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Takeaway: The recent Egyptian political uncertainty is supportive of our view that the post Arab Spring transition in the Middle East will be complicated and long tail in nature.  As such, political transitions in the Middle East, in particular Egypt, should remain front and center as a global macro risk.

Back in April of 2011, when the Jasmine Revolution and Arab Spring were front and center for global macro risk managers, we wrote the following:

 

“In many ways, Egypt will be a real litmus test for the Middle East. With 85 million people, it is the largest country in the region and geographically it is very central. Furthermore, Egypt does not have any major tribal or sectarian issues, like many sovereign states in the Middle East, so it should have the best chance at a peaceful and democratic transition. Not dissimilar to Egypt’s role in the late 1970s when it was the first Arab nation to officially recognize Israel via the 1979 Egypt-Israel Peace Treaty, Egypt’s leadership may usher in a new era in the Middle East."

We believe this view continues to hold as it relates to Egypt. In the note below, we provide some background on Egypt and a couple of scenarios as to the political future of Egypt -- a nation that is and will continue to be a litmus test for the entire region.

Background: Egypt’s Political History


Egypt has been a republic since 1952, when members of the military over threw the old monarchy following a defeat in the 1948 Arab-Israeli War. After a brief attempt at civilian rule, the officers terminated the old constitution and declared Egypt a republic on June 19, 1953.

Since then, Egypt has had four presidents. Muhammad Naguib was sworn in as the first president of Egypt in 1953, and remained in office until he was succeeded by Gamal Abdel Nasser Hussein, famous for representing Egypt during the Suez Crisis. Nasser held office until his death in 1970, at which point Anwar El Sadat commenced an eleven-year presidency that culminated with his assassination in 1981.

Sadat fundamentally changed Egypt’s economic and political direction by re-establishing the multi-party system and negotiating the Egypt-Israel Peace Treaty.  After Sadat’s death and a brief interim president, Sadat’s former vice president, Muhammad Hosni El Sayed Mubarak, became Egypt’s fourth president in October of 1981.

Mubarak’s almost thirty-year presidency was characterized by broad corruption and abuse of power.  Not surprisingly, the Egyptian economy floundered under Mubarak and was in a large part supported by annual aid from the U.S.  Mubarak’s regime maintained one-party rule under a continuous state of emergency, refusing to null the emergency law that had been enacted after the Six-Day War in 1967 and thereby preserving the government’s unchallenged power to censor, imprison, police, and suspend constitutional rights. Under the Mubarak regime, political activists were imprisoned without trial, undocumented detention facilities were established and universities, religious buildings and publications were discriminated against based on political affiliation.

In late 2010, Tunisian President Ben Ali was ousted with the advent of popular uprisings across the Middle East and North Africa.  Given Mubarak’s seemingly self-serving and dictatorial rule, few astute political analysts were surprised when in early 2011 Egypt became the epicenter for the “Arab Spring” and popular unrest in the Middle East.

As protests escalated in early 2011, Mubarak made a number of live, televised appearances in which he promised governmental reform, but refused to step down from his office. Finally, in mid-February, Mubarak caved – Vice President Omar Suleiman announced that Mubarak was resigning his presidency and turning power over to the Egyptian military, led by Field Marshall Mohammad Hussein Tantawi.

Post-Mubarak and the Current Situation


In the aftermath of Mubarak’s deposition, Tantawi dissolved Egypt’s Parliament, suspended its Constitution and promised open presidential and parliamentary elections within six months. The prior cabinet, along with Prime Minister Ahmed Shafik (a secularist with ties to the old regime), was appointed to serve as a caretaker government until a new one was formed. In response to protests, Shafik was replaced on March 5th with Essam Sharaf, Egypt’s former transport minister.

In the new political landscape, Islamist parties such as the Muslim Brotherhood demonstrated a renewed strength, taking lead roles in constitutional changes, voter mobilization tactics, and demonstrations.  For many observers, the reemergence of the Muslim Brotherhood signified increased Islamic influence in Egypt and raised questions about the country’s future relationship with Israel, and whether Egypt would be able to assimilate and appease its broad political and religious interest groups.

Despite Mubarak’s resignation, protests continued throughout the remainder of 2011, fueling international concern over how long the military junta would rule the country. Parliamentary elections were held in January 2012, with the Muslim Brotherhood winning roughly half of the seats. In March, the Brotherhood reneged on their previous promise to seek the presidency and nominated Mohamed Morsi for office after their first-choice candidate was rejected by courts.  

After the first round of voting in Egypt’s presidential election from May 24-25th, the winners were Morsi and Shafik. Around this time, the Egyptian military took a number of legislative measures to extend their powers in what critics labeled a “silent coup.” Such measures included the dissolution of Parliament on the grounds that the law under which it had been elected was unconstitutional, and the passing of a charter limiting presidential authority and giving generals legal and economic control of the country.  The second round of voting took place from June 16-17th, and on June 24th, a week after the polls closed, Muslim Brotherhood candidate Mohamed Morsi was confirmed as the official winner of the election with 51.7 percent of the vote to Shafik’s 48.3 percent.

