Monday, 9 January 2017

The Enterprise 2017 CEO Poll, Day One

TL;DR

What We’re Tracking Today

** Our first Enterprise CEO Poll kicks off this morning. We’ll have 13 top executives speaking over the course of this week in industries ranging from financial services to food, banking, private equity, manufacturing and law. We’re also very pleased that one of the most influential fund managers on Wall Street with an interest in Egypt has also joined us. We’ll be running the interviews all week long — alphabetically by last name — in the place of our industry news roundups, which will return next week.

Stability is the watchword of 2017. CEOs want policy stability from government on everything from taxes to investment incentives, but don’t expect economic or exchange rate stability until sometime starting the second half of the year, at the earliest. On the whole, they’re more optimistic about the long-term prospects for the economy and their business than they are apprehensive about what they almost universally agree will be a challenging 2017.

The format: Each CEO answered roughly the same set of questions, tailored only for their industry. The interviews have been condensed and edited for clarity and are presented in “as told to” format — that’s journalism speak for “in their own words.”

Today’s participants are:

  • Karim Awad, group chief executive officer, EFG Hermes
  • Ahmed Badr, MENA CEO and head of MENA equities, Renaissance Capital
  • Ahmed Badreldin, partner, The Abraaj Group

Their interviews begin after our Image of the Day, below.

Eight Irish Parliament members (TDs) are in Egypt today on a five-day visit to meet with detained Irish citizen Ibrahim Halawa in prison. Halawa was arrested during protests in August 2013 and awaits trial. The TDs will also meet with “representatives of the Egyptian parliament and government later in the week,” according to The Irish Times. The visit came through an invitation from Egypt’s House of Representatives.

Enterprise+: Last Night’s Talk Shows

Med prices are rising, Cabinet spox says: Yahduth Fi Misr’s Sherif Amer spoke to cabinet spokesperson Ashraf Sultan, who said Prime Minister Sherif Ismail wants med prices to increase as soon as possible — before 1 February at any rate. Amer also hosted Social Solidarity Minister Ghada Wali, who said the ministry will be taking a census of the number of citizens with disabilities starting next month.

Bankruptcy law getting some traction: Over on CBC, Lamees El Hadidy spoke with Khaled El Nashar, a media advisor to the Justice Ministry, who said the effective elimination of debtor’s prison is the hallmark of the proposed bankruptcy act now making its way through the system. (watch, runtime 7:48). Lamees then moved on tuition fees at international schools, where an Education Ministry official told her it is illegal for schools to collect fees in any currency other than the EGP (watch, runtime 25: 42).

Speed Round

Speed Round is presented in association with

Egypt’s planned eurobond roadshow will focus on Dubai, Abu Dhabi, London, New York, Boston, and Los Angeles, Al Mal reported. The eurobonds’ promoters and underwriters have completed their plans and expect them to be approved by the Finance Ministry within days, sources said. The USD 2.5-3 bn issuance is being managed by BNP Paribas, JPMorgan, Citi, and Natixis. Deputy Finance Minister Ahmed Kouchouk had said the issuances are expected to include bonds of five to ten year maturities, with also a scope for a 30-year issuance. Egypt is reportedly looking to issue a total of USD 5 bn in eurobonds in 2017.

The news comes the same day that Finance Minister Amr El Garhy briefed President Abdel Fattah El Sisi on the state of the economy and expectations of 2017, the domestic press reports.

The Egyptian Competition Authority (ECA’s) decision to refer the Confederation of African Football (CAF) to prosecution over anti-competitive behavior is not an open invitation to pirate broadcasts of the African Cup of Nations, the ECA said. Organizations such as CAF have a duty not to abuse their position in the market, the ECA explained in a statement. Chairperson Mona El Garf told Al Masry Al Youm in an interview that the ECA’s action now requires CAF to offer broadcast rights for the competition to another outlet aside from Lagardère Sports — while also protecting the rights of those who paid to get access to view the games.

The interview, littered with video excerpts of El Garf’s comments, delved into other high profile ECA cases. El Garf spoke about violations in distributing medications and fertilizers, two cases her office asked prosecutors to investigate in 2016. Al Masry Al Youm also asked about Abraaj’s hospital acquisitions, without naming the company directly, and El Garf responded unequivocally saying that her office looked into them and found they do not pose any threat to competition in the healthcare market.

