Why the UAE Is Pumping $35 Billion Into Egypt

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1:25Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, did you see the big headline coming out of Egypt recently? Yeah, I was kind of blown away by it. So I think there's two things that I've seen recently out of Egypt. One is they're letting the Egyptian pound float. They already have all, and so the Egyptian pound has fallen to record lows. And then they have this huge deal with the UAE to develop a piece of property. And it almost sounds like, and I don't think it's exactly the case, but it almost sounds like when you read about it, like the UAE basically just bought a big part of Egypt.

2:06Oh, that's punchy. But you're right. Is that wrong? I should have specified at the beginning because there have been a number of headlines. And it's kind of interesting because they're all feeding into each other. So I think last month the UAE unveiled this announcement that it was investing$35 billion in a place in Egypt on the Mediterranean coast called Ras al-Hekma. And the idea was to develop new tourism and real estate. But of course, that investment comes at a really sensitive time for Egypt. The economy hasn't been doing too well. Inflation has been high. And so what we've seen since that announcement is that the Egyptian central bank was able to hike rates finally.

2:51And then to your point, they were able to free float the Egyptian pound. And then the IMF felt much better about the direction of the Egyptian economy. And so they ended up increasing their own financing for Egypt. I think it went from like$3 billion to$8 billion. And so when you combine all of these things, which have basically happened in less than a month, you've seen kind of a turnaround in how people are feeling about the Egyptian economy. I'm looking at spreads on Egyptian bonds right now, and they have come in quite a lot. Right. Well, they've gotten a huge injection of cash. And I feel as though this story is at the intersection of a few different things.

3:34As you've mentioned, the Gulf states seem really into real estate megaprojects these days, whether it's Saudi or the UAE, etc. And so this is apparently another opportunity to build some gigantic modern city of the future. Egypt itself has, of course, come under strain, particularly since, I don't know, maybe it's like the triple shock of COVID, the war in Ukraine and the surge in wheat prices. We know Egypt is a really big wheat importer. And then also, obviously, strains from the war in Gaza. And like many EMs, it's just generally been under strain and needed help from the IMF. And so this sort of feels like a story that sort of multiple things happening once multiple things coming together at the same time.

4:21Well, it's also happening against a very intense political background. And the complicated web of, I guess, influence in this particular region is something that we could probably spend hours and hours and hours on. You want to hear my framework for understanding this? I always think about it in terms of mean girls, like everyone's frenemies. But I guess Abu Dhabi MBZ is basically Regina George and Saudi Arabia MBS is sort of Karen Smith. And that makes Qatar Gretchen Wiener because her hair is big and full of secrets. And then I guess Egypt is now Lindsay Lohan because people are trying to get her on board.

5:07Amazing. I love it. I think about this a lot, weirdly. Okay. So maybe we should just bring on our guest. So we do, in fact, have the perfect guest, someone we've been meaning to get on the podcast for a long time. I worked with him when I was based in Abu Dhabi, and I used to go to Dubai quite a lot. We are going to be speaking with Bloomberg Economics chief emerging markets economist Ziad Daud. Ziad is one of the smartest people I know when it comes to Middle Eastern economics, and he has a piece out on Bloomberg, our new big take, all about this particular topic. What does this$35 billion injection actually mean for Egypt and for the wider Middle East?

5:53So Ziad, thank you so much for coming on All Thoughts. Thank you, Tracy. And thank you, Joe. It's a pleasure to be with you. I'm going to start with the really basic question, which is what do we know about this$35 billion injection? So my understanding is that it was divided up into tranches. One of those has been paid at this point. But what do we know about the intended use of this money and whether or not it comes with conditions or strings? Well, we know three things about this$35 billion. One, we know it's a huge amount of money, $35 billion just for perspective. Egypt was trying to agree a deal with the IMF throughout last year.

6:33The size of that was$3 billion. You know, 35 is much bigger than three. When the IMF deal got much larger, it ended up being$8 billion. So 35, again, it's huge. $35 billion is more than Egypt has in foreign exchange reserves. And even for a rich country like the UAE, and it is a rich country,$35 billion is 7 % of GDP. So it's a significant amount of money. So that's the first thing we know about it. The second thing we know about it is that the money is arriving over a short period of time. You know, when you do an IMF deal, you do it over multiple years. This one is coming within two months. So again, the UAE is shifting 7%, the equivalent of 7 % of its GDP, to Egypt in the space of two months.