In the month since the second round of voting, a string of events have thrown the country’s switch to democracy into confusion as relations between the military establishment and the Brotherhood have grown increasingly strained. The Brotherhood had been well-established during Mubarak’s reign as the primary opposition to his military dictatorship, and its decision to join young liberal activists in revolutionary protests was integral to the revolution’s overall success. That said, it was the military that ultimately ousted Mubarak and took control of Egypt.

Ultimately, Morsi’s electoral success gave the Brotherhood a boost in its struggle for power with the Egyptian military. On July 8th, Morsi surprisingly ordered Parliament to reconvene, directly challenging the reigning military that had reaffirmed its order to dissolve the body. Despite this “breach,” the military made no move to prevent the legislators from gathering for a brief parliamentary session on July 10th.

At a military ceremony on July 17th, Field Marshal Tantawi asserted: “Egypt will not fall. It is for all Egyptians, not for a certain group – the armed forces will not allow that.” There is ample reason to believe that this defiant statement was addressed to the Brotherhood, and that there may be turbulent times ahead.

Expectations for the Future


Egypt has the 27th largest economy in the world, and remains incredibly relevant due to its place as an important American ally in the region and its role in global commerce as the home of the Suez Canal, which transports roughly 8% of the world’s oil supply. Moreover, Egypt has served as a key arbitrator in the Israel-Palestine peace process for thirty years.  As The Economist aptly stated in a recent article:


“With its strategic situation, its cultural influence and a population double that of any other Arab country, Egypt has for three decades now been the linchpin of a precarious but enduring regional Pax Americana.”

 At present, a number of unknown variables drastically complicate national (and regional) prospects for a stable future.  Moreover, accelerating internal unrest due to skyrocketing unemployment, as outlined in the chart below, is also a key factor.

Egypt . . . Now What? - chart2

 

Each group involved in the present power struggle seems to have a different ideal outcome in mind. The U.S. wants a thriving democracy to bring stability to the region; the army seems to want to maintain a status quo peace; the Muslim Brotherhood wants to establish a nation governed by traditional Islamic values. As a result of these conflicting interests, it’s nearly impossible to confidently predict where the nation is heading. Taking that into consideration, there are three possible directions in which the Egyptian political situation could head over the next few years.

Scenario one: The Egyptian military refuses to give up power and re-asserts control. The military wasn’t afraid to seize control of the country during Mubarak’s ousting, and there is no reason to believe that they wouldn’t do so again. Though they did concede in allowing Parliament to endure a five-minute session, they have the self-ordained legislative power to step in at any time. However, if the military did reassert control, it is likely they would face significant international pressure. Specifically, this pressure would come from the U.S. who provides more than $1.3 billion a year to Egypt in military assistance. (In the chart below, we highlight the close relationship between the U.S. and Egyptian stock market over the last six months, which is a point that is likely indicative of the massive U.S. support given to Egypt.) Moreover, if Islamists and liberals alike were to become convinced that the military had no intention of relinquishing power, we would see an increased probability of a second revolution with an unpredictable outcome.

Egypt . . . Now What? - Egypt

 

Scenario two: Morsi and the Muslim Brotherhood assert power. In response, the military would likely challenge the action in court, which will lead to more even more uncertainty and take months, if not years, to resolve. Even if the Egyptian military were to unexpectedly accept Morsi’s presidency, the challenge of leading Egypt remains monumental. The Egyptian population has endured a tumultuous past couple years, and citizens will be impatient in demanding immediate change. Apart from being forced to juggle what will most certainly be an overwhelming influx of social demands, Morsi will need to be cautious of threatening the military’s economic, commercial, and political interests. Morsi lacks political experience, and whether he has the nerve and/or ability to lead Egypt during this difficult transitional period remains to be seen.

Scenario three: Egypt enters a period of conflict and political paralysis, and party disagreements lead to violence. While Morsi may be the “official” president, it is critical to keep in mind that over 50 percent of Egyptians did not initially vote for either Shafik or Morsi, and instead supported more moderate candidates. It is uncertain how this demographic will respond to Morsi as a leader, yet they play a key role in determining the country’s political future. Many who initially supported the revolution are stuck between a rock and a hard place, having to choose between a traditional Islamist and an old-regime secularist who might threaten revolutionary progress. In the face of a prolonged power vacuum, there’s a risk for conflict Egypt’s political parties to take a violent turn and trigger a second revolution.

As Shakespeare wrote:

 

“Expectations are the root of all heartache.”

Currently, expectations in Egypt for a quick resolution of the current political stalemate are low, but perhaps these low expectations are just what the nation needs as it comes to grip with a new governing reality.

Daryl G. Jones

Director of Research