Why Egypt Could Be In The Path Of Turkey's Currency Crisis

Egypt’s Finance Minister says the country is actually benefiting from the Turkish crisis, but so-called 'hot money' can burn long-term prospects.

Cairo street scene
Cairo street scene
Waad Ahmed

CAIRO — Over the past few weeks, the United States doubled tariffs on Turkish imports of aluminum and steel, sending the Turkish lira plunging to record lows. Turkey's central bank took certain measures — including cutting reserve requirement ratios to ease liquidity — while holding interest rates steady. The lira recovered slightly, and Turkey announced taxes on US imports of rice, alcohol and cars. Two majors credit agencies downgraded Turkey's credit rating. The lira continued to fluctuate in a worrisome international development for emerging markets worldwide, markets already jittery about the strengthening US dollar.

The world asks, will these emerging markets be hit by a contagion?

Egypt's Minister of Finance Mohamed Maiet answers that Egypt is actually benefiting from the crisis, saying that various international funds investing in emerging market debts have redirected some of these investments from Turkey to Egypt.

But what constitute rapid, high returns and low-risk investments to these funds are also short-term external debts for Egypt, as well as a source of foreign currency.

Meanwhile, observers take a more cautious position on Egypt's dependence on hot money inflows, just as the world debates whether the Turkish crisis will manage to put the breaks on its own troubles, or whether this is a signal to investors that it is time to leave high-risk emerging markets in favor of stronger US dollar-backed assets.

Investments in short-term debt in emerging economies have also historically been a breeding ground for contagion when a crisis hits — a situation that often occurs when a blow to an emerging economy triggers panic among investors, who fear that emerging economies will not be able to pay them back and choose to sell off the debt, a move that often leads to a sudden drop in foreign currencies in these economies.

But Egypt's debt rose following the beginning of the lira plunge because of the Turkish crisis, Maiet told Enterprise, without specifying a figure.

It is likely that investments in treasury bills, a type of foreign investment in government short-term debt securities, known to be a form of hot money, have recently risen in Egypt, which will become apparent when portfolio investment data for the current quarter is released.

However, it is unlikely that this increase was significant, notes Mahmoud al-Masry, senior economist at Cairo-based bank Pharos Holding for Financial Investments. "A significant increase in t-bills investments would have decreased yields significantly. This did not happen — yields only dropped slightly in the few days following the crisis," Masry explains.

Egypt had seen a rapid influx of hot money since November 2016, when it reached an agreement with the International Monetary Fund for a three-year, US$12-billion financing program, and subsequently liberalized its exchange rate and hiked interest rates.

This rapid build up of foreign inflows into hot money, compared to a less significant inflow of long-term sticky investments — i.e. foreign direct investment — prompted the Institution of International Finance, a global association of financial institutions, to mark Egypt as one of five emerging markets most vulnerable to contagion from the lira crisis, in line with expectations by Sherif al-Diwany, the former director of the Middle East at the World Economic Forum.

Investors speaking to Bloomberg on August 16, however, asserted that they still find currency stability and high yields attractive despite the sell-off in government debt since March, noting that Egypt continues to provide an interesting opportunity for emerging market investors.

Saudi Arabia, U.A.E and Kuwait had showered Egypt with billions.

Far from certain, Egypt's vulnerability to a sell-off of foreign investments in emerging markets is dependent upon Turkey's ability to contain its own crisis and the increased risks posed by the strengthening dollar. Here, Masry adds, the support of Arab countries becomes key.

Saudi Arabia, the United Arab Emirates and Kuwait showered Egypt with billions of dollars in Central Bank deposits, petroleum products and grants in the aftermath of the political upheaval that followed the ouster of former Muslim Brotherhood President Mohamed Morsi in 2013. For the past year, the three countries have agreed to renew deposits in the CBE, helping Egypt avert a drop in foreign currency reserves.

"Risks for foreign investors investing in Egypt still exist, but what makes the situation better for foreign investors is the Gulf's support of Egypt — even if Egypt's credit rating is low, investors' confidence remains high due to Arab support," says Masry.

The real risk of over-reliance on short-term dollar inflows through investments in t-bills hinges on Egypt's inability to attract foreign currency through more sustainable means, such as long-term sticky foreign direct investments and a trade balance surplus. "In this way, Egypt ends up depending on net borrowing from abroad," says Masry.

Additionally, Diwany notes that one of the main reasons for the Turkey crisis is the country's high external debt levels — as a result, any threat to the Turkish economy leads to capital flight, backed by fears of high levels of debt.

Egypt's total external debt recorded $88.2 billion at the end of March, up 20% from the same period one year earlier.

While the current stability in Egypt supported the CBE's decision to keep interest rates steady, any escalation in emerging markets could prompt it to reverse its current path of easing of monetary policy gradually and resort to raising interest rates once more, Masry says.