Health Ministry gives in on pricing for meds treating chronic conditions: The Health Ministry has reportedly agreed to pharma producers’ demands and will raise the prices of meds used to treat chronic diseases, sources tell AMAY. The ministry “had no choice” but to agree to the hike to avoid facing a shortage in those types of medications later on, they added. The government had said in a statement that it would only increase prices for medications that treat non-chronic illnesses, provoking a backlash from pharma producers.

AMOC and Enppi in line to become the first state-owned companies to offer shares on EGX this year: Additional shares in Alexandria Mineral Oils Company (AMOC) could be offered on the EGX and petroleum industry contractor Enppi could IPO in the first phase of the state’s “IPO program” for publicly owned companies, Al Borsa reports.Investment Minister Dalia Khorshid said during a press conference that the Investment Ministry will begin promoting the offerings after obtaining official approval from the two companies’ board of directors. The government is expected to offer a number of other companies by the end of 1H2017, the newspaper speculates. The story does not mention Banque du Caire, which had been widely expected to be the first IPO out of the program.

Reuters hits the trifecta this morning with stories on the public’s limited patience with the economic reform program, a note that the EGP is strengthening against the USD as demand from importers cools and a third piece suggesting that the rising price of building materials could send real estate prices up by as much as 30 percent.

MOVES- Naglaa Mousa Balabel has been appointed head of the Agriculture Quarantine Agency, the Agriculture Ministry announced. Balabel replaces Ibrahim Imbaby, who had been appointed to head the agency in March. The Agriculture Ministry gave no reason for the change, Reuters says, noting that “Imbaby had replaced Saad Moussa, who insisted that imported wheat should contain zero levels of the ergot fungus against more internationally acceptable standards of 0.05 percent.

Egypt beat Tunisia for the first time since 2002 in friendly held as a warm-up for the Pharaohs’ 2017 African Cup of Nations quest. Marwan Mohsen put the team ahead late in the game as the match ended 1-0 for Egypt. King Fut has the blow-by-blow as well as post-game commentary from coach Hector Cuper. The UK’s Sun has what it claims are Reuters images of a clash between fans and police at the match.

The Golden Globes are entering the home stretch as we write this. The New York Times is updating the list of winners in real time and The Guardian is doing an excellent job with its liveblog, and we’re a bit grumbly that The Americans have been left out. Also surprised that The Crown has taken home best drama series. You can look for the commentary later today, but in the meantime, the most satisfying thing to do is to scroll through the official Golden Globes website as they update the winners and enjoy the mugshots, including a slightly demented-looking Mel Gibson.

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Enterprise is available without charge — just visit our English or Arabic subscription page, depending on which edition you would like to receive. We give you just about everything you need to know about Egypt, in your inbox Sunday through Thursday before 7am CLT (8am for Arabic), and all we ask for is your name, email address and where you hang your hat during business hours.

Egypt in the News

The Economist’s Cairo bureau chief Roger McShane is not happy with the way Egypt treats journalists and believes the country has a PR problem, he writes for the newspaper’s sister magazine 1843. “The state often veers from one extreme to the other in its treatment of the press. We are blocked from reporting stories and berated for our bias, and then invited to grand events and fancy conferences — where we are often blocked from reporting and berated for our bias.” McShane says that despite the mns of USD paid to Western PR firms, the efforts are undermined by officials “who are deeply suspicious of the press.”

Italy-Egypt relations are smooth, despite the Giulio Regeni case, Chiara Cruciati writes in Il Manifesto. “Ambassador to Cairo or not, other evidence shows Italy-Egypt relations have never really changed. Commercial ones, that is,” Cruciati says, pointing specifically to the contracts signed with Energy producers Zohr and Edison. “This commerce stifles the efforts of those seeking truth for Regeni. The interests of Italian companies in Egypt are well worth the normalization of relations, she says.

Over to the French media, AFP has a story, picked up by Le Parisien, about Egyptians pooling funds to afford weddings, framing the piece as “helping Egyptians living in a period of deep economic hardship to find funding outside the banking system.” It’s not a new trend, but the practice of no’ta — and you won’t find the images in the story or the footage at the end of the accompanying video in the domestic press.

Image of the Day

Declassified CIA maps: The CIA declassified a number of once-secret maps in celebration of its cartography division’s 75th birthday. The Smithsonian says “these days, the C.I.A. and other intelligence agencies rely more on digital mapping technologies and satellite images to make its maps, but for decades it relied on geographers and cartographers for planning and executing operations around the world.” While interesting to look at, as Smithsonian argues, it is sobering to remember that these maps had a major role in shaping global politics and include, for example, some of the documents US government officials used to plan the Invasion of the Bay of Pigs in Cuba in the 1960s, predicting global trade in the 1950s, and assessing Middle East oil production in 1951.

