Spotlight: The EBRD’s Heike Harmgart on Egypt’s post-covid economy, what policymakers can do, and the bank’s investment plans
As alarms have sounded that we’re heading into the deepest global recession of the modern era, Egypt has broadly been exempt from the (long) list of countries the IMF and other international organizations think will see their economies contract this year. The European Bank for Reconstruction and Development (EBRD) is no exception — its latest Regional Economic Prospects report sees Egypt doing better than any other country in the region this year, and achieving growth rates second only to Lebanon in 2021.
We sat down with Heike Harmgart, the EBRD’s managing director for the southern and eastern Mediterranean (SEMED) region to discuss Egypt’s post-covid economy, what policymakers can do to stimulate growth, and the EBRD’s investment plans. Edited excerpts from our conversation:
Enterprise: What do you think Egypt needs to do to maintain the relatively positive economic outlook, and what should happen for us to exceed expectations?
Heike Harmgart: Egypt will be severely affected by the covid-19 outbreak, as is the case with all countries we assess. This really shows how interconnected our world is. Egypt has entered the pandemic crisis from a point of strength, after achieving high economic growth in 2019, and it is the only country in the MENA region that will not endure a recession in 2020. We think Egypt will then rebound quite sharply in 2021. That outlook shows the success of the already-enacted macroeconomic reforms and the resilience of the Egyptian economy.
Now, policymakers need to think about how to ensure that you end up in the best possible scenario at the end of this crisis. But the catch is that all scenarios are globally interdependent, so how Egypt or any other single country will perform economically will depend significantly on what other countries are doing, even with the best individual response in place.
For example, some scenarios we’ve been running had different assumptions for tourism, which is a very important sector for Egypt. Obviously, tourism rebounding in spring 2021 would be much better than recovery in summer or fall 2021. But tourism recovery depends on a number of global factors, including how testing is incorporated in the travel process, and the policies set in place by the countries from which tourists are coming to Egypt. At what point will they reopen their borders and have global or bilateral agreements to resume tourism? The sector will take time to recover regardless, but a key policy to pursue is setting high-quality hygiene standards at hotels and tourism sites, and extensive testing and tracing. That’s the only thing Egypt can do itself.
Other key contributors to Egypt’s economy that unfortunately isn’t under the control of politicians are remittances and revenues from the Suez Canal, which have been hard hit. We do hope that global trade will resume strongly, and even if some global value chains become shorter, the Suez Canal will remain one of the most vital trade routes globally.
Egypt needs to focus now on continuing to ensure that the health system can cope with the health part of the crisis. There are other countries that have struggled immensely, and the cost is paid by both the affected and the healthy parts of the population. So I think that the key here is testing, testing, testing, and contact tracing, followed by quarantine.
We also believe it’s critical to make sure that domestic investment and domestic demand remains strong. The Central Bank of Egypt has been giving banks liquidity to on-lend to SMEs, and government investments in vital infrastructure will form the base for a more resilient and faster economic rebound.
From a legislative perspective, anything that gives the private sector more oxygen and space to breathe would be helpful in this crisis. The initial phase of recovery will require significant dependence on the private sector, so it is important at this time to ensure that the sector is resilient and can innovate. This is not the time to over-regulate or make processes like license applications cumbersome — this is a golden window to reduce bureaucracy and ensure that domestic investment can be maintained in these difficult times. This doesn’t just apply to Egypt; it’s a global phenomenon and all countries should look at how to simplify doing business.
One way to do that is to make business more digitally enabled. This is a huge opportunity for Egypt that shouldn’t be neglected. Many locally grown startups can be brought on to help with this transition. There’s a huge upside there, and it would be a huge loss if we come out the other end with the same amount of bureaucracy.
E: What other policies or reforms would you like to see the government enacting to improve the business climate, both now and a little further down the line?
HH: One thing that Egypt has done incredibly well in the past is embarking on a path to a green transition. There have been a few heat waves over the past weeks — this shows the excellent level of radiation for solar energy. Investments in solar and renewable energy are really paying off now, and this is the time to continue focusing on green innovation, which will be more resilient than other sectors — this crisis has already proven that. If you look at funds that are investing exclusively in the green economy, they’ve been doing much better than their competitors with more diversified portfolios. In 2019, the EBRD had two major investments in wind energy: EUR 75 mn in the Lekela wind project, and we invested another USD 60 mn in equity in Infinity.
