Maplecroft’s Head of MENA, Anthony Skinner, analyses election scenarios and their implications for Egypt’s investment climate.

Maplecroft’s Head of MENA, Anthony Skinner, analyses election scenarios and their implications for Egypt’s investment climate.

Egypt’s political drama continues to unfold following the confirmation that conservative Islamist and Muslim Brotherhood leader Mohammed Morsi and member of the old guard Ahmed Shafiq will stand head-to-head in a June run-off vote for the presidency. That moderate Islamist candidates Abdel Moneim Abdoul Fotouh and Mohamed Selim al-Awwa, along with secular left-of-centre Hamdeen Sabahi did not acquire sufficient votes to place amongst the top two for the runoff is regrettable. One might say the same of former foreign minister and former secretary-general of the Arab League Amr Moussa who, despite serving under former President Hosni Mubarak, is less of a controversial figure than Shafiq. The two front-runners are likely to cause even greater political polarisation in Egypt. This is despite efforts by Morsi and Shafiq to widen their appeal to the broader Egyptian electorate.

While a victory for Morsi will likely exacerbate friction with the ruling Supreme Council of the Armed Forces (SCAF) and stoke fears amongst secularists and liberals that politics will be monopolised by Islamists, a victory for Shafiq could trigger a protracted period of conflict and/or political gridlock. Ironically, Shafiq’s electoral campaign has promised a return to security and stability. There are a large number of scenarios with many variants in Egypt but three are worth looking at closely:

Scenario 1 – significant likelihood

• Ahmed Shafiq wins the run-off vote, causing political upheaval and effectively stalling the political process. Shafiq is clearly SCAF’s favoured candidate. This derives from his credentials as former head of the air force, former minister of civil aviation and former prime minister (albeit very briefly) under Hosni Mubarak. He will protect the interests of the military leadership. Even if legitimate, Shafiq’s victory would likely be seen by opponents of the former regime as a rigged vote and an attempt to derail Egypt’s already fragile shift towards democracy.

• The Muslim Brotherhood’s Freedom and Justice Party (FJP), which in combination with the ultra-conservative Salafists control approximately 70% of parliamentary seats, may in turn indefinitely boycott the People’s Assembly, stage persistent protests and encourage strikes. This would be a hazardous move as the FJP has faced local criticism for failing to formulate strong policies in parliament to lift the economy and improve the plight of the majority of Egyptians despite not holding a single post in government. Yet the Muslim Brotherhood may be willing to take the risk in a bid to force political concessions from the SCAF.

Business implications

• A victory for Shafiq may not only plunge Egypt into a prolonged state of political paralysis, but also dramatically increase the risk of street clashes between agents of SCAF and supporters of Shafiq on the one side and Islamists and liberals on the other. The news that Shafiq had made it to the runoff has already provoked protests involving thousands in Cairo and Alexandria which would likely be dwarfed by those that would follow the former minister’s electoral victory. On 28 May, protestors smashed computers and set storage rooms ablaze at Shafiq’s Cairo headquarters. Businesses with operations or logistical networks that run through cities such as Alexandria, Cairo and/or Suez would risk disruption and damage to their assets.

• Political paralysis would also mean that plans to form a 100-member constituent assembly to draft a new constitution and put it to a referendum would continue to be frozen. This would not only mean that the powers of the president, the prime minister and parliament would remain undefined, but also further delay the formulation of a clear economic and investment policy to encourage economic growth and FDI. The IMF projects real GDP growth of 1.5% in 2012, rising to 3.3% in 2012. Yet, this expansion will depend on a combination of domestic political normalisation, strong political leadership with the popular mandate to see reform through, and a rise in confidence from investors and potential tourists.

Scenario 2 – significant likelihood

• Morsi wins the presidential vote, consolidating the Muslim Brotherhood’s grip on the civilian levers of power. Such a result would likewise exacerbate friction between the Muslim Brotherhood’s FJP and the SCAF with the former emboldened by its sense of popular legitimacy. The SCAF, whose members are committed to ensuring Egypt remains non-theocratic and are concerned about the Muslim Brotherhood’s true agenda, is likely to become all the more uncomfortable about the FJP’s strengthened political clout. This would be the case even if the Muslim Brotherhood seeks to avert a head-on collision with an institution which its members know cannot be defeated and forced from power in the short- or medium-term. The SCAF’s concern will persist irrespective of whether Morsi wins the runoff vote by a mere whisker, and irrespective of whether he fulfils his promise to form a broad coalition government if elected. The SCAF would still view the Muslim Brotherhood with the same entrenched suspicion and distrust.

