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Oct 27, 1:28 PM EDT

Egypt squeezed between need for reforms and fear of backlash

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CAIRO (AP) -- Inside the glitzy Nile Ritz-Carlton hotel off Tahrir Square, Cairo's business elite were eager to put years of tumult and lost opportunities behind them.

Hundreds gathered this week for an event organized by the American Chamber of Commerce, chaperoned by a State Department official and aiming to show support for Egypt's government as it readies austerity measures and economic reforms. While the moves are a much-needed salve to years of state excess, they're also likely to bring at least short-term pain on the street.

Most observers and assume the government will go through with it - the question is when. With Egypt deep in debt and no more easy money coming from Gulf Arab benefactors, President Abdel-Fattah el-Sissi has little choice but to unleash market forces. The steps will be painful: dramatically devaluing the currency, collecting more taxes and cutting fuel subsidies, all necessary to gain a bailout by the International Monetary Fund and a seal of approval that should encourage foreign investors.

But fears are growing over a possible backlash from a public already straining under high inflation and unemployment, threatening to undermine the tenuous stability el-Sissi has forged over the past two years with a heavy hand.

Talk in social media of street demonstrations on Nov. 11 prompted the Interior Ministry to warn that its forces are ready to respond decisively to any "conspiracies to incite chaos," code words for what it describes as rabble-rousing by the now-banned Muslim Brotherhood, whose Mohammed Morsi briefly ran the country before el-Sissi overthrew him as army chief in 2013.

Just outside the banquet hall gathering stood a pointed reminder of the surprises a dissatisfied Egyptian public can deal out: Tahrir Square was the epicenter of the 2011 popular uprising that led to the overthrow of longtime autocrat Hosni Mubarak.

But while the government is clearly wary over the repercussions of the reforms, investors are wary of bringing fresh foreign capital to Egypt until they happen.

"I would wait, you would wait, everyone will wait until it passes," said Omar Mohanna, Chairman of Suez Cement Group and head of the Egypt-U.S. Business Council. Mohanna, who is Involved in think tanks the government has been consulting on policy, was confident reform is coming. "I think we're really going to bite the bullet this time - it's a matter of days, weeks."

That the reforms are necessary is not in question; Egypt's government vastly overspends its resources. For decades, it has poured much of its budget and hard currency into subsidies to ensure low prices on basic goods and fuel, guaranteeing social peace in a country where almost half of the fast-growing population of 90 million lives near or below the poverty line.

But the past five years of political upheaval have deeply damaged the top earners of hard currency. The tourism industry has been gutted. Foreign investment plummeted. El-Sissi's government bled currency reserves in a fruitless effort to prop up the Egyptian pound. The shortage of foreign funds has fueled the black market, with a dollar now trading at around 16 pounds compared to the official rate of 8.9.

Capital controls taken to stem the dollar shortages appear increasingly desperate. Businesses that purchase materials abroad have already been straining to get dollars, forcing some to pare back operations. Now hotels hosting the dwindling number of foreign tourists insist that all bills be settled in foreign currency, an old rule suddenly enforced with new vigor. Egyptians travelling abroad can only pull $100 a month out of foreign currency accounts back home.

Last week, the state lashed out against companies in an effort to solve a sugar shortage driven by the currency crisis, seizing thousands of tons of sugar from large food producers, including Twinkie manufacturer Edita, and reportedly PepsiCo. PepsiCo officially did not respond to requests for comment, although some representatives at the Nile Ritz-Carlton insisted that everything was fine.

"Seizing stocks and treating us like smugglers is shameful," Edita Chairman Hani Berzi said in interviews on Egyptian television, later shared widely online. "I want to know what we did wrong," he said, insisting that his company's sugar supplies did not break any laws.

Despite the efforts to keep every dollar, the government still appears several billion dollars short of the foreign reserve requirements demanded by the IMF for the loans, amounting to $12 billion over three years. That means it still needs to find the money in bilateral loans.

In a further blow, Saudi Arabia this month suspended monthly deliveries of oil granted under generous repayment conditions. Oil Minister Tareq el-Molla told The Associated Press he was not sure if the suspension will continue. If it does, the government will have to eat even further into its reserves to buy the fuel.

With inflation already running at 14 percent and unemployment at 13 percent, the fear is that prices will leap further once the devaluation and other steps are taken, putting additional strain on the public.

In an ominous sign, several videos of enraged Egyptians protesting their lot have recently gone viral on the internet. The jailing of opponents, mostly Islamist-led, and a general clampdown on dissent have left few outlets for airing dissatisfaction within the system. Sharp in everyone's memory, including that of government and security officials, are the bread riots that erupted during major subsidy reforms attempted in 1977. IN the end, those reforms were repealed.

El-Sissi has pledged to protect the poorest with better-targeted welfare, already underway and often disbursed by the army. But it is unclear if that will be enough to soften wide-scale impact until, as is hoped, increased investment and the influx of billions of dollars boosts employment and wages.

Businessmen at the conference at the Ritz Carlton, entitled "Partnering for Egypt's Future," persistently painted a rosy picture.

Mohanna said that once the reforms are enacted, it will "unleash Egypt's true potential" and that in the meantime, foreign companies are still operating around the challenges.

The most upbeat investors appeared to be those with contracts linked to foreign development aid or otherwise involved in sales guaranteed to be paid in dollars.

"Yes, hard currency payments are challenging these days," said Craig Connell, a senior vice president of U.S. power generating company Black and Veatch, in Egypt for decades and bidding to build and operate a coal-fired power plant. "The reforms are happening, but there is lots of uncertainty over how fast they will happen."

David Thorne, a senior adviser to Secretary of State John Kerry who headlined the conference, emphasized ongoing support by the American business community in Egypt, saying that el-Sissi's commitment to execute the reforms is not in doubt, it is just a matter of time.

"The reforms are very difficult, clearly they will have a major impact on people's lives and businesses' lives, and it will be disruptive," he said at a press briefing capping the meeting. "It's in the interest of the U.S. and everyone that Egypt be stable."

While the vast majority of those attending the luncheon were from firms already heavily involved in Egypt, a few investors not yet in country were scouting out opportunities, assuming the reforms are passed.

"I've some sense of bullishness," said Shahryar Oveissi, operating adviser for private equity firm Pegasus, which is looking to set up plants for solar powered LED street lamps. "There's great opportunity here."


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