There’s also a lot of scope to improve the capabilities of economic zones like the Suez Canal Economic Zone, where there are a lot of synergies between companies. Egypt is already in a good position there and should continue to invest.
Then there’s the fintech route. We’ve supported a lot of Egyptian startups and there’s a vibrant scene of accelerators, venture startups, and tech-enabled startups through our star venture program. These need to be supported throughout the crisis to ensure the recovery and also to ensure that companies have flexibility in their delivery mode.
E: How has the pandemic changed the EBRD’s strategic approach to investments?
HH: Generally, we have changed our approach to all our countries of operation because it’s a global crisis. While we are open for our regular business, and I think our regular strategic priorities for Egypt, namely green and inclusive and integrated remain valid, there is a need to respond to this crisis immediately. Our board of directors swiftly approved a large global solidarity package of an initial EUR 1 bn followed by EUR 4 bn for the 38 economies where we invest. This package will allow a much faster approval for our existing clients, with a particular focus on the private sector. In the second phase, we’re also looking at faster approval for vital infrastructure.
E: What does that mean for Egypt?
HH: We want to further support SMEs that are the backbone of the Egyptian economy to help make them resilient and to enable their recovery. What they need during this period is urgent financing, and some of it is on a very small scale, through onlending via local banks. Egyptian banks asked us for additional liquidity to help lend to the real economy, particularly smaller exporters. In response, the Bank approved USD 850 mn of support to five Egyptian banks — QNB, the National Bank of Egypt, the National Bank of Kuwait, CIB, and Banque Misr — with USD 350 mn dedicated to trade-related activities. Egypt was one of the first countries to benefit from the solidarity package financing and the scale is probably one of the largest. The loan approval happened very quickly as these banks are our existing clients.
We’re also looking at how to support other clients like the Egyptian Electricity Holding Company on vital infrastructure projects, and other ways to support the real economy. There’s also a lot of demand for EBRD support from agribusiness companies and other industries such as the construction sector which is struggling at this point in time and needs extra liquidity to make sure they don’t have to resort to layoffs and to keep the lights on. This shows how things are changing — we’re starting to get a lot more demand from the real economy directly, as opposed to demand being more concentrated among banks. This could take longer because we haven’t worked with some of them and the due diligence process takes time to understand their business models; nevertheless this is an area we’re looking at.
E: Does the EBRD have a set amount of funding it allocates to Egypt at the beginning of each year or is it an open-ended portfolio? And how do you decide how much is enough?
HH: The EBRD’s financing model is very demand-driven, and now even more so than ever. We don’t set an envelope at the beginning of the year; rather, we depend on demand. The last two years, Egypt was the biggest investment destination among EBRD’s recipient countries, and I don’t expect that to change this year. In 2020 and 2021, most of our operations will probably have something to do with the crisis. In some cases, funding may not fall under the fast track option and might take longer to approve, but just judging by the first few months, I think this will be a year where we’ll do more in Egypt than we have in the past.
We can still do more with the Egyptian private sector including onlending banks. We do have an estimate based on investments during the previous year and how that work panned out, so there is a sense of what we’re able to do and we plan accordingly, but it will always depend on demand. It’s unlikely that we’re going to double our investment from one year to the next, because it’s unlikely that demand and opportunities will increase that much. However, we always maintain a degree of flexibility to be able to take a really good proposal as it comes and finance it.
E: Based on how the past couple of years have played out, are there any sectors that the EBRD is focused on in particular?
HH: In the past, we’ve tried to support renewable energy projects. Our biggest was obviously the Benban solar power park, but last year we also supported solar and wind energy projects in Egypt, partially because we really believe that this is the competitive solution for the future and partially because Egypt has such amazing energy resources. So I think renewables will remain a focus, and we’ll go deeper into the energy value chain. Other areas where we’ve been active in the past and want to maintain are municipal services — water, wastewater, and solid waste — national canals and irrigation, which is an area where Prime Minister Moustafa Madbouly signaled to us that Egypt is very keen on developing. There’s a national canal program right now, which will save water, help with irrigation, and rehabilitate a lot of water canals to make them more environmentally compliant and reduce water waste.
As a whole, we want to support projects that have a positive impact on the average Egyptian, and we try wherever possible to work with the private sector. That applies to private sector companies being awarded tenders to carry out government infrastructure, but it also goes into the corporate sphere where we’ve worked with agribusiness, equity funds, property and tourism. We’ve been very involved in urban transport projects like the Cairo Metro. In the transport sector alone, our investments have surpassed EUR 750 mn, so this will remain an important sector.