• Although not wanting to be held responsible for the day-to-day running of Egypt, the SCAF may resort to radical measures to reduce the institutional clout enjoyed by the Muslim Brotherhood. The motive to do so would be all the greater were Morsi to win the presidential elections.It is little surprise, therefore, that the SCAF is attempting to issue a constitutional declaration before the run-off vote to delimitate the powers of the presidency, despite this being the prerogative of the yet-to-be formed constituent assembly. In addition, the Supreme Constitutional Court is expected to rule on whether the electoral law which was applied during the parliamentary elections of late-2011 and early-2012 was constitutional. A negative vote could result in the dissolution of the FJP-dominated parliament. As with scenario 1, this would likely trigger mass protests and account for a prolonged period of severe political instability.

Business implications

• As with scenario 1, Egypt would enter a period of political paralysis and conflict. More than 50% of Egyptians did not vote for Shafiq (a candidate who won 23.6% of the vote in the first round of the elections) or Morsi (who secured 24.7%) and opted for more moderate or secularist candidates. They will now play a key role in determining the election outcome and level of stability, or more appropriately instability, in Egypt. There is however little to suggest that these individuals will stand squarely behind any one of the two candidates. Sabahi and Abdoul Fotouh initially implied that they would urge their followers to give their vote to Morsi in the runoff, but have since back-peddled. Choosing between a conservative Islamist and old-guard secularist who may seek to derail the revolution is a hard call for liberals and supporters of the Egyptian revolution. Many may be tempted to boycott the runoff vote. A victory for Morsi under these conditions could encourage the SCAF to take a more confrontational approach. With the Islamists and liberals all the more convinced that SCAF has no intention of relinquishing power,  calls for a ‘second revolution’ would likely become shriller.

• Even if Morsi were to assume office and the SCAF were to accept the result, the challenge of leading Egypt will remain significant. The Islamist leader lacks the political experience of a successful minister (such as Shafiq) to lead Egypt during an extremely difficult period of transition. Apart from having to juggle social demands to reduce employment (officially at 12% but unofficially considered to be significantly higher), reduce poverty and debt, Morsi would need to ensure he does not overly impinge on SCAF’s very significant economic, commercial and political interests. The military controls between 15% and 40% of the economy according to unofficial estimates, is adamant to sustain a strong level of political influence and is determined to prevent Egypt from ever being subjected to theocracy. While seeking to attract investment to Egypt, Morsi would seek to fulfil his promise to improve the lot of ordinary Egyptians and this would involve populist policies and spending.

Scenario 3 – moderate likelihood

• The election of Morsi or Shafiq does not provoke a large-scale political crisis. Protests occur but lose steam. Whichever candidate wins registers some success in reassuring different segments of society that he will be inclusive, act in accordance with the national interest and not favour any single segment of society. The Muslim Brotherhood will seek to accommodate the SCAF and allow its interest to remain intact. The constituent assembly will form but with a more balanced representation of liberals versus Islamists and Egypt will eventually adopt a new constitution that clearly defines the division of power and enshrines the principles of democracy and liberty. This scenario is unfortunately less likely than scenarios 1 and 2, given the current political dynamic.

Business implications

• Investors who are mindful of Egypt’s significant growth potential as an N11 emerging economy would seek to rapidly take advantage of political normalisation. Yet, Egypt’s current challenges will not disappear overnight. The SCAF’s withdrawal as a behind-the-scenes operator is unlikely to take place without turbulence, and friction between Islamists, secularists and members of the old guard as a distinct category will persist in the political sphere and in public. Reducing poverty, unemployment and national debt will be a long drawn-out and painful process. Local economists maintain that Egypt needs at least US$11bn over 12 months to manage a current account crisis and avert devaluation. Yet, the formulation of a clearer economic and investment policy designed to encourage investors would help instil greater confidence in a market with very significant growth potential.