Egypt's Failing Economy: Western Corporations Are Awaiting A Real Economic Plan From The Morsi Government While Small Businesses Wither

When the Arab Spring swept through Egypt and angry protesters descended on Cairo to overthrow the Mubarak autocracy, Mara Vaughan was not particularly concerned about her safety.

Eight years earlier, Vaughan had moved from her native Ireland to Egypt. She now owns a small hotel called the Mara House in Luxor, a tourist destination a few hundred miles south of Cairo.

The street demonstrations that engulfed a handful of large Egyptian cities in January 2011 never reached Luxor. So Vaughan, who also operates apartment rentals in the capital city, traveled north to witness the scene for herself.

“I needed to see if what the TV reported was true,” she said.

Although the uprising was disturbing and violent – more than 800 people died in the clashes between civilians and security forces centered in Tahrir Square in downtown Cairo – and many protesters voiced anti-Western sentiments, Vaughan didn’t (and still doesn’t) feel threatened. But now, with Mubarak gone and President Mohamed Morsi’s popularly elected administration in power, she is more apprehensive than ever.

“Nobody is secure here now -- I don't mean in the physical sense,” she said.

Over the past two years, Vaughan has watched the streets get dirtier as trash collection got spottier. Electricity has become unreliable. Fuel has grown scarce. Food prices are rising as personal incomes shrink. “Nobody is secure because nobody knows what is happening,” she said.

For Western businesses and investors in Egypt, this pervasive sense of uncertainty is a serious concern. In some ways, the situation isn’t as bad as it looks; trade between the United States and Egypt is still relatively healthy in the wake of the Arab Spring.

But unless the embattled Morsi administration can deliver a future that looks a lot better than its short past, the strong commercial bonds that have linked Egypt and the West since 1949 could begin to fall apart.

Going Corporate

Two-way trade in goods between Egypt and the United States has ramped up considerably over the past decade, according to U.S. Census data. The high point came in 2010, when it surpassed $9 billion. That figure fell in 2011, but not by much – $8.28 billion in goods were exchanged despite the upheaval – and trade was flat last year.

“During the moment of the revolution in Egypt, businesses did close for a few days, primarily to enable staff to get home safe,” said Khush Choksy, executive director of the U.S. Egypt-Business Council at the U.S. Chamber of Commerce. “Some of them did evacuate nonessential employees temporarily. But not a single American company in Egypt was impacted in terms of damage to property. They were back to business as usual within two weeks.”

To bolster U.S-Egypt trade, representatives of more than 50 major American companies traveled to Cairo last September for a much-vaunted meeting meant to strengthen business ties and to promote private-sector partnerships. Among the companies that made the trip were PepsiCo Inc. (NYSE:PEP), which employed about 12,000 people in Egypt in 2012; Xerox Corporation (NYSE:XRX), whose subsidiary Xerox Egypt has operated a manufacturing facility since 1975; and Apache Corporation (NYSE:APA), a hydrocarbon firm whose annual investments in Egypt total about $1 billion.

These multinationals have been able to maintain their operations in Egypt because their size and scope give them advantages over small-business owners like Vaughan, who rely on sales within the country for their cash flow.

“The foreign entities that are OK are the ones that can take advantage of other markets,” said Steve Formaneck, a business professor at the American University in Cairo. “People here don’t have the money to buy products, so international companies need to be able to send some of their units outside the country. The ones who are surviving are the ones that are flexible in that regard.”

The Daily Grind

Private investments in Egypt are supplemented by a steady stream of foreign aid. The European Union approved an aid package for Egypt worth $6.4 billion in November. Gulf states like Qatar and Saudi Arabia have deposited billions into the Egyptian central bank. The United States delivered $129.1 million of foreign assistance in 2012, and in March of this year, U.S. Secretary of State John Kerry promised to pump another $190 million into the Egyptian budget and offered another $60 million as part of a program to bolster small businesses.

The Morsi administration is in dire need of all this support – and then some. A severe economic crisis is still stifling progress for Egypt’s 83 million people, despite all the pledges, disbursements and investments.

Egypt’s economy has been on shaky ground for decades – it is part of what prompted the revolution in 2011. But the Morsi government, which is dominated by the Freedom and Justice Party – a wing of the Islamist Muslim Brotherhood – has so far failed to address longstanding problems. And analysts and lenders say it is in desperate need of a real plan, not a day-to-day survival kit.

Instead of implementing a sustainable economic blueprint for the future, the administration responds to fiscal emergencies with stopgap measures like targeted tax hikes and opportunistic borrowing. But without a long-term approach, Egypt is in danger of losing the investments it so desperately needs.

“The government of Egypt is not making investment decisions, for example in infrastructure or large-scale projects,” Choksy said. “Such projects would be welcome by U.S. companies.”

Indeed, there is not much about the Egyptian economy right now that brings comfort to any businesses – multinational or local. The Egyptian pound has lost about 10 percent of its value so far this year, substantially inflating the cost of living in a country where 25 percent of the population lives below the poverty line. Last year, unemployment reached 13 percent, according to conservative government figures, and gross domestic product grew by less than 2 percent. Foreign currency reserves are dwindling, and may run out in a matter of months.

Moreover, the Egyptian budget is bogged down by a massive public subsidy program, a remnant of the Mubarek era. It costs about $20 billion annually, or about one-third of government receipts. This entitlement lets Egyptians buy bread and fuel at dirt-cheap prices. The subsidies are plainly unsustainable, but the administration knows that slashing them will provoke fierce backlash – something it is keen to avoid ahead of parliamentary elections, which are expected later this year.

Waiting Game

For now, major multinational corporations with existing operations in Egypt say that they can absorb the shocks of an economy in transition a while longer. But smaller enterprises – not to mention average citizens – are not so fortunate.

In Cairo, Formaneck regularly encounters long lines at gas stations, which can back up traffic in the crowded capital city. He has seen an outbreak of looting and tear gas as recently as January, on the two-year anniversary of the Egyptian revolution.

As a result, Formaneck said, “There has been a lack of new foreign entities coming in.”

Domestic businesses that rely on international travelers – like the Mara House in Luxor – have been particularly hard-hit by the turmoil.

“The first week of the revolution meant total collapse of the tourist industry in Egypt,” said Vaughan. “Some places have closed, many restaurants no longer open for lunch, the bank has repossessed some businesses as far as I know."

She and other residents will have to deal with the power outages, crumbling roads and faltering tourism as long as the government remains too cash-strapped to invest in infrastructure. And the longer it takes for the administration to patch together a plan for growth, the more likely it is that big investors will begin to look elsewhere, which will only worsen the situation for Egyptian businesses.

“I'm an optimist, but I have my down days,” said Vaughan. “It's the frustration of not knowing -- that's the killer.”