By Vin Weber
As the political crisis in Egypt continues to evolve, American and European investors are becoming increasingly troubled by what they see as a lack of legal and regulatory security. Two years ago, the theme was revolution as the heroes of Tahrir Square demonstrated that courage in the face of tyranny could produce societal change. Today, many are shying away from the term "revolution" as the fledgling democracy struggles to implement a new constitution and forge its institutions.
Predictably, investors are taking notice of this unstable political climate. Egypt’s Central Bank recently announced that foreign investors withdrew $5 billion from the country within the last six months. When an Egyptian appeals court annulled the privatization of a textile company on the grounds that the government should never have sold it in the first place, alarms sounded throughout business communities around the world. Not only do investors believe private capital to be under assault but they also lack any clues as to when the country will yield more favorable conditions.
In January, ambassadors to Egypt from all 27 E.U. member states raised the issue of Egypt’s “deteriorating business environment” to President Morsi, saying in a letter that investment decisions are being delayed because of uncertainty over “legal, contractual and policy” frameworks governing foreign investment. At the heart of this fear are the courts’ decisions to renationalize foreign assets. From Mexican- and Greek-owned cement factories to an Italian-owned bank and the property holdings of a UAE-based developer, foreign investors are facing legal proceedings that could lead to asset forfeiture. The shadow of seizure, even if never realized, compounds the downward economic spiral, which makes the political transition to democracy all the more difficult.
Ironically, top government officials, as well as the Muslim Brotherhood, insist that the private sector is the key to the country’s economic future. Indeed, when I visited Cairo last fall, key leaders told me that a private sector-led economy was the only strategic possibility. But the reality clearly doesn’t match the rhetoric. The result is uncertainty, not only among private investors, but also among official creditors—including the U.S. and European governments. Despite the flow of some aid, most governments are waiting for evidence that President Morsi has a sensible economic stabilization plan and the political capacity to implement it.
The International Monetary Fund will be critical to this process. The Morsi government has restarted negotiations for a $4.8 billion loan that will inevitably include the usual austerity measures but might lack the kinds of protections the private sector needs to stay invested. This is a mistake. Without foreign investment, Egypt’s economy and its people will continue to suffer.