Aurelia Butler

For almost a decade, Egypt’s president Abdel Fattah al-Sisi has promised his people that he would revive the economy and build a new state. But when Egypt this year marks the 10th anniversary of the coup that brought the former army chief to power, Egyptians will find little to cheer. Instead, tens of millions of people will be struggling to put food on their tables as the Egyptian pound has fallen to record lows and inflation soars above 20 per cent. The private sector is grappling with an almost year-long foreign currency shortage that is choking businesses. Egypt is a country in crisis. Like much of the world, the Arab state was hit hard by Covid and is enduring headwinds caused by Russia’s war in Ukraine. But Sisi’s autocratic regime is also squarely to blame as it has presided over a state living beyond its means.Last year, Cairo was forced to go to the IMF for the fourth time in six years. Even before that $3bn loan was secured in October, Egypt was the fund’s second biggest debtor after Argentina. At the core of its problems is an over-reliance on hot money flowing into its domestic debt as a source of foreign currency, and the muscular expansion of the military’s footprint across the economy. The vulnerabilities of the former were exposed when investors withdrew about $20bn from Egyptian debt around the time Russia invaded Ukraine. Egypt, which had been paying the world’s highest real interest rate to attract the portfolio inflows while artificially propping up the pound, was forced to turn to Gulf states for bailouts. The central bank has since been devaluing the pound in phases to bring supply-demand equilibrium to the forex market. It has agreed with the IMF to move to a flexible exchange rate, with the pound down about a third against the dollar since October.The deeper problem is the military’s role in the economy, which stretches from petrol stations to greenhouses, pasta factories, cement plants, hotels, transport and beyond. It also oversees hundreds of state infrastructure developments, including vanity projects such as building a new administrative capital and cities in the desert.It is a phenomenon that has crowded out a private sector wary of competing with the most powerful state institution, and stymied foreign direct investment that would generate jobs and a more sustainable source of hard currency. Yet since Sisi’s regime first went to the IMF for a $12bn bailout in 2016, the fund and donors have, inexplicably, tiptoed around the issue while Cairo quashed internal debate.The IMF appears to be belatedly addressing the issue with the latest loan. It says Cairo has committed to reducing the “state footprint” in the economy, including military-owned companies, by withdrawing from “non-strategic” sectors and through asset sales. State-owned entities will also be required to submit financial accounts to the finance ministry on a twice yearly basis and provide information on any “quasi-fiscal” activities to improve transparency.It is now up to the IMF and donors to use their leverage to ensure the military-led regime meets its commitments. After conducting some reforms in 2016 to secure the $12bn loan, the government continued to expand the army’s role, while failing to make the serious changes the economy needs.It is often assumed that Egypt is too important to fail, and that donors or Gulf states will always bail Cairo out. But the reality is with an estimated 60mn people living below or just above the poverty line and getting poorer, the state is already failing its citizens. If Cairo’s allies are serious about helping the country, they must pressure Sisi to act on his pledges. More

Business leaders and top government officials have expressed optimism about the global economy as China drops coronavirus controls, the US embarks on a green investment boom and western Europe adjusts to the impact of Russia’s war in Ukraine.At the World Economic Forum in Davos, Gita Gopinath, deputy managing director of the IMF, signalled that the fund would upgrade its economic forecasts. Instead of predicting a “tougher” 2023, she now expected an “improvement” in the second half of the year and into 2024. Positive data from Europe and the US in recent weeks have boosted hopes that the world’s economy will avoid a recession this year. Germany’s chancellor, Olaf Scholz, told Bloomberg that the eurozone’s largest economy would avoid a recession, while the Mannheim-based think-tank ZEW said its monthly gauge of investor sentiment had turned positive for the first time since Russia’s invasion of Ukraine. Daniel Pinto, head of JPMorgan’s investment bank, highlighted the global economy’s resilience. “We have come through a period with a war, a pandemic and the biggest normalisation of monetary policy in history,” he said. “Considering all the things that have happened, the world is a lot better than you would have expected.”While the economic downturn in advanced economies no longer appears as bad as feared, Chinese growth has slowed, with Beijing posting a disappointing rate of 3 per cent for 2022.Gopinath warned that 2023 would nevertheless be a “tough year”. With inflation still too high, central banks should “stay the course” with interest rates rising until inflation fell sustainably, she said. Gita Gopinath says that instead of a ‘tougher’ 2023, she now expects an ‘improvement’ in the second half of the year and into 2024 © Stefan Wermuth/BloombergHowever, financial markets have rallied on the back of lower energy prices, fewer supply chain difficulties and the end of China’s zero-Covid policy.Liu He, Beijing’s top economic official, told the forum China’s economy would bounce back. “If we work hard enough, we are confident that growth will most likely return to its normal trend,” he said. “The Chinese economy will see a significant improvement in 2023.” Alan Jope, Unilever chief executive, said China’s rapid reopening was unexpected. “We’re gearing up for revenge spending,” he said, referring to the phenomenon of consumer shopping sprees once restrictions are eased. US business leaders hailed the Joe Biden administration’s Inflation Reduction Act — a $369bn bid to stimulate green investments in America’s economy. Mark Hutchinson, chief executive of Fortescue Future Industries, said the tax incentives were “huge . . . you’d put every investment dollar you possibly could in there”, he said.Börje Ekholm, CEO of Swedish mobile phone maker Ericsson, voiced frustration at Europe’s regulation-led approach, which he said was stifling technology companies, calling instead for a more “pro-growth” attitude. But European Commission boss Ursula von der Leyen told the forum that Brussels would temporarily water down state aid regulations and pump cash into strategic climate-friendly businesses, as it sought to counter Biden’s green subsidy package. “There is a need to be competitive with offers and incentives that are currently available outside the EU,” she said.She added that the region had brought energy prices down “quicker than anyone expected”.European wholesale natural gas prices hit an intraday low of under €52 a megawatt hour on Tuesday, the lowest since September 2021. Although prices remain more than double the average price before Russia’s invasion of Ukraine, they have fallen 85 per cent since peaking in August. Fatih Birol, head of the International Energy Agency, praised Europe’s progress, but cautioned gas prices would not have fallen as far had the weather not be so clement.

