One of Citi’s key political analyst Fordham commented this morning on the Egyptian situation (Global Political Insights – Military Intervention in Egypt and EM Vox Populi Risk). Here is an excerpt from the report:


Dramatic fall of Egypt’s Mohamed Morsi

President Mohamed Morsi’s government was riven by infighting, and struggled both to build bridges with Egyptians who didn’t vote for it and to deliver economic opportunities. Media reports suggest that Mohamed Morsi is under house arrest and the constitution has been suspended temporarily, with new elections planned but no date set. Citi Research estimates economic growth at 1.2% this year, down from 5.1% in 2010 and 7% in 2008.

Egypt’s military is likely to proceed with its plan to temporarily suspend the constitution, dissolve parliament, and create some form of government of national unity. Media reports suggest that the head of the Constitutional Court will take over the presidency until new (unscheduled) elections. Even so, Egypt’s opposition remains fragmented in multiple “fronts” and does not signify a government-in waiting, suggesting continued volatility. Agreeing a date for new parliamentary elections, and some kind of platform for national reconciliation, may be the path out of the impasse if both sides can agree. An IMF plan is unlikely until these tensions are resolved. Though the Muslim Brotherhood remains the pre-eminent political force and should be considered the favourite in any future election, its support has almost certainly dropped over the past few months, and these demands could force divisions within the broader Islamist movement.

Violence and turmoil are likely to continue for an extended period in Egypt, but with limited impact for commodities and global markets. Egypt’s unrest is unlikely to spill over beyond its borders in Citi’s view, suggesting limited implications for commodities prices and global financial markets. The crisis underscores continuing economic disintegration and the failure of the government to address the demands of those who didn’t vote for it. Meanwhile, the US and international community has limited options and is likely to remain on the sidelines.

Egypt: It’s hard to know how this will play out

* Both seem to have been proven wrong. President Mohamed Morsi and the MB instead opted to dig their heels in, refusing to compromise with the Egyptian military and the opposition.

* As such, on the evening of July 3 the military, for all intents and purposes, seized power, with the president and other senior members of the MB seemingly confined to Republican Guard barracks in Cairo. Given the general concern about the unraveling political situation, the move is unlikely to face a high level of international opprobrium, which in part reflects the fact that the military has produced a roadmap outlining a return to democracy, although no specific time frame has been announced.

* Arguably the biggest concern is how the MB will be incorporated, or not, into this transition, in order to avoid their marginalisation. This in part also depends on whether the military can ease tensions in the coming weeks or whether their move escalates tensions.

The bottom line seems to be that, while the move by the military does offer one way out of the recent political impasse, the reality is that the MB has to be taken along in this process. If not, the divisions within Egyptian society that have emerged in recent years will remain unresolved and simply suppressed.