The 2017 Enterprise CEO Poll

Karim Awad, Group CEO, EFG Hermes

Karim Awad has led EFG Hermes since 2013, bringing the firm back to profitability in the wake of fallout from 2011 revolution. He has solidified its position as the region’s leading home-grown investment bank and directed its expansion since 2015 into non-bank financial services, including financial leasing and microfinance. Awad is presently taking EFG Hermes into global frontier markets and rolling out a merchant banking model. He’s soft spoken and modest, a critical thinker who came up through the investment banking side of the business, which he joined in 1998. Awad has led and closed transactions with an aggregate value of more than USD 40 bn. Excerpts from our conversation:

2017 will be the year of adjustment. The world is going through a tremendous period of change, and our region is far from immune. When you combine that with the period through which we’re passing in Egypt with the government’s reform agenda, the level of change is historically unprecedented. There’s no doubt in my mind that the reforms are spot on in terms of what they will do for the long-term health of the economy, but they will pose short-term challenges. Companies will have to adapt to an environment quite different from what they saw in 2016 — or any other year in recent history. The free float, the phase-out of subsidies, rising prices of utilities and fuel, the implementation of the VAT, inflationary pressure, rising cost of labour — everyone has completed their analysis of how these factors will impact the overall health of their business, and 2017 will be a year in which we all adjust our plans as we go.

The biggest challenge for the economy is bringing in investment, whether that’s direct or portfolio. Direct investment is much more important at the moment — it’s the only way to sustainably create employment and drive the long-term health of the economy. The immediate impediment to attracting direct investment has been removed by highly courageous decision of the currency float that dealt with the problem as a whole and through a devaluation piecemeal. But there are still other impediments that need to be dealt with in the same manner. We need to remember that non-Egyptian investors with significant foreign capital to deploy have a multitude of global investment destinations from which to choose. We need to make sure that we stand out.

The passage by the House of Representatives of a very good investment law is a starting point, but we also need to remember that ongoing communication is going to be key. There needs to be a continuous dialogue between the government and the investment community. They’ve been very good at that across all of the key ministries, and it needs to continue.

The government needs to continue to listen to the issues that businesses and investors bring to the table. Identifying those and dealing with them quickly and proactively will make our jurisdiction stand out. We need to be seen as offering a pro-business environment.

Our industry faces many challenges in 2017, most of which are a direct outgrowth of the highly volatile nature of the business. We have a set strategy and business goals, and we can always control costs, but we have comparatively little control over revenues. We’re the largest brokerage house in the UAE, Egypt and Kuwait, for example, but if trading volumes thin out, there are limited levers you can pull to generate brokerage revenues.

We will definitely be implementing raises — our people are our biggest asset. You deliver the best quality services by having the best quality people. We’ll retain staff by addressing inflation, by giving them access to on the job training, exposure to the best transactions and by ensuring that young, dynamic professionals who come up through the ranks with us have clear paths to advancement. In our high burnout industry, it’s always healthy for younger people who have been nurtured in the firm’s culture to come into senior positions with a renewed drive and energy.

Our industry’s biggest opportunities are product-related. We need to grow beyond the plain vanilla products we all offer today. We have led the way by investing significant capital and resources to open our leasing business in 2015 and then again in 2016 with the acquisition of Tanmeyah, which form the backbone of our non-bank financial services platform. There’s more to come on that front in 2017. Our private equity division has been very innovative with its investments in yield-generating renewable energy assets in Europe. Brokerage and Research have just launched a comprehensive online trading platform in cooperation with SaxoBank. It’s about thinking outside the typical product box to create more opportunity to maximize cross-selling and minimize volatility.

I do think the IPO outlook will be quite healthy in many parts of the region. The recovery of capital markets will be key — robust capital markets are very helpful in attracting new listings. We’ve led 10 companies through successful IPOs since 2014 on the DFM, LSE, Nasdaq Dubai and the EGX. That’s more than any other player in the region. And we entered 2017 with a good pipeline in Egypt and the UAE, all of which are exciting equity stories that will, in many cases, provide investors with access to underrepresented industries and even industries not presently presented on the exchange.