Video: Davos: why stakeholder capitalism is under attack | FT Moral Money More

The shocks of the past three years have hit low and lower-middle income developing countries hard. That was the theme of last week’s column. But the damage does not just lie in the past. It is lying in wait in the future. The world’s poorest countries, which contain a large proportion of the world’s poorest people, are threatened by a lost decade. That would be a human catastrophe and a huge moral failing. It would affect all our futures, especially those of Europeans, being so close to some of the worst hit countries. Something must be done, starting with tackling the debt crisis that is now looming.According to Kristalina Georgieva, managing director of the IMF, “about 15 per cent of low-income countries are already in debt distress and an additional 45 per cent are at high risk of debt distress. Among emerging markets, about 25 per cent are at high risk and facing default-like borrowing spreads.” Sri Lanka, Ghana and Zambia are already in default. Many more will follow. Something must be done urgently.Why has this happened? The answer is that low and lower-middle income countries have taken on too much of the wrong kind of debt. That mainly reflects the lack of good alternatives. The world opened up a debt trap, by making the terms of borrowing attractive but risky. Covid-19, soaring energy and food prices, higher interest rates, a strong dollar and a global slowdown have now rendered the costs prohibitive, duly closing the trap upon these vulnerable countries.When debt becomes unaffordable, it needs to be restructured. This is as true of countries as it is of companies and households. But restructuring has become even more difficult than it was in the 1980s, after the Latin American debt crisis in 1982. Back then, the main creditors were a few large western banks, western governments and western-dominated international financial institutions (IFIs). It was at least relatively easy to co-ordinate these entities. The main difficulty was to admit how bankrupt some western banks were.Just between 2000 and 2021, the share of public and publicly guaranteed external debt of low and lower-middle income countries (other than that held by IFIs) owed to bondholders jumped from 10 to 50 per cent, while the share owed to China rose from 1 to 15 per cent. Meanwhile, the share held by the 22 predominantly western members of the Paris Club of official lenders fell from 55 to 18 per cent. Thus, co-ordinating creditors in a comprehensive debt restructuring operation has become far harder, because of their greater number and their diversity. Moreover, no one wants to restructure debt owed to themselves if that would merely benefit other creditors, not the country itself. (See charts.)There exists no effective framework for bringing all these creditors together. Nor is there any credible template for restructuring that debt. The G20 created the “Common Framework for Debt Treatment”, to deal with the former difficulty. But it is in practice a Paris Club-led process. The other (and frequently much bigger) creditors are not really engaged. According to the IMF itself, the framework does not have traction. Equally, there is no approach to debt restructuring that is at all likely to deliver what is needed — a new start for heavily indebted crisis-hit countries.Two well-known debt experts — Lee Buchheit and Adam Lerrick — have sent me a proposal aimed at doing what Brady bonds did in bringing the Latin American debt crisis to a halt, but in an updated manner. They suggest the offer to creditors of two bond exchange structures. The entire stock of the government’s external bonds would be converted into an equal nominal amount of 25-40 year debt at a 3-3.5 per cent interest rate. The result should reduce the (currently unpayable) net present value of the debt by more than 50 per cent.Under the “Cash Downpayment Structure”, investors receive a cash downpayment of the existing bond equal to 30-35 per cent of its current market value plus a new standard long-term bond with no writedown of the principal amount. Under the “Floor of Support Structure”, investors receive a new long-term bond of equal nominal amount that has a liquid rising floor of support with an initial value of 60-70 per cent of the existing bond’s current market value. The floor of support is based on the investor’s ability to convert the new bond into a World Bank zero-coupon bond at any time. The IFIs would finance this through a combination of new loans and repurposing of undrawn amounts under existing loans, again following the Brady precedent. The IFI loans should also contain provisions that restrain excessive borrowing.Why should creditors accept this? The answer is that the alternative would be a long drawn-out mess in which they are likely to get far less. Meanwhile, IFIs could sort out the dire situation of so many clients at a predefined price. Someone would have to take this task on. In 1989 it was then US Treasury secretary Nicholas Brady. Now, who would be better than his successor, Janet Yellen?Cleaning up the mess is just a part of the task. At least equally important is creating a system for financing development, including climate mitigation and adaptation, that does a far better job of handling risk and recognises these objectives as global public goods. Excellent ideas have been put forward in Finance for Climate Action, from a high-level expert group and the Bridgetown Initiative developed byAvinash Persaud for the Barbadian prime minister.The system we currently have for resolving the debts of poor countries is not, as people say, “fit for purpose”. The same is true of that for helping poor countries through adverse shocks and towards sustainable development. Change is needed urgently. Start [email protected] Martin Wolf with myFT and on Twitter More

