Hopes for Quick Return To Democracy Destroyed By Crackdown

BMI View: The violent crackdown on Muslim Brotherhood supporters has dealt a serious blow to the chances of political reconciliation in Egypt and will only further widen the political division s in the country. Events are also indicative of the army's increasing control over the country, and while we do not expect a descent into civil war , the army will most likely become the main political force in Egypt .

The violence surrounding the Egyptian army's dispersion of protestors at the Rabaa al-Adawiya and Nahda sites in Cairo will have profound negative implications for the country's political future and security situation , and destroys any chance of a quick return to civilian democratic rule . Since the overthrow of the Muslim Brotherhood in early July, we have held a view that the optimism reflected in most analysis and the financia l markets was overly optimistic. Nonetheless , the events of August 14 appear to be close to a worst case scenario for the country. The latest government figures state that 525 people have been killed, whilst the Muslim Brotherhood's estimates place the figure above 2,000. Either way, it is clear that this is one of the highest death tolls Egypt has experienced, possibly surpassing the bloodiest days in the overthrow of Hosni Mubarak in 2011.

Army's Control Will Only Increase

Falling Down The Rankings
Egypt - Short-term Political Risk Ratings

BMI View: The violent crackdown on Muslim Brotherhood supporters has dealt a serious blow to the chances of political reconciliation in Egypt and will only further widen the political division s in the country. Events are also indicative of the army's increasing control over the country, and while we do not expect a descent into civil war , the army will most likely become the main political force in Egypt .

The violence surrounding the Egyptian army's dispersion of protestors at the Rabaa al-Adawiya and Nahda sites in Cairo will have profound negative implications for the country's political future and security situation , and destroys any chance of a quick return to civilian democratic rule . Since the overthrow of the Muslim Brotherhood in early July, we have held a view that the optimism reflected in most analysis and the financia l markets was overly optimistic. Nonetheless , the events of August 14 appear to be close to a worst case scenario for the country. The latest government figures state that 525 people have been killed, whilst the Muslim Brotherhood's estimates place the figure above 2,000. Either way, it is clear that this is one of the highest death tolls Egypt has experienced, possibly surpassing the bloodiest days in the overthrow of Hosni Mubarak in 2011.

Falling Down The Rankings
Egypt - Short-term Political Risk Ratings

Army's Control Will Only Increase

In the short term, the crackdown on Muslim Brotherhood supporters will increase the army's power and influence in the government. The role of civilians in the government has been weakened by the resignation of t he Vice President, Mohamed ElBaradei, who said that he could not defend the attacks on the protestors. Furthermore, more civilian members of government could resign in the coming days to distance themselves from the actions of the army , as this crackdown will be associated with current politicians in future elections.

As well as a weakening role of the civilians, the army , and in particular General Abdul Fattah al-Sisi , has actively tightened its grip on power and will remain the key political force for the foreseeable future. As well as the announcement on August 13 of 19 generals appointed to Egypt's 24 governorships , the declaration of a state of emergency that will last for at least a month will give security services expanded powers of arrest and detention .

Bleak Long-Term Outlook

The long-term impact that the army's actions will have on the country is difficult to assess fully at present. H owever, the picture is bleak at best. The most likely scenario appears to a return to the situation experienced in the 1990s whereby the military retained de facto control of the country with a facade of civilian elements. Elections were rigged and opposition groups were driven underground. More worryingly , the actions of the army could pave the way for an uptick in domestic terrorism, a situation which would have profound negative implications for the country's tourism sector.

At present , it is unlikely that the Muslim Brotherhood will be allowed back into power, or even partake in elections , which will likely be rigged. The army will remain the most powerful institution in Egypt regardless of the system of government (democratic or otherwise) . Thus, given the mistrust between the Muslim Brotherhood and the army , it appears inconceivable at present that the Brotherhood could hold political office. Other civilian alternatives s uch as National Salvation Front are still unlikely to come to power given their lack of organisation or coherent ideology.

