Last week, Basilinna CEO Deborah Lehr interviewed Egypt’s former Assistant Minister of Investment, and Basilinna Senior Advisor, Ambassador Yasser Elnaggar, about Egypt’s unique position as the only emerging market to see economic growth in 2020 and sectors of opportunity for foreign companies and investors. They also discussed what a new Biden Administration means for relations with Egypt and how those dynamics could impact investors. Finally, the Ambassador provides some advice on how to navigate the opportunities and challenges. The following is a quick recap of the wide-ranging conversation.
How did Egypt spur growth amidst the pandemic?
Egypt is the Middle East’s most populous country and the only emerging market to see growth for 2020. The economy is expected to hit a 2.5% to 2.8% growth rate. While this is less than the predicted 5.6% growth pre-pandemic, Egypt is that rare economy coming out of COVID with growth. The Egyptians instituted immediate lockdowns for only two months and then moved quickly to roll out a targeted stimulus package that differed from other economies, according to Ambassador Elnaggar. Instead of pumping cash into the economy, the Egyptians made reforms targeting key business sectors, like tourism and manufacturing, and worked to shore up the informal sector.
Tourism accounts for 12% of the Egyptian economy and is a critical source of employment, and was the hardest hit sector globally and domestically. The government’s plan gave the industry grace periods for loan repayments, social security payments, taxes; and, the Central Bank of Egypt subsidized loans to specific businesses to keep them afloat, particularly manufacturing and tourism.
The Egyptian government also moved to shore up the informal sector, which remains a driving force in Egypt’s economy. Ambassador Elnaggar said that if the informal sector faltered, there would have been immense social and political repercussions. India experienced such unrest with its hard-hit informal sector. The government used the pandemic to accelerate efforts already underway to integrate the informal sector into the formal economy. Specifically, the government increased public spending for construction and real estate to spur key projects already underway, such as the New Administrative Capital and New Alamein City – both massive building initiatives outside of Cairo designed to modernize outer suburbs and bring state-of-the-art smart cities technologies to Egypt’s new urban centers.
Growth spells opportunity for foreign firms
There were clear sectoral winners coming out of the pandemic, and most spell opportunity for foreign companies and investors. Tech was one of the biggest economic winners of the pandemic globally, and Egypt was no exception. In a country with a 110% mobile phone penetration rate, COVID accelerated fintech and the automation of banking in particular. Many Egyptian banks have transformed their customer-banking relationship and even their business-banking relationship to an automated process. Again, this was already underway, but the market has taken off since the pandemic and represents a significant opportunity for foreign firms.
While physical retail space is still essential in Egypt, the country is experiencing a boom in e-commerce. However, the platforms for e-commerce in Egypt and the region are still minimal, and there is a significant need and opportunity for investment in developing new platforms. Currently, there is only one reliable e-commerce site, souk.com, which is an Amazon affiliate.
The pandemic also revealed weak points in Egypt’s system. The government has announced an extra 40 billion EGP (3 billion USD) for health and education, which will prove to be important sectors of focus for the Egyptian government and provide opportunities for foreign investors as well.
Biden will bring a tougher approach to Egypt
Egypt will not factor high on the Biden foreign policy agenda, but relations are expected to be tougher than under the Trump Administration. For team Biden, working out a new China policy is the highest priority, and the Iran nuclear deal will top the Middle East agenda. Secretary of State Antony Blinken and CIA Director Bill Burns were both instrumental in negotiating the Iran nuclear deal under the Obama Administration. For Iran, there is a golden opportunity to cut a deal with this Administration, according to Ambassador Elnaggar. So far, however, the Iranians have not indicated a willingness to make any political concessions.
As such, the Middle East maybe a distant third or even fourth priority, which will strain U.S.-Gulf relations. We will not see the same cozy relationship that there had been between former President Trump, the UAE, and Saudi Arabia. Relations with Egypt will get tougher too. President el-Sisi was the first international call President Trump took upon entering office, but there has been no such call yet with President Biden, who has already had calls with officials from over 43countries. The Biden Administration also promises to be more vocal on human rights issues globally and has already commented on Egypt’s human rights. This tougher new approach could impact foreign investment.
How should foreign companies navigate the opportunities and challenges?
Doing business in Egypt is attractive from a return perspective but requires planning, according to Elnaggar, and an extraordinary level of patience. There are many advantages to doing business in Egypt, from its population’s purchasing power to the geographical location. A critical obstacle that many foreign firms face when entering the market is how to navigate the system. The Egyptian system is not clear-cut. Laws have loopholes, so knowing the laws is important, but understanding how to navigate them is essential.
An issue most foreign firms face when entering the market is not having a localized strategy. A one-size-fits-all does not work in Egypt or the MENA region. Having a reliable and well-positioned domestic partner is essential that can help navigate the laws but also the maze of proxies and other interests that can have an impact on your business. There will be added complexities for U.S. firms stemming from a tougher bilateral relationship as well.
Regardless, these dynamic sand challenges are not unique to the region. And Egypt’s demonstrated ability to navigate the pandemic successfully coupled with its other economic attributes will make it a more attractive destination for foreign investment in the coming years.
Check-out our infographic for tips on entering the MENA market: