Emirates Buys a Piece of Egypt

exceptionally generous package of 'bail-out' diplomacy

Welcome back to SovereignBeat!

In this publication:

  • G20 pins hope on a soft landing

  • Markets bet on OPEC's continual cuts; Fed's and ECB's delay in cuts

  • Russia bans exports on gasoline

  • UAE steps in to tackle Egypt's economic woes with a strategic acquisition

  • The Europe’s last dictatorship regime is set to continue

Let’s dissect

Markets Snapshot

As of 01/03/2024 market close

  • During the G20 meeting in Brazil, finance leaders expressed optimism about the global economy achieving a soft landing, driven by a quicker-than-anticipated disinflation. However, they also acknowledged persistent geopolitical tensions, particularly the conflicts in Ukraine and Gaza. Despite these challenges, the IMF recently revised upward its global growth forecast for 2024 to 3.1%, attributing it to the robust performance of the US and fiscal initiatives from China amid the ongoing backdrop of geopolitical and geoeconomic uncertainties.

Bond Markets

  • USA: US 10-year Treasury yields moderated to approximately 4.19%, remaining below the recent three-month high as investors assess the Fed's future monetary policy. The recent adjustments to the US GDP growth rate for Q4 revealed a 3.2% expansion, slightly below the initial 3.3% estimate. Markets now assign a probability of just 50% to a 25bps Fed rate cut in June, with an increasing likelihood of the first cut being deferred to Q3, buoyed by strong CPI and employment reports.

  • EU: ECB President Lagarde addressed the ongoing disinflationary process in the eurozone, emphasizing the need for more evidence that inflation is aligning with the ECB's 2% target. Anticipated February CPI data is projected to show a deceleration in inflation to 2.5% YoY. Despite this, wage pressures continue to pose a significant influence on price dynamics. The ECB is closely monitoring these developments and comparing them to the Fed's response to fundamentally the same issues, with market expectations leaning towards an ECB rate cut before the Fed. Current market predictions indicate an anticipation of around 90 basis points in ECB rate cuts for the year, marking a reduction from previous forecasts.

Commodities

  • Oil: Crude oil climbed above USD 82 per barrel, nearing a four-month high, driven by the latest EIA data and market speculation ahead of the upcoming OPEC+ meeting. The key question at the forefront is whether OPEC+ will extend its production cuts into March in a bid to further elevate prices, with the prevailing consensus leaning towards maintaining voluntary limits until the June meeting. The recent report from Energy Information Administration highlighted a notable surge in US crude inventories, up by 4.2 million barrels last week, attributed to decreased refinery activity.

  • Gasoline: Russia has declared a six-month halt to gasoline exports from March 1 to keep prices stable amid rising demand from consumers and farmers. The ban will only exempt countries in the Eurasian Economic Union, including Mongolia, Uzbekistan, and the Russian-backed regions of South Ossetia and Abkhazia.

    In 2023, Russia's gasoline production reached 43.9 million tons, with approximately 5.76 million tons, equivalent to around 13% of its production, being exported. The ban could force North African nations to seek for alternative gasoline sources, causing disruptions in supply chains and potentially driving up fuel prices. This is especially concerning for Libya, Nigeria, and Tunisia, as major importers of Russian gasoline.

Global Finance

Egypt Seals $35 billion Deal

  • The United Arab Emirates is injecting $35 billion into Egypt, a game-changer in Cairo's efforts to overcome its worst foreign-exchange crisis. The deal involves a significant $24 billion investment by Abu Dhabi's ADQ in the premium Ras El-Hekma area on Egypt's Mediterranean coast, and an additional $11 billion from the UAE's funds in Egypt's central bank for other prime projects in the region. This emphasizes a strong financial partnership between Egypt and the UAE. ADQ will aslo lead consortium indeveloping Ras El-Hekma region and expect to further attract over $150 billion in investments.

Source: Egyptian Ministry of Housing; Rendering Ras El-Hekma’s development plan.