China has passed its peak of Covid-19 infections and is returning to normal faster than the government expected, Beijing’s top economic official has told investors at the World Economic Forum.“The majority of society has recovered to a normal state of affairs,” said Liu He, vice-premier and chief economic adviser to President Xi Jinping, in a speech at the forum’s international gathering in the Swiss resort of Davos on Tuesday. “The speed of reaching the peak and speed of recovering normality were relatively fast, in a way exceeding our expectations.”After ending its zero-Covid policy in December, China shut down its coronavirus testing apparatus and has published limited data on deaths, making it difficult to gauge the scale of infections. Instead, epidemiologists have relied on online surveys to measure the spread.Earlier this month officials in Henan, one of China’s most populous provinces, said almost 90 per cent of the local population had been infected. Shengjie Lai, an epidemiologist at the University of Southampton, told the journal Nature that cities would have passed their infection peak by mid-January.In contrast, Zeng Guang, former chief epidemiologist at the Chinese Center for Disease Control and Prevention, warned last week that the latest wave of Covid-19 infections was yet to peak, adding that family visits over this weekend’s lunar new year would result in a surge of cases in rural areas.Liu said he was “extremely amazed” by estimates for travel figures over the 40 days surrounding the new year festivities. The transport ministry predicts travel over that period will be almost double what it was in 2022, and about 70 per cent of the pre-Covid level in 2019.Liu is due to meet Treasury secretary Janet Yellen, his US counterpart, in Zurich on Wednesday for the first time in person, as Beijing and Washington rebuild face-to-face diplomatic relations.Following a speech by European Commission president Ursula von der Leyen, who said the EU would seek to “de-risk” rather than “decouple” its trade with China and would use all its tools to deal with “unfair practices”, Liu sought to reassure his Davos audience of Beijing’s commitment to globalisation and marketisation.“Some people say that China is pursuing a planned economy, but this is fundamentally impossible: Chinese people will not walk this path,” he said.The vice-premier’s comments come after Beijing showed signs of relaxing a multiyear crackdown on the country’s technology titans that scuppered the planned public listing of Jack Ma’s Ant Group and forced ride-hailing group Didi to delist in New York.This year’s appearance in Davos may be Liu’s last, as the 70-year-old prepares for retirement. At the 20th congress of the Chinese Communist party last year, he was one of several top officials responsible for economy and finance who stepped down from party posts.

“The market-reformist school of thought lacks a flag carrier,” said George Magnus, research associate at Oxford university’s China Centre. “The Davos rhetoric is aimed mostly at foreigners and foreign businesses. The government’s desire to have control over private firms and entrepreneurs isn’t changing at all.”Liu insisted Beijing’s “common prosperity” policy aimed only to prevent economic polarisation and high levels of inequality.“We are absolutely not about egalitarianism and welfarism,” said Liu, adding that the government stressed equality of opportunities, not of outcomes. More