Egypt: President Sisi expected to win presidential vote amidst severe economic crisis

• Only a handful of politicians will run for president, but none poses serious challenge to incumbent
• Upcoming election already fraught with accusations of repression and harassment of other potential candidates
• Sisi wants legitimacy of new election victory so that unpopular reforms could be restarted
• Analysts believed elections were brought forward so government has room to implement painful FX reform

Egypt will hold a presidential vote on December 10-12, at a time the most populous Arab country in the world is struggling with a painful economic crisis. The winner will be announced on Dec 18, with a run-off on Jan 8-10 if no candidate secured more than 50% of the vote. Egyptian expatriates will vote on Dec 1-3, and in the runoff on Jan 5-7.

President Abdel Fattah al-Sisi (68) is widely expected to win the vote and stay in power until 2030. Sisi, a former defense minister, who ousted an elected but divisive Islamist president in 2013 amid street protests, was first elected in 2014. Since then, authorities have launched a major crackdown on dissent, which drew heavy criticism from the West with no meaningful impact - Sisi then won the 2018 vote in a landslide against one of his own supporters. Importantly, Sisi retains the backing of the security services, most notably the army, which has become more powerful and expanded its economic influence. Only a handful of politicians will contest this year's vote, but none poses a serious challenge to the incumbent, who has faced criticism from the West over his country's human rights record. Thousands of government critics have been silenced or jailed, mainly Islamists but also many prominent secular activists, including many of those behind the popular 2011 uprising that toppled longtime dictator Hosni Mubarak. The upcoming election is already fraught with accusations of repression and harassment of other potential candidates.

Economy in crisis

Economic and fiscal reforms had turned Egypt into "a darling of bond and carry traders" before a series of external shocks such as the COVID pandemic and the war in Ukraine triggered massive capital outflows. Egypt's pound has lost 50% of its value since early 2022, which fueled consumer inflation and the country's large and persistent twin deficits discouraged foreign investments. The government and the IMF reached an agreement on USD 3bn Extended Fund Facility in late 2022, under which Egypt committed to a flexible FX rate, fiscal and economic reforms. The central bank (CBE), however, did not deliver on its promises and the artificial stabilization of the pound led to severe FX shortages and raised FX uncertainty. Consequently, disbursements from the financial support package were halted.

Prices, however, continued to soar as the parallel FX rate tumbled amid supply disruptions and unclear import policies. Meanwhile, the ambitious divestment program of the government moved rather slowly, as foreign investors - mostly GCC funds - disagreed on the FX rate and valuations. Considering the challenging external debt payment schedule, the three major rating agencies have downgraded Egypt's sovereign rating over the past few months. Relatively high poverty rates, gender inequality and rigid labour market also contribute to social risks.

The election had initially been scheduled for the spring of 2024. Some experts believe it was moved forward so it would be easier for the authorities to pass such an unpopular reform as the pound's liberalization. The pound is believed to be around 30-40% overvalued, so such a painful adjustment could exacerbate social tensions in the country of 105mn. Sisi's government has announced a series of social protection measures and raises to the minimum wage in attempts to cushion the economic blow.

Fiscal metrics have deteriorated

Years of heavy borrowing abroad has left Egypt with large foreign debt and once the global liquidity tightened and investors left, the import-dependent economy struggled to find enough hard currency to buy essential commodities. Debt repayments due in 2024 stand at an all-time high of USD 42.5bn, according to CBE projections. Increasingly priced out of global debt markets, the government has financed a widening deficit by expanding domestic borrowing at a time when interest rates have been surging both domestically and abroad, leading to even bigger deficits. Interest payments surged 120% y/y in the first quarter of the current FY, accounting for 167% of tax revenues and 60% of total government spending in the period. Interest payments are thus the single largest category in government spending and constitute a major credit weakness. Critics of the regime say Sisi's large-scale projects such as new cities, ports and road networks have been absorbing much needed investments without a direct effect on the poor classes who are already suffering from increased poverty and high prices.

What's next?

As in previous elections, Sisi is expected to win by a landslide margin. He had promised in the past to bring stability and security, following the turbulence between 2011 and 2013. While Sisi's administration had implemented reforms that put the economy on more solid footing, his rule has become increasingly authoritarian. The security services have jailed critics and intimidated political opponents, according to human rights groups. A low turnout would embarrass the ruling regime, so it is believed that bribes would be paid, and civil servants would be used to shore up voting numbers.

Nevertheless, Sisi's regime wants the legitimacy of a new election victory so that unpopular reforms could be restarted. The badly needed but painful FX rate liberalization is likely to have a severe impact on most Egyptians. In the last few months, the already embattled pound has plunged to about USD/EGP 50 on the street market, compared to the official rate of USD/EGP 31. Meanwhile, foreign investors favour policy continuation and predictability so another term for Sisi should be a welcomed development for them. A market-driven FX system and an expanded role of the private sector in the economy, would be credit positive for industry, exports, and the banking system after previous periods of extended instability in the FX markets. These factors could attract non-oil investments, boost productivity, and create jobs for the country's burgeoning population. However, should the economic reform programme fail to make the economy more competitive and create more jobs, Egypt may face a serious social struggle in the future.