Egypt -- A transition in trouble

Today, we turn to risk #8 in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.

Here's a summary:

Egypt's twists and turns: The military has clung to power longer than expected -- sometimes resorting to violence to defend it -- and it appears unlikely to withdraw from politics even after presidential elections in mid-2012. Secular revolutionary activists have grown increasingly disillusioned with the direction of the transition, and a deteriorating economy is making matters worse. The country's importance for the Arab world and its peace treaty with Israel make it crucial for regional stability.

Q- Why has Egypt's post-Mubarak transition taken a turn for the worse?

A- The ruling Supreme Council of the Armed Forces (SCAF) remains Egypt's dominant political actor, and it has underestimated the revolutionary activists who instigated Hosni Mubarak's removal and their commitment to civilian leadership of the country. The military is only now beginning to recognize the activists' determination to push past the removal of Mubarak and to insist on a more fundamental political reform. Dissatisfaction with the political system and the economy is growing. The military has focused on building a relationship with Islamist political parties, who have been more willing than secular activists to share power. But even this accommodation may begin to fray, as some Islamists begin to doubt that they can ever gain true decision-making authority as long as the military maintains its grip on power. The anniversary of last year's uprising, the writing of a new constitution, the Mubarak trial, and the presidential election are all potential flashpoints to monitor in the first half of the year.  

Q- Who are the Islamists? How diverse are the constituencies that make up this broad group?

A- The "Islamist" label in Egypt encompasses a large segment of the population. (Islamists won more than two-thirds of seats in lower house elections). Within this label, there are different, often competing, visions of Egypt's future. The Muslim Brotherhood represents the conservative, organized, and largest sector that has worked with the military to this point. Its leadership, and much of its support base, is largely made up of middle-class professionals or those who aspire to join the middle class: doctors, lawyers, engineers, and others who want Egypt to maintain its Islamic foundations. The Salafi wing, represented by the Nour party, which performed better than expected in elections, is fundamentalist and more radical. Al-Wasat, which won only a handful of seats, represents the most moderate wing of political Islam. By choosing to work with the Muslim Brotherhood, the military council believes it can manage its power, while scaring the non-Islamist population with the possibility of a Salafi rise in the absence of military control.

Q- What's going on in Egypt's economy? How will it affect the political transition?

A- Egypt is quickly running out of foreign reserves as it continues to prop up its currency, which has been under pressure from capital flight. Negative headlines about the political transition will likely exacerbate this trend, especially since tourism, a critical element of Egypt's economy, will suffer. Egypt will conclude a loan arrangement with the IMF, but it will come with strings attached. Fearing public criticism, the military leadership turned down an IMF loan with relatively favorable terms shortly after Mubarak's ouster; worsening investor sentiment will ensure that the latest loan offer will come with more stringent terms. Finally, reforms such as currency devaluation and a reduction in costly energy subsidies will be tough to implement. Doing so could further choke growth and push food prices higher. Egypt's economy and political transition are interrelated, with negative developments in one fueling problems with the other.

Next up, the conflict within South Africa's ruling party.

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