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Driven by fear, Gulf states finally supporting Egypt

Published: Mar 17, 2014 3:00 a.m. ET


Opinion: $40 billion housing deal beginning of long-overdue financial ties




JERUSALEM (MarketWatch) — After three years of political turmoil, social strife, and economic stagnation, a mega-deal announced last week may ignite a long-overdue mercantile momentum along the Nile.

The deal promises Egypt $40 billion worth of affordable housing units to be built by Dubai-based contractor Arabatec, starting this summer and ending by 2020. The project will span 13 sites from Luxor through Cairo to Alexandria, and should be the largest of its kind in the Middle East.

The 40-year-old Arabtec ARTC, +5.28% the largest publicly traded builder in the Gulf, has built the world’s tallest building, Dubai’s Burj Khalifa, and is involved in the construction of major projects like St Petersburg’s Lakhta Center, which is planned to be Europe’s tallest building, to Dubai’s Sports City, a $4 billion campus comprising four stadiums checkered with apartment blocks. With a market cap of roughly $4 billion, Arabtec has been one of the Dubai Financial Market’s most intensely traded stocks since going public a decade ago.

The other party to the deal is the Egyptian Defense Ministry. While this may seem odd to some, in Egypt it makes sense, because the military owns considerable real estate, and in this case will be providing it free of charge.

Even so, the deal’s financial logic is debatable, and in fact cannot be understood without its political context and diplomatic rationale.

Egyptian home buyers lack a tradition of purchasing housing through mortgages, and the banking industry often lacks effective foreclosure leverage. Then again, such challenges have been overcome in many emerging markets once governments saw in them an aim. In Egypt, such political will has been lacking ever since the land reforms of the 1950s, which focused on rural rather than urban real estate, besides having eventually failed.

The Egyptian who is expected to grapple with this challenge is Defense Minister and presidential hopeful Abdel Fattah al-Sisi.

Sisi has yet to formally announce his candidacy in the election that is expected sometime before June. However, he is widely predicted to run and win, having already emerged from the past three years’ turmoil as the strong man on the Nile.

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A 59-year-old American-trained career soldier, Sisi had been promoted to defense minister by then-President Mohammed Morsi, whom he soon helped overthrow. Sisi turned on his patron, officials explained at the time, because the latter was plotting an Islamist autocracy.

Whether or not those allegations justified the removal of an elected leader, there is no arguing that Morsi ignored the economy, which demanded drastic surgery that he refused to perform.

Sisi sat in the cabinet when Morsi failed to display any economic vision other than go hat in hand to assorted lenders, from the IMF to Vladimir Putin. Otherwise, Morsi spent his time tinkering with the constitution and harassing the judiciary.

The economy, meanwhile, tanked, as tourism plunged, foreign currency reserves dwindled, energy exports crumbled, unaffordable subsidies remained untouched, and unemployment crossed 10% while the rest of the labor market remained largely underemployed.

The economy’s deformities are underscored by the demise of the gas industry, which now exports less than half of what it did last decade, because it is heavily subsidized and therefore scandalously wasteful. Egypt’s energy crisis is an emblem of its need for economic gospel. That need is visible in government agencies where millions are salaried for minimal work, it is visible in cafés where men sit idly during work hours, and it is visible in frequent power outages.

That is why Sisi’s deal is a breath of fresh air. Whether or not it will actually create the 1 million jobs he promises remains to be seen, but the understanding behind it, that Egypt needs an economic gospel, is itself a gospel. Three years’ turmoil, and decades of economic apathy have finally produced a leader who sees in a problem like Egypt’s housing shortage a strategic challenge.

Pan-Arab affair

Egypt’s crisis has alarmed many foreigners, from Washington and Brussels to Riyadh. The street violence that exposed ongoing tensions between modernists and fundamentalists, rich and poor, and Muslims and Christians, could spread to the rich Gulf states.

For decades the Gulf states refrained from seriously investing in the largest Arab country, though Egypt is a short flight away, speaks the same language, and professes the same Sunni Islam. The past three years’ upheaval did wonders to focus the minds of rich Arabs who, as this column noted in the past, did little over the decades to treat Egyptian poverty.

Arabtec is tied by the umbilical cord to the government. The Aabar investment fund has a 22% stake in Arabtec and is owned by the government of Abu-Dhabi, which is one of the seven principalities that form the United Arab Emirates. This means the deal is diplomatic no less than commercial. And the diplomacy at play sadly reflects fear more than capitalism or greed, not to mention altruism.

Even so, the fear at play, that radicalism will capture Egypt and move east, should suffice for creating a long-overdue financial pipeline from the Gulf to the Nile.

Following Morsi’s overthrow, Saudi Arabia, Kuwait and the Emirates have pledged Egypt a $12 billion aid package, initially using some of that to rehabilitate the Egyptian pound.

Now the housing deal signals a smart strategy to put money directly in projects, rather than deposit it with the government. This way, companies like Arabtec can be used to verify that foreign money is being used to create the private assets of which Egypt has too few, rather than multiply the public liabilities of which it has too many.

This does not mean that what will follow the Islamists’ downfall will be panacea, but it does mean it will be better than what preceded it.

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