  • On Friday, Egypt has already received the upfront payment of $15 billion, a move that also expects to help to unlock additional international assistance. The markets responded positively to the news, with Egypt’s dollar bonds seeing a notable uptick. Abu Dhabi is committed to provide the central bank of Egypt with the necessary resources to carry out a long-awaited currency devaluation, marking Egypt's fourth since early 2022 and potentially the most significant one to date. This is one of the requirements from IMF (we wrote about it here) to extend Egypt's current $3 billion loan—only a small portion of which has been distributed—transforming it into a package exceeding $10 billion.

Our thoughts

  • In a critical moment for Egypt, the UAE delivers an exceptionally generous package, surpassing Egypt's entire net foreign direct investment of $10 billion in 2023. The investment will also take Egypt closer to securing a new deal with the IMF. In addition to the financing package, the country is poised to receive a 35% share of profits from the Ras El-Hekma project, along with a commitment from the UAE to engage in a joint venture for building an international airport in the area. This not only highlights the deal's substantial scale but also enhances Egypt's economic and credit outlook.

  • Still, Egypt's move to essentially sell a piece of its land for financing may provide short-term relief but could lead to long-term cost complications. It also continues to be a form of 'bail-out' diplomacy, a foreign policy approach Gulf states have employed with Egypt since the 1960s. The UAE, Saudi Arabia and others currently hold ownership in Egyptian companies engaged in port operations, petrochemicals, finance, retail, and tourism. The recently revealed deal is another manifestation of this ongoing trend.

Geopolitics

Lukashenko ‘Secures’ his new Cabinet and Regime

  • Belarus just held its first election since the political crackdown that started roughly 3.5 years ago. The parliamentary and local council elections will establish a new state body called the All-Belarus Popular Assembly, comprising 1,200 seats. The Assembly, with top officials, local legislators, union members, and others, will wield the authority to enact constitutional amendments and appoint election officials and judges, all in support of its dictator, Aleksandr G. Lukashenko, who has been in power for 30 years and is expected to run for reelection next year. The highly controlled election environment lacked international observers from the Organization for Security and Cooperation in Europe (OSCE), a development that the OSCE termed "deeply regrettable."

  • The absence of international observation in Belarus follows the 2020 elections, during which Lukashenko secured a sixth term in office. The aftermath of the 2020 election saw more than 35,000 people arrested during months of mass protests sparked by controversy surrounding the election results. Lukashenko has sustained his rule back then by relying on subsidies and political support from his key ally Putin. As a gesture of appreciation, he permitted Moscow to deploy troops through Belarusian territory into Ukraine in February 2022.

  • Before the scheduled election day on the 25th 2024, Belarus's Central Election Commission (CEC) reported a record early voting turnout from February 20. As of February 24, almost 48 percent of registered voters had participated, according to the CEC. Observers widely perceive early voting as a mechanism employed by Belarusian authorities to manipulate election outcomes.

  • This election mirrors the format and predictability of an upcoming vote in Russia, designed to secure a fifth term for Mr. Putin in the Kremlin. Belarusians who chose not to vote in elections risk potential repercussions such as job loss in state-run companies and institutions or facing questioning by the state security services according to the exiled opposition activists.

Our thoughts

  • In a year expected to be marked by democratic elections worldwide, Belarus offers a stark contrast: a parliamentary election devoid of any genuine opposition candidates. All opposition parties have been banned, leaving the four elegible parties to compete solely to demonstrate higher levels of unwavering loyalty and support for the president Lukashenko.

  • The 2022 constitutional reform, granting automatic membership in the newly forming All-Belarus Popular Assembly for a retired president, secured Lukashenko immunity from prosecutions upon leaving office. In this maneuver, Lukashenko, coupled with the fraudulent election, employs a strategy to maintain influence and secure his safety in the post-office era, following a well-established pattern of dictatorship. The question of him leaving voluntarily, even with those safety reforms, remains open-ended.

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Our Further Reading Recommendations

  • Javier Milei's will to save Argentina's economy whatever it takes (FT)

  • Macron Stirs Allies in a Bid Against Russia (NY Times)

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