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Walk Like an Egyptian
Hey everyone, welcome back. This week we’ll be covering North Africa. North Africa is virtually comprised of all countries in the Sahara Desert, although this week we’ll be focusing on Egypt, Morocco, & Tunisia.
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Last Week Briefing:
Poland delayed their contentious presidential election. It was originally scheduled for May 10th.
Argentina is expected to default on its debt for the ninth time. They are seeking to broker a restructuring agreement before their May 22nd deadline.
Turkey has banned foreign exchange trading for a multitude of international banks including UBS, Citibank, and BNP Paribas. The Turkish Lira continues to fall to all-time lows.
The Brazilian Central Bank is carrying out one of the largest quantitative easing programs in history. For the first time ever, the nation’s central bank may now purchase Brazilian treasuries in the primary market.
The Almighty Dollar
Last week I briefly touched upon the concept of “dollar-swaps” and how they serve a crucial role in global trade. In case you’ve forgotten already, (I get it, it’s Monday) a dollar-swap is an operation utilized by the Federal Reserve to maintain liquidity (access to cash) in foreign countries during times of crisis. In practice, The Federal Reserve will enter an agreement with another sovereign central bank to exchange dollars for their foreign currency at a fixed exchange rate. Meanwhile, they simultaneously agree to re-exchange currencies at the same fixed price sometime in the future. Interest is paid out on these currencies and is distributed to the central bank holding custody of the currency.
It should be said that all of these provisions can be altered by the participants of the agreement. In fact, they don’t even have to include the Federal Reserve at all. Foreign exchange swaps and interest rate swaps can be brokered between any two countries in the world. Ukraine, for instance, recently established a €462M Euro-swap agreement with the E.U. to shore up the value of their own domestic currency: the Ukrainian hryvnia.
What is the obsession with the dollar?
The U.S. Dollar is the world’s primary reserve currency. That is, of all of the currencies in the world, the U.S. Dollar is the most abundantly held (60% of the world’s foreign exchange reserves are U.S. dollars) currency amongst sovereign nations. It is also accepted for just about any international transaction. Oil, gold, among other integral goods, are quoted in USD across the globe.
World War II brought upon an onslaught of historically resilient currencies. The British Pound capitulated following Operation Bernhard, when the Nazis flooded the British market with forged banknotes causing economic turmoil. The dollar emerged as the world’s reserve currency following the Bretton Woods Agreement of 1944. The agreement mandated that the U.S. dollar be pegged to gold, while all other foreign currencies would be pegged to the U.S. dollar. The Bretton Woods agreement also marked the creation of the International Monetary Fund (IMF) and the World Bank, two vital institutions for international trade. President Nixon would ultimately decouple the dollar from gold in the 1970’s, ushering in the fiat currency system we use today.
Lately, countries such as Russia and China have called for a new, global reserve currency to replace the dollar. However, they are not alone in expressing their concern over the Federal Reserve’s “money printing” and the growing U.S. federal deficit. Interest in digital currencies has gained institutional traction as the People’s Bank of China (PBOC) began to test out the functionality of a digital yuan just last week.
Nickels & Dimes: Can you name the top five most frequently traded currencies in the world? Answer will be at the bottom.
Don’t Play with Fire
Unlike other quasi-democratic systems in the region, Tunisia is the only sovereign, democratic state amongst the Arab world. Perched atop the very northernmost point of Africa, the country of Tunisia was formerly a French colony up until 1956. Their roots in French culture have not been forgotten, however. In addition to Arabic, students are required to learn French. Government documents, street signs, and restaurant menus can also often be found in both Arabic and French. This intimate, cultural tie with their northern neighbor is indicative of Tunisia’s strong trade relationships with the European Union.
To understand how Tunisia got to where it is today, we’d only have to rewind to the beginning of the decade. In December of 2010, a street vendor by the name of Mohamed Bouazizi was harassed and beaten by Tunisian authorities. Officials cited that he failed to present a permit, justifying the confiscation of his cart. Reasons why the officials assaulted him are still widely debated. Other street vendors have mentioned systems of bribery in which vendors must grease local officials in order to stay in business.
