foreign reserves in Egypt have been under severe pressure, and this results in capital movements akin to a run on a bank. The Egyptian authorities have taken steps to control capital movements and use the banks to manage flows. Overall, the level of risk and leverage in the economy is low, which has allowed for this and minimised the consequences thereof. But a sharp sudden move in the currency has a high probability, and investors need to be mindful of this. As South African investors we are acutely aware that such a move can benefit certain industries with internationally driven revenue lines, while costs are incurred locally. A currency sell-off provides for an easy step-up in profitability which is effectively hedged. Businesses such as these have been equally sold off in Egypt, and presents investors with a great investment opportunity in our view.
Colin Powell has a great quote: ‘Capital is a coward. It flees from corruption and bad policies, conflict and unpredictability. It shuns ignorance, disease and illiteracy. Capital goes where it is welcomed and where investors can be confident of a return on the resources they have put at risk. It goes to countries where women can work, children can read, and entrepreneurs can dream.’
Investors can do well where countries set their moral compass accordingly. The first two acts in Egypt are playing out to do exactly this, and we await the final act with interest.
PETER LEGER joined Coronation in 2005. He has 13 years’ experience in the financial markets in Africa as both a portfolio manager and research analyst. Peter currently heads up the Africa ex-SA unit for Coronation, which includes the Coronation Africa and Coronation Africa Frontier Funds.
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