7:19And that is fairly, fairly rapid. And we're talking about real money here. You know, the$35 billion,$24 billion is fresh cash, and$11 billion is basically a conversion of existing deposits for the UAE at the Egyptian central banks that's going to be converted into investments. And the third thing we know about this is that all these investments are going to be real estate investments. So the UAE is going to buy a big piece of land on Egypt's north coast called Ras al-Hekma. And on top of this, it will invest in other real estate projects. So it's big, it's arriving in a short period of time, and it's going to be real estate investments.

7:56I want to get to, obviously, what the UAE is ultimately getting out of this deal or why it's made that. But actually, I want to ask one more step back question, which is, you know, in normal times, and I don't know what counts as normal times anymore. Let's just throw out of here like 2018. Like, what is the Egyptian economy? I was going to say, Joe, that was the last time I was in the UAE. So thank you for choosing that as your pinnacle of normality. That was the cutoff. When Tracy left, everything started to go off the rails. But in normal times, what is the Egyptian economy like and what has happened to it since then that has caused it to go into such distress?

8:35Right. So let's start from the beginning. For a very ancient country like Egypt, the beginning could be thousands of years ago. So let's not go there. So let's start from 2016. It's very Putin-esque. Many thousands of millennia ago. Yeah, we're not going to do that. So 2016, Egypt had a recent. It had a reset politically. It had a newly elected president, Abdel Fattah Sisi, not in that year, but he was elected a couple of years earlier. And he had a lot of political capital. So there was a lot of political support for President Sisi at the time. But it also had an economic reset. In late 2016, Egypt almost started on a clean state from an economic perspective.

9:16It basically devalued the currency by 50%. It agreed to deal with the IMF. It removed some subsidies on fuel. And it became the darling of global financial markets, who was the biggest carry trade in the world. So what was Egypt doing at the time? It devalued the currency, so there's limited downside risk to carry traders. If you're going into Egypt, you get high interest rate in a world that was offering zero to negative interest rates. and you have limited currency risk because the currency had moved a lot and because the country had ensured that carry traders essentially can take their money out of the country.

9:56So a lot of money flowed into Egypt in terms of short-term debt and that lasted between 2017 and 2021. And yes, Egypt has been unlucky with a few global shocks. Joe, you've mentioned already there was COVID, there was the Russia-Ukraine war, and there was the war in Gaza, and also the US interest rate hikes, which were significant. But also, I think there were policy mistakes in Egypt. There was the fact that there was massive reliance on this hot money inflows, and these do reverse fairly quickly. There has been a growing role for the army in the economy, which prevented more stable funding to go into Egypt and prevented the country from exporting more.

10:39So it was still running a trade deficit that had to finance. And the only source of financing that was available was this hot money inflows. So there's reliance on hot money. There was the army role in the economy. Egypt actually effectively, after the 50 % devaluation of late 2016, almost repecked the currency to the dollar. So it didn't allow the exchange rate to move in a free way and absorb the shocks. So you combine these policy mistakes with the unfortunate global shocks, and Egypt looked very vulnerable starting 2022. So I definitely want to get into the why, and I have a feeling the next question probably feeds into that anyway.

11:21But one thing I wanted to ask you about is this investment, this$35 billion, isn't coming from the Abu Dhabi sovereign Wealth Fund that I would normally think of making these huge investments. So that would be Adia. And I cannot emphasize how big a deal Adia was when I was in the UAE. There was this whole sort of mythology built up around it. But this investment is coming from a new SWF called ADQ. Can you talk a little bit about that and how it's supposed to be different to Adia, like what the different purposes are? So the UAE Abu Dhabi in particular, where you still live, Tracy, has multiple sovereign wealth funds.

12:07They have different chairperson chairing them. Mostly they belong to the ruling family. I think the division of labor is not clear to me. But what is clear is that this new sovereign wealth fund, ADQ, which is different from Adia, different from Mubadera, the other two sovereign wealth funds, has been very active in Egypt recently. So it was the one which entered this land sale deal, the$35 billion development deal. But it's also been active in Egypt lately. So in the last two years since 2022, ADQ has bought state stakes in Egyptian firms as varied as in sectors like fertilizers, banks, fintech, the tobacco company.