And even the tourism sector in Egypt, which has recently rebounded after hitting record lows in 2016, is now facing rising competition from Turkey after its devalued lira has made it a more attractive destination for tourists, Masry points out. Tourism, he says — historically one of Egypt's main sources of foreign currency — could now see Russian and Ukrainian tourists diverted to Antalya's resorts.

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How Thailand's Lèse-Majesté Law Is Used To Stifle All Protest

Once meant to protect the royal family, the century-old law has become a tool for the military-led government in Bangkok to stamp out all dissent. A new report outlines the abuses.

Pro-Democracy protest at The Criminal Court in Bangkok, Thailand

"We need to reform the institution of the monarchy in Thailand. It is the root of the problem." Those words, from Thai student activist Juthatip Sirikan, are a clear expression of the growing youth-led movement that is challenging the legitimacy of the government and demanding deep political changes in the Southeast Asian nation. Yet those very same words could also send Sirikan to jail.

Thailand's Criminal Code 'Lèse-Majesté' Article 112 imposes jail terms for defaming, insulting, or threatening the monarchy, with sentences of three to 15 years. This law has been present in Thai politics since 1908, though applied sparingly, only when direct verbal or written attacks against members of the royal family.

But after the May 2014 military coup d'état, Thailand experienced the first wave of lèse-majesté arrests, prosecutions, and detentions of at least 127 individuals arrested in a much wider interpretation of the law.

The recent report 'Second Wave: The Return of Lèse-Majesté in Thailand', documents how the Thai government has "used and abused Article 112 of the Criminal Code to target pro-democracy activists and protesters in relation to their online political expression and participation in peaceful pro-democracy demonstrations."

Criticism of any 'royal project'

The investigation shows 124 individuals, including at least eight minors, have been charged with lèse-majesté between November 2020 and August 2021. Nineteen of them served jail time. The new wave of charges is cited as a response to the rising pro-democracy protests across Thailand over the past year.

Juthatip Sirikan explains that the law is now being applied in such a broad way that people are not allowed to question government budgets and expenditure if they have any relationship with the royal family, which stifles criticism of the most basic government decision-making since there are an estimated 5,000 ongoing "royal" projects. "Article 112 of lèse-majesté could be the key (factor) in Thailand's political problems" the young activist argues.

In 2020 the Move Forward opposition party questioned royal spending paid by government departments, including nearly 3 billion baht (89,874,174 USD) from the Defense Ministry and Thai police for royal security, and 7 billion baht budgeted for royal development projects, as well as 38 planes and helicopters for the monarchy. Previously, on June 16, 2018, it was revealed that Thailand's Crown Property Bureau transferred its entire portfolio to the new King Maha Vajiralongkorn.

photo of graffiti of 112 crossed out on sidewalk

Protestors In Bangkok Call For Political Prisoner Release

Peerapon Boonyakiat/SOPA Images via ZUMA Wire

Freedom of speech at stake

"Article 112 shuts down all freedom of speech in this country", says Sirikan. "Even the political parties fear to touch the subject, so it blocks most things. This country cannot move anywhere if we still have this law."

The student activist herself was charged with lèse-majesté in September 2020, after simply citing a list of public documents that refer to royal family expenditure. Sirikan comes from a family that has faced the consequences of decades of political repression. Her grandfather, Tiang Sirikhan was a journalist and politician who openly protested against Thailand's involvement in World War II. He was accused of being a Communist and abducted in 1952. According to Sirikhan's family, he was killed by the state.

The new report was conducted by The International Federation for Human Rights (FIDH), Thai Lawyer for Human Rights (TLHR), and Internet Law Reform Dialogue (iLaw). It accuses Thai authorities of an increasingly broad interpretation of Article 112, to the point of "absurdity," including charges against people for criticizing the government's COVID-19 vaccine management, wearing crop tops, insulting the previous monarch, or quoting a United Nations statement about Article 112.

Activist in front of democracy monument in Thailand.

Shift to social media

While in the past the Article was only used against people who spoke about the royals, it's now being used as an alibi for more general political repression — which has also spurred more open campaigning to abolish it. Sirikan recounts recent cases of police charging people for spreading paint near the picture of the king during a protest, or even just for having a picture of the king as phone wallpaper.

The more than a century-old law is now largely playing out online, where much of today's protest takes place in Thailand. Sirikan says people are willing to go further on social media to expose information such as how the king intervenes in politics and the monarchy's accumulation of wealth, information the mainstream media rarely reports on them.

Not surprisingly, however, social media is heavily monitored and the military is involved in Intelligence operations and cyber attacks against human rights defenders and critics of any kind. In October 2020, Twitter took down 926 accounts, linked to the army and the government, which promoted themselves and attacked political opposition, and this June, Google removed two Maps with pictures, names, and addresses, of more than 400 people who were accused of insulting the Thai monarchy. "They are trying to control the internet as well," Sirikan says. "They are trying to censor every content that they find a threat".

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