Jan. 16 (Bloomberg) -- When Saudi Arabia’s King Abdullah held talks with Secretary of State John Kerry on Nov. 4, his main concern wasn’t U.S. policy toward Iran’s nuclear program or Syria’s war as the visitors had expected: it was Egypt.
The king, 89, insisted that Egypt was too important to be allowed to fail, according to two people familiar with the talks, who requested anonymity because they weren’t authorized to speak to the media. Abdullah is already acting to make sure it doesn’t, joining other Gulf monarchs to pledge $15 billion in aid since Egypt’s army under Abdelfatah al-Seesi ousted Islamist President Mohamed Mursi in July.
The Gulf allies are betting that their money can help build a stable Egypt run by sympathetic generals, after three years of chaos. Saudi rulers deplored the fall of Hosni Mubarak in 2011, and worse still was the rise of Mursi’s Muslim Brotherhood, viewed by the Gulf’s absolute monarchies as a threat because it seeks to bring political Islam to power via the ballot box.
Now the Brotherhood is in retreat, labeled a terrorist group, its leaders on trial, and thousands of its supporters killed or jailed. Al-Seesi, who led the crackdown, hasn’t ruled out a run for president this year. Gulf money is likely to keep flowing, analysts say, in an effort to ensure that Egypt’s latest rulers aren’t dragged down by the economic failure that undermined Mursi’s one-year rule.
The Gulf allies “without a doubt appear to want al-Seesi to become president,” said Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai. “The generals present a strong willpower to keep Egypt stable. The Gulf states respect this mentality.”
The first test of al-Seesi’s ballot-box appeal was this week’s referendum on a new constitution, widely seen in Egypt as a vote of confidence in the army takeover. The ballot ended yesterday, and while results haven’t been published, unofficial returns suggest the charter was backed by at least 90 percent of participants. There was no reliable figure for voter turnout.
It was held amid regular bomb attacks on security forces and protests by Mursi supporters, who boycotted the vote. Also part of the backdrop was Egypt’s stalled economy, which has been growing at the slowest pace in two decades, barely outpacing the population. The army-backed government that took over from Mursi inherited record unemployment and a budget deficit at 14 percent of gross domestic product.
Money from Saudi Arabia, the United Arab Emirates and Kuwait has helped ease the pain, replenishing Egypt’s foreign reserves and stemming the pound’s decline. The benchmark stock index has rebounded 45 percent since the army intervention, and yields on one-year debt dropped more than 4 percentage points to 11 percent.
“The Gulf states realize the size of the problem in Egypt,” said Mohamed Abu Basha, an economist at EFG-Hermes, Egypt’s biggest investment bank. “They’re willing to give Egypt a lift for some time.”
Egypt’s slide into dependency on Gulf backers is a comedown for a country that once led the Arab world.
Under Gamal Abdel Nasser, Egypt was at the forefront of a wave of Arab nationalism, promoting plans that included a short-lived merger with Syria. Its influence declined after Nasser’s successor Anwar Sadat broke from Arab allies, with encouragement from the U.S., to sign a separate peace with Israel in 1979. For three decades under Mubarak, Egypt was a bit-part-player on the international stage, though at least it was mostly solvent.
Now, even the Gulf money won’t be enough to keep the country afloat indefinitely, and eventually “there will be a need for additional resources,” Abu Basha said. He said the Gulf monarchies can help out there too, by “lobbying for IMF support.”
Three years of on-off talks between Egypt and the International Monetary Fund have failed to produce a deal. The U.S. is the Fund’s biggest shareholder, and there are signs that its policy is shifting since the Kerry-Abdullah meeting.
A longtime ally of Egypt’s generals, the U.S. has hedged its bets over their re-entry into politics. The Obama administration declined to call it a coup, yet it suspended military aid in October and has expressed concern about the killing of Mursi supporters.
Kerry told King Abdullah that the U.S. did the minimum it could under law in response to Mursi’s ouster, according to a person briefed on the matter. A week after the meeting, Kerry held talks in Abu Dhabi and said that the U.S., Saudi Arabia and the U.A.E. had agreed on “specific joint efforts” to support Egypt’s economy.
Last month, a team of U.S. officials from the Treasury and State Department met U.A.E. and Saudi counterparts to discuss measures to restore investor confidence in Egypt.
The U.S. and Saudi Arabia share “a strong interest in promoting reforms that will allow Egypt to return to financial sustainability,” Johann Schmonsees, a spokesman for the U.S. Embassy in Riyadh, said in response to e-mailed questions. The Saudi Foreign Ministry declined to comment on the meeting between Kerry and the king.
Collaboration on Egypt may help ease tensions on other regional issues. Gulf leaders have questioned the U.S. diplomatic engagement with Iran, and expressed skepticism about its commitment to support the rebels fighting to oust President Bashar al-Assad in Syria.
Saudi Arabia and its neighbors also have business reasons to hope for an Egyptian revival.
At stake are billions of dollars of investments by companies from Dubai developer Emaar Properties PJSC to Saudi food producer Savola to U.A.E.-based Dana Gas PJSC, which began to receive long-overdue payments from Egypt last month. Citadel Capital SAE, a Cairo-based private equity firm founded in 2004, lists an Abu Dhabi fund among its biggest investors.
The U.A.E. has set up an office in Cairo to oversee the implementation of projects financed by aid money, including clinics, schools, affordable housing and wheat silos. Last month, State Minister Sultan Al-Ahmed Al-Jaber inspected some of the projects under the army’s supervision in southern Egypt.
Money, though, won’t be enough to bring stability to Egypt. The Saudi-backed crackdown on the Muslim Brotherhood, which has won every election since Mubarak’s fall, is an obstacle to a solution, according to Anthony Dworkin and Helene Michow at the European Council on Foreign Relations.
“Egypt’s economic and social problems cannot be solved without a political settlement that enjoys broad-based acceptance,” they wrote in a paper published last week.
Since Mursi’s ouster, security forces have killed hundreds of his supporters in clashes across the country. Most of the group’s senior leaders are on trial for charges including inciting violence and murder. Last month, the interim government classified the organization as a terrorist group, blaming it for a string of bombings without providing evidence.
Yet a September survey found support for al-Seesi and Mursi was almost equal.
That highlights the risks Gulf countries are taking in their bet on Egypt, said Paul Sullivan, a Middle East specialist at Georgetown University in Washington.
“One of the biggest pitfalls is the potential blowback by the Muslim Brotherhood and their allies,” Sullivan said. “Getting rid of Mursi and some supporters isn’t the same thing as getting rid of the instability that the Brotherhood and related groups can cause in the future.”
Only Qatar among the Gulf monarchies backed the Brotherhood in Egypt, sending billions of dollars of aid when Mursi was in power. Since his fall, Egypt has sent back some of the money, and arrested journalists from the Qatar-owned Al Jazeera television channel. Earlier this month it summoned the Qatari ambassador to protest “interference in internal affairs.”
For Saudi Arabia and the U.A.E., though, Mursi’s one-year presidency interrupted more than two decades of close ties with Egypt under Mubarak, a former air force commander.
“The army is the only institution that they’re comfortable to work with,” Ghanem Nuseibeh, founder of Cornerstone Global Associates, which advises clients on risk in the Middle East, said from Abu Dhabi. “The army doesn’t have the capability to run the economy,” which is why the Gulf states are “trying to provide technical assistance.”
“If the wrong people come to power,” Nuseibeh said, “it will be a dilemma whether to continue pouring money into a black hole, which is what Egypt potentially is.”
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