Worrying Signs Of Divisions

Although the likelihood of civil war has increased, particularly given how the situation reflects the early days of what occurred in Syria, it still remains an unlikely scenario overall. Egypt does not have a history of sectarianism or widespread violent internal conflict present in Algeria and Syria. Indeed, given Egypt's size and importance, it is not in any regional or global powers' interest to see Egypt descend into civil war. However, attacks on Copts (who account for almost 10% of the population) have increased. There are worrying signs of a repeat of the violence in 1990s. Attacks against churches and businesses run by Christians echo events under Mubarak. Indeed, violence has been concentrated in the more conservative south, around Minya, Asyut and Sohag - all centres of the Islamic insurgency in the 1990s.

Pushing Higher
Egypt - US$2020 Bond, Yield %

Little Leverage For Regional Powers

Events in Egypt leave regional and global powers in a quandary. The United States and the EU cannot be seen to be too close to the interim government and army's actions, lest they be accused of supporting a regime which has killed hundreds of its own citizens. However, given Egypt's vital importance, specifically with regard to the Suez Canal and peace treaty with Israel, Western powers will be loathed to lose what little leverage they have left over the regime. Indeed, the military's growing role in government is putting the US in an increasingly difficult position of not terminating the annual grant of US$1.3bn given in aid to the country. Meanwhile , Saudi Arabia and other Gulf states, which have been eager to support the interim government due to their opposition to the Muslim Brotherhood, are unlikely to offer any further assistance in the near term, and this could further exacerbate Egypt's economic position .

Risks Being Priced In
Egypt - 5 yr CDS Spread (bps)

No Relief For Financial Markets

We have previously highlighted that the reaction of the financial markets to the overthrow of the Muslim Brotherhood was overly bullish given the political divisions and economic problems that remained in the country. Whilst the magnitude of recent events was not our core view, consensus is now moving in line with our assessment . The Egyptian s tock exchange, though not our preferred indi cator of investor sentiment given its reduced liquidity, fe l l 4.25% to 5,549 on August 14 . The government ha s announced that the stock market will remain closed until August 18 at the earliest , the first time it has closed since the overthrow of Mubarak. More indicative of international sentiment is the 35bps rise to 785 of the 5 year CDS as well as the increase in yields to 8.8% from 8.5%. We expect that y ields and the CDS will remain elevated as the political situation remain s perilous . F urthermore, the negative impact on the country's tourism sector given the violence beamed around the world will put further strain on the country's foreign reserves and wider economy .

Egypt - Political Overview
System of Government Undergoing democratic transition
Source: BMI
Parliament (Majlis al-Shaab) 498 Seats
Upper house (Majlis al-Shura) 270 Seats
Head of State President Adly Mansour
Head of Government

Prime Minister Hazem Al Beblawi

Last Election Presidential - June 2012
Majlis al-Shaab - January 2012
Majlis al-Shura - March 2012
Current Ruling Party Interim Government
Key Cabinet Figures

Minister of Finance - Ahmad Jalal

Minister of Foreign Affairs - Nabil Fahmy
Minister of Interior - Mohammed Ibrahim
Minister of Defense - Abdul Fatah al-Sisi
Main Political Parties Social Democratic Party (16)
(number of seats in parliament) Freedom and Justice Party (213)
Nour Party (107)
Building and Development Party (13)
New Wafd Party (38)
al-Wasat (10)
Free Egyptians (15)
Next Election Presidential - None Scheduled
Majlis al-Shaab - None Scheduled, most likely early 2014
Majlis al-Shura - None Scheduled
Ongoing Disputes Tensions with Israel likely to rise. Traditionally hostile relations with Iran, following peace agreement with Israel, but evidence of some thawing following overthrow of Mubarak
Key Relations/ Treaties Key alliance with the US and Israel. Founder member of Arab League, with headquarters in Cairo. Signatory of the pan-African free trade area COMESA and founder member of the Pan-Arab Free Trade Area.
BMI Short-Term Political Risk Rating 39.0
BMI Structural Political Risk Rating 52.0

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Sector: Country Risk
Geography: Egypt, Egypt, Egypt, Egypt
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