In 2020, the composition of our investments might be skewed a little more towards financial institutions than in previous years, because I think that some corporate sectors are still trying to assess the damage of the crisis to determine their actual needs. We expect to see them coming to us more towards the end of the year, once they’ve formulated a more concrete outlook on how we fit into that.
E: In hindsight, are there any sectors where you think the EBRD could have been more involved?
HH: The health sector at large, which we only started supporting last year and is now more important to support than ever. We were involved earlier this year in the sharia-compliant “commodity murabaha” financing for Al Batterjia Medical Group to build greenfield hospitals in Alexandria and Casablanca. Demand on public and private healthcare will increase, so it’s a sector we’ll look at more closely. The EBRD has always supported the pharma sector, but healthcare specifically and all related sectors, like health advisory companies, could be interesting sectors for EBRD in the future.
The importance of healthcare now is that it will also feed into other critical industries such as tourism. The recovery of tourism will depend largely on the health standards you can ensure for travelers in order to be a bit ahead of the curve in terms of reopening. So all of these companies along the tourism value chain will need to have a lot more awareness, and training and implementation of health and sanitation practices going forward.
I do believe that there’s more to be done with Egyptian manufacturing than we have in the past. It’s a bit of a challenging sector, but I think there is more capacity and we haven’t really invested that much in the sector yet. This could change if the government doubles down on increasing the speed of licensing and giving the sector space to breathe.
E: Where does Egypt’s privatization program fit into the bank’s investment plans in the country? If the government decides to revive the plans this year, would the EBRD still be interested in the Banque du Caire IPO?
HH: We would definitely look at it very seriously, although it would depend: Is it the right time? What are the circumstances? But the bottom line is that we are supportive of IPOs in general in Egypt, so we would be looking very seriously at it again if it happens later in the year.
E: How does the EBRD decide on whether to opt for equity, loans, or tier two finance?
HH: This is based solely on demand. We come up with tailor-made, project-by-project design to try to choose the best instrument for a given project or company. That’s the first order of business — what is the best structure for this specific case? But of course, it does take time to build trust with companies for them to invite you as an equity participant, so it usually ends up with the bank starting out with debt. We start with loans, and then maybe move on to a tier two financing instruments — this is sort of like an engagement period before moving on to the proverbial marriage. It’s a big thing to be an equity partner: We take a huge interest in the governance, and we want to add a lot of value at the company level, so it just takes time to build that up. Although we really think that our equity investments are often the most impactful ones, we always start smaller.
Globally, around 10-15% of what we do is equity. We can do more, but I think in emerging markets in particular, there isn’t that much demand yet. It’s challenging, but there is more upside to equity investments. The question also remains — now as much as before the crisis — where to exit. How many IPOs happen in Egypt, in any given year?
E: Looking at the job market here in Egypt, there’s a lot of technical talent that is sapped from the domestic market in favor of more appealing markets like Europe. Is this on your radar as something the EBRD is looking to address?
HH: We’ve seen the numbers there, so we’re both aware of and concerned about this issue. The EBRD is looking at it in two ways: One is closely related to the crisis response, because we have a huge inclusion agenda and an inclusion crisis response where we help companies train, and retrain talent. The idea is that we’ve set up different tailor-made training and HR programs for companies, as well as training recruiting programs, with an eye on inclusion for women, young people, and people who may be from disadvantaged regions of the country. We also work with the government on labor market policies to help Egypt retain its top talent.
We’re also focused on tech startups. We’ve recently launched a program across the regions where we invest that we piloted in Egypt and Jordan. We selected some tech startups and gave them an intensive one-year support program with mentorship and advisory support. It’s not funding support but it does help them with fundraising. We’re also invested in global and regional equity and venture funds that invest in tech companies and startups.
It’s really critical to realize that know-how matters. That’s one thing we’ve done not just with tech companies but small businesses in Egypt. It’s been very interesting to see how their requests for advice have shifted during the crisis from something maybe more closely related to typical quality improvements and HR practices to really become so much more tech-focused, how to improve digital marketing, how to reach new online markets, what to do with an online payment system, and so on. We’re also tailor-making our advisory program now as supported by our donors to account for the changing landscape through the crisis.