12:52And actually, if you look at the Egyptian stock index, and you look at the top three companies in that index, the top one is a CIB, a bank, and a company that is part of the sovereign wealth fund, ADQ, is the largest shareholder. The third largest company in the Egyptian stock index is Eastern Tobacco Company. And again, the biggest shareholder is ADQ. And the second largest company is a construction company called Talat Mustafa, with a very interesting history, especially with relation to the UAE, is basically is the one that is acting as the middleman for all these ADQ deals, including the recent$35 billion deal.

13:31But also Egypt recently sold a few historic hotels, which Talat Mustafa Group was a co-investor and a middleman for these deals. So ADQ seems very active in Egypt. And yes, it's brokering all these deals there. So let's talk then about this deal. How much potential is there? What can the UAE get for$35 billion? It's a lot of money. And when the prime minister of Egypt had the press conference, when he announced the deal, he said, you know what, this is going to be a global touristic destination. We will probably get 8 million people coming to this area of land. It's not just going to be a city.

14:10It's going to be going to have yachts. You're going to have all sorts of things and tourism all around the year. But I think it's something I like how you say it's not just going to be a mega city. It's also going to have yachts. I saw this great video and it's going to have amusement parks and a clean energy corridor and a light industrial hub. And anyway, sorry, keep going. Actually, interestingly, it's also adjacent, actually very close to Egypt's nuclear power plant called the Daba. And he actually mentioned it and he said it might provide clean energy to the area, megacity, whatever it is.

14:46But I think that if you look at it, it's just difficult just to see that it's just all about economics. I think the first item is if you look at the average price of land in that area and what the UAE paid, it wasn't a fire sale. If anything, it might have been, the UAE might have been generous in the money that it paid to Egypt. So that's the first item. And I think the second item, if you think about the narrative of why Egypt got into trouble into its latest crisis, the simplest thing, the one sentence sort of narrative is that Egypt borrowed extensively and in short term from financial markets abroad and built a new capital city that had limited economic return, right?

15:29So this is the one sentence summary of what happened to Egypt between 2017 and today. Now, it is very odd, and I say that in the odd loss podcast, that the solution to building a megacity is to build another megacity, which is even further away from the capital. So I think it's not about the economics. And we can think about what is there in terms of non-economic benefits that Egypt can provide. And I think the the biggest one is basically stability. The region is already unstable. If you look at Egypt's west, there is Libya, and it's completely unstable. Egypt's south, there is Sudan, and again, there is an internal civil war.

16:07And Egypt's east, there is Gaza, and there's an ongoing war that is brutal, and that's probably going to shape the Middle East in the coming years. So I think the stability of Egypt is important. I think the UAE is very conscious about not allowing, for example, Islamist groups to be in power. And maybe they think that kind of investment would prevent such thing from happening. But it's clearly something beyond the economics of this because the economics, yes, you can make a case there, but it's not full. It doesn't tell you the full picture. And whatever the economics is, we just talked about the size of it, 7 % of GDP, the UAE is sending 7 % of its GDP in two months to invest in Egypt real estate.

16:52That is significant.

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18:22Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokerage services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. I appreciate your summary of Egypt's economic situation earlier since 2016 slash 2017. There is an event that I think lives sort of rent free in a lot of UAE rulers heads, which is the 2011 day of revolt in Egypt or the Arab uprising elsewhere.

19:11And I think there is also that element sort of hovering in the background. But one thing I wanted to ask you, how much of this is coming from geostrategic considerations? So the idea that, OK, maybe you're going to develop a tourist city on the Mediterranean coast in Egypt, but maybe you're also sort of building up a trade network in a kind of like China belt and road type way. Maybe you're building up a strategic bulkhead in that area as well. Perhaps. I think I think there's three elements here. There's the commercial side of it and we've talked about it and there is the trade side of it. But then if you think about that, I mean, the last G20 in August, I don't know if it's the last one, but the G20 last August, there was a memorandum of understanding that was signed to have a trade corridor between India, the Middle East and Europe.

20:09Right. So that goes from India to the UAE, through Saudi Arabia, Israel and all the way to Europe. And that was only signed as a memorandum of understanding in August. So to think about doing another trade route, maybe there is some logic there, but you start to make progress on that initial project first before you head there. I think there is a geopolitical side to this as well. If you think about the ongoing war in Gaza, you know, Gaza has two borders, one with Israel and one with Egypt. And Egypt will clearly play a role in the future of Gaza. And maybe this is a way to flex muscle, the UAE muscle in Egypt.

20:48And to ensure that in case of future agreements over the future of Gaza, Egypt will side with basically the country that got it out of this crisis. There's one other thing I wanted to ask you, and I don't think it's verging on conspiracy theory, but it's definitely speculative. And it kind of goes back to Abu Dhabi making a push into petrochemicals, renewable energy, things like that. We've seen it make these moves because it kind of wants to diversify away from pure oil extraction and move into more value-add processing, that sort of thing. But I think this particular area of Egypt sits kind of right above the world's biggest sinkhole, and I have totally forgotten its name.

21:39But there's been some discussion at various points in time of developing that area into either mining it for critical minerals or putting like using it to generate electricity or maybe like building a pipeline from the Mediterranean or something like that. Do you think those sort of energy considerations play into this at all? They weren't mentioned. So I think the first day when when when the deal was announced, a few things were mentioned that these beaches are very pristine. They are virgin and undiscovered, and it's going to be a touristic attraction. I think then doing mining would probably undermine that sort of touristic attraction side of it.

22:19I think to the broader question of energy, and maybe this is just a bit of a digression, but I think within the region, you might see that, you know, from afar, that the oil monument in the region, places like Saudi Arabia and Qatar and the UAE, and they're very active in their investments. You might group all of them as doing the same thing. But I think there are differences in their visions for different things on political issues and economic issues and market issues. And one of the very obvious one is energy transition and what that does to oil. You know, this is all coming down to the fact that these countries export, the GCC by that I mean, export a lot of oil and that gives them a lot of wealth and a lot of firepower.

23:03But there's different visions on how to deal with that and how to manage this in the context that the world is going to transition away from fossil fuel towards cleaner energy. And I think the two pillars of these different visions are basically Saudi Arabia on one side and the UAE on the other. The UAE is basically pushing for, actually it is expanding its oil production capacity. It is pushing for its OPEC quota to increase and it wants to produce more today so that it doesn't end up with stranded assets when oil prices drop in the future. Saudi Arabia is the other sort of end of the spectrum where it has large funding needs, which requires it to have a high oil price.

23:47And as a result, its strategy towards the oil markets is to restrict supply now, not to increase supply, restrict it in order to get that high price and allows it to fund its domestic investments. And these disputes at times, you know, sometimes they surface in OPEC meetings than they did a couple of years ago. But sometimes they just, you know, they're in the background when the OPEC discussions happen. So maybe it's not, I digress quite a bit, but maybe it's not related to the clean energy. But I think the deal speaks to the fact that there's also competition between this oil monument and Egypt, this one area where they compete over.

24:23So I mentioned in the beginning or early on that there just seems to be an endless stream of stories about the development of big new real estate project megacities. And there are all these visions, particularly Saudi, obviously, and like there'll be these videos that I see on Twitter, like here's how their 100 kilometer city is going and here's how their city that's going to have a mayor that's an AI bot or something like that. It's always like this sort of wild stuff. But what is the track record here? Setting aside whether the UAE is going to fully get the sort of economic returns that maybe would justify a$35 billion deal, is there reason to think that there's a good chance of turning this part of Egypt into sort of a booming industrial and tourist area?

25:14The short answer to this is that the regional track record of developing and making profitable new cities, megacities, is not great. If you look at Egypt itself, I've just mentioned the reason why it got into its most recent crisis. It has built a new administrative capital, which has limited economic returns. Actually, in the late 1990s, early 2000s, Egypt tried to build another city, which was in southwest of the country, away from the Nile Valley. And the president was, at the time, was fully invested in that. They were hoping that millions of people would live there. Today, very few people reside there.

25:56Saudi Arabia obviously is building a mega city in Neom. We'll wait to see if that's going to succeed or not. But Saudi itself had a number of cities and developments. There were mega developments that didn't work out. There was King Abdullah economic cities, and there's a bunch of other stuff. So the track record in the region of building these cities away from where you have the cluster of the population hasn't been great. And that doesn't bode well for this new investment. So Joe mentioned in our intro that there could be a sense that Egypt is kind of selling part of itself to the UAE. What's been the domestic reception within Egypt around this deal?

26:39So obviously, it seems to have led to something of a recovery in financial markets, but people on the ground, how do they feel about it? Not great. I think if you think about it, inflation in Egypt is above 30 percent. And that is before the recent flotation of the pound, which moved by 40 percent. It weakened by 40 percent. So even before that weakening, inflation was very high. And that's the second, you know, if you think about the currency itself and the last since President Sisi came to power in mid-2013, the currency has lost about 86 % of its value against the dollar. So that obviously eats up into people's real incomes, that increases living costs.