Egyptian cabinet reshuffle

In Egypt, in a cabinet reshuffle on 14 June the Ministers of Defense and Interior were replaced by President Abdel Fattah el-Sisi.

• The appointment of new defense and interior ministers implies Sisi's internal power consolidation within the state security apparatus with the appointment of loyalists, reducing the risk of a successful opposition emerging from the military against the president.
• Parliamentary support for Sisi is almost certain to permit the establishment of a de facto ruling party, and increase the likelihood of the 'rubber-stamping' of presidential foreign policy.
• Economic policy is likely to remain committed to reducing government subsidies for basic utilities, and progressing the privatization of banks, rail infrastructure, and the energy sector.

A total of 12 ministers were replaced, including those in the finance and trade and industry ministries, but the two key cabinet changes were in the defense and interior ministries. The Minister of Defense, Sedki Sobhi, was replaced by Major General Mohamed Ahmed Zaki. Zaki had served as commander of the Presidential Guard since 2012 following his appointment to that position by deposed President Mohamed Morsi. The Minister of Interior, Magdy Abdel Ghaffar, was replaced by Major General Mahmoud Tawfik. Before his appointment, Tawfik was head of the National Security Agency, where he was credited by the state for having located Islamic State jihadists who had attacked Egypt's Coptic Christians in 2017.

The reshuffle is the first since Sisi was re-elected in March 2018. It indicates that he has asserted total control over the state security services. Before the presidential election, Sisi had removed potential challengers to his position or detained and threatened them with prosecution.

The pre-election crackdown was accompanied by reshuffles within the military and intelligence branches, which we view as intended to reduce the likelihood of a successful coup or assassination attempt against Sisi. By removing Sedki Sobhi, Sisi has excised the most prominent member of the armed forces who was involved in the removal of presidents Mubarak and Morsi while still holding a public position. The new appointees are likely to be more dependent on personal loyalty to Sisi than their predecessors, with less scope to cultivate their own power base within the security forces.

Consolidation within parliament
On 1 June, Egyptian state-owned newspaper Al Ahram reported that more than 200 MPs belonging to the For the Sake of Egypt Association had joined the Nation's Future Party, making it the largest parliamentary group with more than 250 of the 596 seats. It is alleged by Egyptian independent media, in our view credibly, that the Nation's Future Party was organized initially by Egypt's Military Intelligence specifically to support Sisi as president.

It is very likely that, as the largest single party, the Nation's Future Party will be used as a de-facto ruling party, similar to the now-banned National Democratic Party (NDP) under Mubarak. This effectively ensures that parliament will serve to rubber-stamp any presidential decrees. This will be clearly indicated if, absent meaningful opposition, parliament suggests an extension of presidential term limits from the current four years, or their outright abolition, before the next parliamentary elections in 2020. IHS Markit views this as likely.

Economic stability and policy continuity
The cabinet reshuffle gives the new heads of the security services time to assume control of their ministries before the new financial year in Egypt, which starts on 1 July, in which another round of subsidy cuts to fuel and electricity is scheduled. Electricity charges will increase by an average of 27.1%; costs to factories will increase by 41.8% and to households by 20.9%. We have factored these planned subsidy cuts into its economic forecast for Egypt and expects that real GDP growth will grow 5.4% in FY 2018/19, reflecting positive developments in the energy and manufacturing sectors.

Cuts to fuel and electricity subsidies disproportionately affect Egypt's middle class and although price increases may reverse the downward trajectory of Egypt's inflation rate, they are unlikely to trigger widespread protests. As an indicator of state preparation, on 4 June parliament approved increasing the pensions of the police and military, and granted salary and pension increases for civil servants and pensioners covering at least 15 million citizens. Although coup risks for Sisi are low, we previously assessed that dissent within the low- and mid-ranking military personnel would be the most likely trigger; providing financial incentives to support him will go some way to placating this.

We assess that these measures, in conjunction with existing social welfare programs intended to cushion Egypt's working poor from subsidy cuts, and the government's well publicized zero-tolerance policy towards unauthorized protests, reduce the risk of social unrest.

Outlook and implications
Sisi's appointment of loyalists throughout the security apparatus clearly indicates that he is attempting to establish unquestioned domestic control. IHS Markit assesses that he will succeed; Sisi now has a consolidated inner circle of loyalist appointees who can apply an unprecedented level of force when confronting any potential opposition, lowering the scope for potential challenges from his peers in the military.

With a consolidated and loyalist security apparatus, Sisi is more likely to undertake more expansive regional foreign policy. Improved domestic security will allow him more leeway to mediate what is likely to be a pro-Israel peace deal reportedly being proposed by the US administration, with less concern that this will risk breaking ranks with the armed forces. Egypt is likely to prioritize securing the border with Libya from infiltration by jihadist groups, and reach a meaningful accord with Ethiopia over Egypt's share of Nile water usage as the Grand Ethiopian Dam becomes increasingly operational.

Although a position of uncontested power will increase the opacity of executive decision-making, IHS Markit assesses that Sisi is extremely unlikely to deviate from his current policy priorities. The replacement of the Minister of Finance, Amr El Garhy, with his deputy, Mohamed Maait, indicates that, the government is unlikely to significantly alter the current IMF-backed program of economic restructuring to reduce the annual subsidy bill and attract FDI through the privatization of banks, and the energy and railway sectors, while seeking to implement existing plans to widen the tax base. This is particularly important if Egypt is to reduce its high levels of external debt, currently 36.7% of GDP, an increase of 62% since Sisi was elected president in 2014. Additionally, the decision to retain Tarek El Molla as Minister of Petroleum, is a positive indicator that the government's current energy strategy - intended to position Egypt as a regional energy hub - is likely to continue, focused on establishing gas import links with Israel and Cyprus in the two-year outlook.