Later that day, humiliated and defeated, Bouazizi walked in front of a government building, covered himself in paint thinner, and lit himself on fire. He would never know it, but Bouazizi would become a martyr for the overlooked, lower-class of Tunisia. Protests broke out in droves as people were fed up with President Ben Ali’s regime. This would launch what we know today as the Jasmine Revolution which would subsequently usher in the Arab Spring. Since then, Tunisia has benefitted from unprecedented levels of civil liberties and freedom. Tunisia is still the only democracy to arise from the Arab Spring.
Unfortunately, Tunisia’s run at democracy has not been without conflict. Tunisia’s unfavorable geography has exposed the country to a myriad of terrorist attacks. In 2015, ISIS claimed responsibility for a mass shooting in the beach destination city of Sousse, killing thirty Brits. However, the country’s tourism industry has rebounded tremendously, surpassing levels seen before 2015. Tunisia’s tourism industry comprises over 15% of their GDP, and its share of GDP has been shrinking since 2010. All of this said, most of Tunisia’s economy is informal by nature and thus goes untaxed. It is estimated that nearly 50% of Tunisian economic output is informal, resulting in a $8.3B shortfall in tax revenues. This inefficient tax structure is reflected in their debt-to-GDP levels, increasing since 2013.
Tunisian Tourist Arrivals, since 2010 (in thousands)
Tunisian Debt-to-GDP, since 2010 (in %)
The blue chips of the Tunisian economy operate in their phosphate sector. Tunisia is the fifth largest phosphate exporter in the world, leading in materials such as iron, salts, and fertilizer. Of the ~$16B in Tunisian exports, about 80% or $13B of them are destined for European countries. Tunisia’s trade with the European Union has been facilitated by transcontinental trade agreements. Their agreement with the European Union eliminates all duties on goods exchanged between the two regions.
Tunisia’s economy is struggling to stamp out the corruption that lingers within the economy. Ben Ali, the former Tunisian dictator, had been credited with liberating the Tunisian economy following the Bread Riots of the early 1980’s. That said, you could argue the lingering corruption within the Tunisian economy can be attributed to Ben Ali’s rule. His extended family assumed prominent roles in government agencies, regulatory bodies, and lucrative corporate gigs. The World Bank found that the Ben Ali family was associated with over 220 businesses. Of those businesses, they contributed only 1% of jobs but over 20% of corporate profits. This neglect of the public good is reflected in the country’s education and skills development systems. Because of this, amongst other factors, Tunisia is classified as a Frontier Market, per MSCI.
Tunisia is one of the many frontier markets reaching out to the International Monetary Fund for debt relief. Despite showing tremendous success in curbing the spread of the virus, (Tunisia has only 327 active cases as of May 10th) the ripple effects of an economic shutdown will certainly leave a scar on their industry. Unemployment is expected to jump to 25% while economic output is expected to drop 5%. The Tunisian government has enacted a program distributing a monthly stimulus check of 200 dinar, or $70/month. What’s more, Tunisia’s external financing requirement, or, the amount of dollars needed to cover short term debt payments, is over 150% of their current foreign reserves. With over $35M in funding available from the World Bank, creditors and investors alike will be seeing how Tunisia’s new government handles this recovery.
Head of State: Tunisia’s new President, Kais Saied was given the moniker “______” based upon his stern looks and reserved nature.
Answer will be at the bottom.
North Africa and the Middle East are often grouped together under the moniker MENA. For purposes of not giving you a novel to read this morning, I’ve categorized Egypt under North Africa.
Across all global equity markets — both emerging and developed — Egypt’s market was the ninth best performer of 2019. Buoyed by an accommodative central bank and a burgeoning tourism sector, the Egyptian economy has earned its association with other economic wunderkinds of Africa. As a matter of fact, Egyptian companies comprise 3% of the MSCI Emerging Frontier Africa Index, making it the 3rd largest allocation in the benchmark. What’s more, the Egyptian economy is the third largest in Africa and the fourth largest economy across the Middle East and North Africa. Since 2015, annual Egyptian GDP growth has yet to fall below 4%.
