Reconnaissance: Strategy Notes
By Douglas Clark Johnson
June 27, 2012
Without external support for Egypt, there are few choices for reconfiguring national output. The country is an oil importer; its agricultural industry fragmented and inefficient; private wealth is suspicious. We also look at the growth implications of the fiasco at the G-20 meeting. In Pakistan, foreign names could rally behind exceptional investment-return potential once an election is called and a new government is in place.
Egypt: The External President
Once fully vested by the Egypt’s military council, the new Muslim Brotherhood-led government faces the brutal reality of an imperiled economy. And to tackle this pressing challenge, Mohammed Mursi must serve as both an “external” and “internal” president. Key here is that the Egyptian economy rides the ebb-and-flow of world markets. Yet Mr. Mursi’s government will have little direct control over Suez Canal revenue, tourism, foreign aid, or remittances. The challenge is to influence them all through the right mix of policy creativity.
Let’s hope Mr. Mursi is as effective on his feet in Riyadh and Abu Dhabi, as he is in Cairo and Alexandria. Focusing internationally, his best course of action is to delegate domestic matters such as education to coalition partners, at least for a season. We’re less troubled by the Salafists than some international commentators, given the political vibrancy we’ve seen. Moderation in balancing Islamic and secular concerns will likely prevail as the new government reaches its stride.
Without external support, there are few choices for reconfiguring national output. Egypt is an oil importer; its agricultural industry fragmented and inefficient; private wealth is suspicious. Affirmative moves by Washington may provide solace for international investors. But Egypt ultimately needs a healthy dose of global growth, just like everyone else. After a presumed initial bounce in the Egyptian economy, it’s a long road back to the sort of 4.0%-to-5.0% growth rates we saw in mid-1990s.
G-20: Every Country for Itself
Los Cabos was a minor fiasco. Leaders expressed shock at the European crisis, as if this was new information. Obama and Putin again clashed on Syria. Obstacles to growth such as the American tax-hike at year-end and the impact of a surprisingly strong yen received barely a mention.
In looking at growth rates across the G-20, the top-five growth economies this year are Turkey, China, Indonesia, Saudi Arabia, and India, at least for now. But this foundation for global growth is precarious. In polite terms, these countries often have differing approaches to handling matters of accommodation. Saudi Arabia and Turkey can be deeply suspicion of each other; China and Indonesia have a long history of diplomatic and commercial tension; and India often relies on ambiguity in handling its foreign affairs.
The one bright spot was the agreement among developing nations to support a European bailout fund. Or so we thought. We noted this headline post-summit in the Bangalore-based Deccan Chronicle, “India may not inject $10 billion into IMF bailout fund immediately.” Huh? Perhaps they have better uses for the money, at least in the eyes of domestic audiences. We suspect this posturing, however diplomatic, repeated itself elsewhere.
Pakistan: There are Issues
Theatrical arts are alive and well in Islamabad. In the latest production, the Supreme Court orders the prime minister to bring charges against the president; the prime minister stalls; the Supreme Court then disqualifies the prime minister from holding office. Yousuf Raza Gilani was just one-month short of being Pakistan’s longest serving prime minister.
Being an expressive country, the opposition chose to celebrate by handing out candy in the streets. Markets responded by trading down the currency, equities, and government paper as a sign of decorum. The judiciary added to festivities by issuing an arrest warrant on drug charges for a first choice to replace the outgoing parliamentarian.
An effect of this misfortune is that it likely further alienates foreign direct investors. Meanwhile, the country desperately needs public-service development, especially its power grid. But fickle global names favor the appearance of less risky investments now presenting themselves in Myanmar, among other countries. Our Lahore-based colleague reminds us that joint-venture announcements with overseas players have all but collapsed over the past year.
Controversially, Pakistan has now affirmed its new prime minister, Raja Pervaiz Ashraf. His previous tenure as Minister for Water and Power was ineffective; he’s now charged with fixing what he largely failed to do in the past. We all learn from our mistakes. The first word from Washington was a State Department spokesperson saying obliquely, “We are pleased that the leadership issue appears to have been settled.”
The mid-June breakdown of NATO transshipment talks was a worrying sign for international observers. But US Defense Secretary Panetta’s willingness to clean the slate with the modified government might be enough to spark an economic turnaround. Foreign names could rally behind exceptional investment-return potential across many asset classes and sectors. Despite the current negative sentiment, we’re not prepared to write-off Pakistan. Emerging markets are full of once tragic, now heroic, investment stories.
As long as Pakistan can keep the current-account shortfall under control, we expect subdued public markets over the months ahead. Prime Minister Ashraf will announce an election shortly; the current government term ends in March 2013. A new parliament offers the prospect of much needed stability going forward.
This material is for general information only.Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate.
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