DoorKnock 2018 Report: AmCham leaders tell US audience that “Egypt is open for business”
Egypt is open for business. That was the main message that AmCham members delivered to a US audience at a panel discussion last week organized for the 2018 Doorknock mission to Washington, DC. Egypt has seen continuous, dramatic shifts in its economic landscape since the Ismail government kicked off its reform agenda, with the result being that we’re now overcoming the major challenges that had been the product of nearly seven years of instability and decades of “decadent” policies and practices, AmCham President Tarek Tawfik said at the gathering.
Today’s Egypt no longer suffers from FX shortages, an energy crisis, or a lack of drive for innovation, he said, highlighting the victories achieved on fronts such as fiscal consolidation, legal reform, and the diversification of energy sources — which has had a profound impact on businesses and industries across the spectrum.
Participants: Tawfik was joined by CIB’s CEO for Consumer Banking Ahmed Issa, Ahead of the Curve CEO Dina Sherif, and Procter & Gamble’s Tamer Younes, who spoke of recent challenges and the new outlook on the macro front. Among the highlights from the discussion:
Egypt’s currency shortage “has been settled once and for all.” The market is now flush with USD thanks to the central bank’s 2016 decision to float the EGP, which was a “breaking point” for the economy, as businesses across the board had been suffering from disruptions in their production cycles due to FX shortages that impeded their ability to fund their raw material inputs, according to Tawfik. The availability of liquidity in the banking system is now also seeing foreign investors favoring the interbank market for their FX needs, rather than using the central bank’s parallel repatriation system, CIB’s Issa said.
The EGP float has also made Egypt a more attractive destination for investors, particularly as a regional export hub for multinationals. Egypt offers land, labor, and energy at more attractive prices than other neighbors in the region, said Younes, who heads P&G’s North Africa and Levant Corporate Affairs division. Supporting that is also ideal geography, a large pool of talent, a wide and rapidly-growing consumer base, and various trade liberalization agreements Egypt has signed with a number of countries in the Middle East and Africa which make it “a good place to be to get your products and services across to people.”
Egypt’s banking sector is liquid, safe, and ready to move forward. “There is a lot of dry powder in the banking system in Egypt to fund the next wave of growth,” Issa said, explaining that deposits in the sector are close to EGP 3 tn (almost 100% of GDP). He also pointed to the positive impact that ensuing digital data migration is expected to have on the sector, as it will not only reduce costs, but will also lead to a shift in overall efficiency, he said, adding that CIB plans to double its customer base over the coming few years. The country’s risk factor is expected to drop yet still once the central bank adopts the IFRS 9 later this year, which he described as a “safe” and “conservative” accounting standard that minimizes balance sheet risk.
Energy shortages are also a thing of the past. Egypt will not only have doubled its electricity production capacity by the end of 2018 to 50,000 MW to create a surplus, but the government has also followed a solid plan over the last three years to diversify its sources of energy by focusing on renewables, Tawfik added. This policy is expected to change the energy mix drastically by 2035, where we should see the mix stand at 45% renewables and 55% fossil fuels from 7% and 93% three years ago.
Legislative and structural reforms are beginning to bear fruit. Industrial growth rebounded during 2017, and so did exports and FDI, thanks in large part to reform efforts, with key pieces of legislation — such as the investment, industrial permits and bankruptcy acts — addressed existing anomalies within the system. Measures such as the gradual phaseout of subsidies have nearly tripled industrial energy bills in the last few years, which has “pushed industry to become more cost-efficient. As a matter of fact we had been complaining very much about cheap energy because it didn’t give industry any incentive to economize,” Tawfik said. “Industries are investing more in sustainable and environmentally-conscious mechanisms … Recycling waste, energy efficiency, recycling water. All of these things were a joke at the time because they did not have any economic viability but now it’s become the mainstream of the Egyptian industry at large.”
Egypt can do a lot more to improve the efficiency of its resource use. Efforts are already ongoing to reduce the margin of water waste in sectors such as agriculture, according to Tawfik, who also pointed to recent measures the state has taken to raise awareness about water consumption and rationalization. The government has also been investing heavily in constructing desalination plants across coastal cities to limit their reliance on Nile water.
Government has also become both more accessible and responsive to the private sector’s needs, according to Younes, who went on to add that “today, you can reach a minister over the phone and actually explain an issue you have … It’s easy to talk to them, easy to explain your challenges. Most ministers have good business background and can really speak the same language and understand where you’re coming from.”
Policymakers are committed to widening and strengthening Egypt’s social safety net through through measures including reform of the food and bread subsidy system, raising pensions and wages for public sector workers and employees (by c. 100%), and expanding social welfare projects such as Takaful and Karama to cover more people.
Entrepreneurship and innovation are in overdrive. Sherif, whose company supports social entrepreneurship, said that these improvements have led to an exponential rise in the number of accelerators, incubators, and university programs that target innovative startups, which she said are essential to resolving the issue of high youth unemployment rates. Egypt is also seeing more women-led startups spring up thanks to programs such as Goldman Sachs’ 10,000 Women initiative and CIB’s fintech accelerator at the American University in Cairo. “Youth and women are really starting to take control of their agency through entrepreneurship and through the creation of new business and I think that’s a narrative that’s not told enough here in the US,” Sherif said, adding that she would like to see more Silicon Valley-type investors “come shopping in our country.”
It’s now time for a second wave of reform, the group agreed. “We have just hit the tip of the iceberg and we need to go and dig deeper on a sectoral level. Without tackling the bureaucracy and red tape, we are not going to be exploiting the real potential of the country,” Tawfik said. “Tackling the bureaucracy, breaking down the red tape, having a more transparent system. We are in an opportune moment that hasn’t happened in quite some time that we have a reformist government and reformist president.” Younes agreed, saying that bureaucracy raises the cost of doing business in Egypt. He also underlined the need for the government to take more initiative in pointing businesses towards cheaper local alternatives for raw materials and production inputs.
More private sector involvement is also imperative. Issa said that one of the main challenges at the moment is attracting more capital to the market through private investment, which is expected to lead growth and create more employment opportunities. Tawfik then pointed out that legislation has already passed allowing the private sector to participate in industries such as natural gas and railway development and management — both of which had been under sole government control over the past several decades. The state is also planning to bring the private sector onboard through its IPO program, which should be kicking off in the second half of the year, he added.
It’s also equally important to communicate clearly the positive narrative on Egypt to the US. “We tend to only tell a very particular narrative,” Sherif said. “Us being here is extremely important, but I would also say that there is a responsibility for everyone in this room and everyone we meet with to go and spread that positive story as well.” Egypt has been looking to sign a trade liberalization agreement with the US and discussions have been ongoing to explain to players in Washington that the country now operates using a new business model that is based on industrial expansion and exports, rather than trade alone as the case was before, according to Tawfik, who said that the pace of reforms in Egypt has been extremely fast in gradually changing the economic environment and putting it on the right track.