This past decade, the Egyptian economy has been nothing short of a rollercoaster. In 2011, Egypt played their part in the Arab Spring with mass protests of their own. Inspired by their Tunisian neighbors, protestors flocked to the streets on a national holiday to protest the autocratic Mubarak regime. They demanded Mubarak step down, given his track record of corruption, police brutality, and suppression of Islamic fundamentalism. At one point, his regime would shut down the internet and arrest a Google employee, drawing the global spotlight upon the Arab Spring. What’s more, his alliance with the U.S. amid the Iraqi Invasion of Kuwait was a very controversial position. Despite Mubarak’s promised economic and social reforms, he would ultimately resign in February, 2011.
The Mubarak regime would be supplanted with Mohamed Morsi’s regime and the era of the Muslim Brotherhood. The Muslim Brotherhood was a prominent opposition party to Mubarak’s secular regime. Morsi was especially a staunch critic of Mubarak’s. Morsi would actually serve prison time for speaking out against the corruption that plagued Mubarak’s cabinet. Morsi would only be in power for thirteen months as his leadership was equally unpopular. He would be ousted following the protests of 2013 and Egyptian coup d’etat. Abdel Fattah el-Sisi, Morsi’s Minister of Defense, would eventually assume power. el-Sisi would be responsible for disassembling the Egyptian constitution and increasing the scope of the Egyptian military in everyday life. He still holds power to this day.
el-Sisi has placed a unique emphasis on the role of the military in Egypt’s economy. The Egyptian army has become an industrial conglomerate, estimated to produce 40-60% of economic output, depending on who you ask. Outside of national security, the army produces cement, food, and even baby formula. The Ministry of Military owns over 20 different companies. Profits from these enterprises go untaxed while budgets go unchecked within the Egyptian government. Consequentially, this advantage has allowed the military companies to undercut prices, crowding out the private sector in Egypt’s economy. The Sovereign Wealth Fund of Egypt, formed in 2018, was created to encourage private investment into Egyptian infrastructure. Lately, the fund has proposed divesting assets owned by the Egyptian Army to accelerate their country’s transformation. el-Sisi proposed listing military companies such as Eastern Tobacco on Egypt’s stock exchange in hopes of allowing private investors to take ownership in these companies. Eastern Tobacco listed 4.5% of their equity on the Egyptian Exchange in March 2018, marking the first of many military divestitures to come.
Critics will argue that Egypt’s economic growth is gilded in nature as the prosperity has not been felt by all. While el-Sisi argues the military serves a vital role filling gaps in the market, the vast size of the public sector has disenfranchised small and medium sized business owners. The privilege to set prices is only enjoyed by the government. In fact, el-Sisi has been quoted instructing the military to enter the food market to “supply more chicken to push down prices”. Egyptian unemployment hovers above 10%. In a country of over 70 million, only around 100,000 Egyptians can afford a new car. What’s more, Egyptian interest rates rival those of a credit card. Thus, private businesses are repelled from borrowing money to invest in their businesses.
The Luxor, Egypt
Formerly pegged to the British pound, the Egyptian pound was floated in 2016. Similar to other ‘shock therapy’ economic reforms, the newly-floated pound floundered 50% against the dollar. The pound is still trying to find its footing. Inflation has simmered since the initial decoupling from the pound, although still checked in above 5% in March 2020. Egypt’s economy was on pace to grow 5.7% in 2020 before the onslaught of COVID-19. Egypt’s tourism industry, which saw over 11 million visitors in 2019 and comprises 4% of GDP, is expected to be a concern for the Egyptian economy. Once again, Egypt will be seeking over $2B in relief from the IMF, with a new focus on infrastructure and social welfare.
COVID-19 will likely be an obstacle for the liberalization of Egypt. el-Sisi’s scope in government is gradually increasing in hopes of combatting the virus. What’s more, questions have surfaced regarding el-Sisi’s ties to the death of Shady Habash. Habash had released a satirical video mocking the President and was sentenced to two years in a maximum security prison. His cause of death is unknown. Twain said that “History doesn’t repeat itself, but it often rhymes.”
The Little Things: Ancient Egypt is known for their affinity of what popular modern beverage?
Might Hurt a Little, Might Hurt a Lot
The beautiful Kingdom of Morocco is a little taste of Arab culture mixed in with Spanish zest. Formerly a Spanish protectorate, (recall the British & German protectorates in East Africa) the sandy deserts of Morocco have become a popular tourist destination for Euro and American travelers alike. Morocco saw nearly 13 million visitors in 2019. Tourism contributes nearly one-fifth of Moroccan GDP. The country has not succeeded in reducing its dependence on the industry, however. Like their Tunisian neighbors, the Moroccan economy is mightily dependent upon their informal economy. It is estimated that the equivalent of 20% of the country’s economic output goes untaxed. The fifth largest economy in Africa, Moroccan GDP growth has slowed of late, as their phosphate dependent economy has hindered economic progress.
Casablanca Stock Exchange
Morocco imported 97% of its energy in 2015, making them the most energy dependent country in North Africa. Morocco unfortunately does not boast the same petroleum prowess as some of their African neighbors. Instead, the country’s renewable energy sector has been their proposed catalyst for economic growth, particularly in solar energy. In 2012, the African Development bank approved $330M loan for the Ouarzazate Solar Plant. The plant is estimated to cost $9B with goals of reaching an energy capacity of 2000 megawatts by 2020. Currently, 35% of Morocco’s power comes from renewable sources and by 2030, Morocco aims to have renewables comprise 52% of total energy capacity. Morocco’s ties with the European Union offers promising opportunities for green energy partnerships. As a member of the Paris Agreement, the country’s strength in renewable energy should prove to be a successful venture for them down the road.
Morocco’s natural gas reserves are another unexploited opportunity for foreign direct investment. It is estimated that only 10% of Morocco’s natural gas reserves have been realized and $30B of investment will flow into the nations petroleum industry before 2030. Multinational oil companies such as Eni, SDX Energy, and Sound Energy have planted their stake in Morocco’s natural gas fields. Last year, the Moroccan government tendered a $4.5B natural gas project to help reinforce their growing energy industry.
Morocco’s landscape is unique amongst its North African contemporaries. Consider the nation’s vast agriculture industry, given its geographic position. The agriculture sector comprises 40% of the country’s labor force and roughly 30% of GDP. The country is the second largest exporter of phosphates in the world, placing them right behind China and ahead of the U.S.. Interestingly enough, the Western Sahara is allegedly home to over 70% of the world’s phosphate reserves. The Kingdom’s reliance upon their agriculture industry makes them prone to uncontrolled risks in the global economy. Due to climate change, Morocco is anticipated to experience severe droughts over the next 20 years, thus forcing the nation to restrict water use for individuals and businesses alike.
The Moroccan Kingdom is one of the many African nations receiving international aid amid the coronavirus pandemic. The World Bank recently approved a $275M relief bill to shore up the struggling economy, particularly the tourism industry. The Moroccan Minster of Tourism stated that 87% of their hotels have been shuttered because of the crisis. Morocco’s populace is especially affected, given the country’s leading position in income inequality across North Africa. Between the country’s informal economy, reliance upon agriculture, and rampant income inequality, the Moroccan Kingdom should consider replenishing investment back into their academic institutions.
What I’m Reading / Watching:
Reading (book): Personal Foul by Tim Donaghy. If you’re unfamiliar, Tim Donaghy was an NBA referee who was caught fixing games for high-stakes gamblers.
Watching (show): Daredevil (Netflix): Much different from any other superhero property. Vincent D’onfrio is incredible.
Watching (movie): Almost Famous: Described as a “love letter to rock n’ roll.” There are frequent Morocco references.
Nickels & Dimes: The top five most frequently traded currencies in the world:
The U.S. Dollar
The Little Things: The Ancient Egyptians were big fans of beer. In fact, they referred to it as “drink of the Gods” and held the Tekh Festival, also known as the “Festival of Drunkeness.” While beer was not created in Ancient Egypt, their methods of brewing closely resemble those which we use today.
Head of State: Kais Saied is given the nickname Robocop. In fact, many political scientists argue that the Robocop memes are what propelled him to victory over his media mogul opponent, Nabil Karoui.
Next Week: TBD
I will be taking a break from these country profiles next week to write about something new. Please let me know if you have any suggestions or questions you’d like featured!