We’re starting 2017 with much stronger trading activity on the EGX in particular, and more importantly, the diversity of investors has shifted dramatically since 3 November. We no longer see only Egyptian retail and Egyptian institutions participating — we’re also seeing a lot of very large tier-one foreign investors coming heavily into the market. The best thing about this is that they see opportunities in Egypt not just because of cheap valuations, but also because they see the EGP moving in their favour before they exit.

What are investors asking? When I met investors at our One on One conference in March, every single person came into the room asking about the economy. Very few were drilling down into EFG Hermes itself. By September at our London conference, it had turned 180 degrees. Today, all of the investors we meet are asking about us, about our plans for the year ahead. I think every listed company is seeing this today. Investors are now looking for the right opportunity because they feel a lot more comfortable with the macro picture than they did at the beginning of the year.

Egypt will see strong M&A flow in 2017, and we have a strong GCC pipeline, too. The reforms the government is undertaking and the eventual resolution of currency volatility are key here. The volatility you see today in the currency is very short term when looked at in terms of the horizon of a long-term strategic investor. I think a large percentage of our M&A transactions will be cross-border and will be more likely to be financed by equity than debt given the high interest rate environment. It’s going to be great for the FDI flows into the country and for the CBE’s reserves.

Commercial banks will continue to do very well. The market remains highly under-penetrated, whether you’re talking about retail or SME banking, and everything from the ongoing budget deficit to high interest rates to a high level of liquidity are in favour. As the economy starts its recovery, they’re also likely to find a lot of opportunity in syndicated facilities, in corporate lending and in growing their fees and commissions business. Non-performing EGP and USD-denominated debt might be the downside for them, but the banks are by and large well capitalized and over-provisioned, and the central bank has been quite strict about USD lending for some time now, so I don’t think we’re going to see much in the way of major defaults.

I’m not sure I can pinpoint one sector — on its own — as the worst-performing, but cost inflation will be very challenging for most businesses. Wage costs will rise, the cost of debt is rising and utility outlays are rising. Everyone on the cost-side of the income statement will be growing faster than will the corresponding revenue-side in 2017. I do see it will be challenging for most industries to pass on the full impact of rising costs, so margins will be squeezed.

If I were to start a new business today, I would have loved for it to have been a restaurant, but my culinary expertise is limited, and I know my business. I’m a big believer in the migration of businesses to digital, in online delivery. That’s why we are launching EFG Hermes One. I would have done something fintech related. I’m a big fan of companies like Fawry, and we have so much incredible young brainpower in Egypt that I can think of any number of innovative fintech products. Whether personally as an investor or as EFG Hermes, I find fintech very compelling going forward.

The government is quite cognizant of the need for regulations to ease the flow of investments into Egypt. I would really want to see movement on the Suez Canal economic zone, which could be a major game changer for the economy as a whole and a huge source of job creation. Obviously, the sheer size of our market is going to be the primary driver of investment in Egypt, but the Suez Canal economic zone could really be transformative by turning our geographical location into a major logistics and industrial hub that would see us be the gateway between Europe and Asia.

For Egypt to increase its export potential, we need as a nation to decide what our competitive industries will be. What advantage do we have over Bangladesh or Southeast Asia in textiles? Why would we focus on technology or agriculture? Once those are identified, incentives for investments in those industries should be given to help nurture and grow them into globally competitive companies that can compete on a global scale and bring much needed dollar inflows into Egypt.

I hope the question we’ll be asking at the end of this year is whether we were too risk averse. We’re in the midst of so many changes and everyone tends to walk on the side of caution. Think about it: Nassef Sawiris one of the smartest business people in Egypt. He undertook a massive investment program in the late 90s and early 2000s when things were very difficult in Egypt. By 2004, the country took off in major way. I bet a lot of people looked at him then and said, “I wish I had done the same. I wish I hadn’t been so risk averse.” It will be a great problem to have if we are in a similar situation and asking that very question in December 2017.

Ahmed Badr, MENA CEO and head of MENA equities, Renaissance Capital

Ahmed Badr leads Renaissance Capital’s MENA business and oversees growth strategy in the region. He joined RenCap from Credit Suisse, where he headed the MENA equities franchise in Dubai and Riyadh. He earlier spearheaded equity sales efforts at Credit Suisse in Dubai and was previously a top-rated analyst heading MENA real estate and infrastructure research at the bank. He joined Credit Suisse in 2008 from HC Securities, where he was a senior analyst covering real estate and construction. Readers will recognise Badr from his firm’s aggressive push into MENA and from his frequent appearances on Bloomberg’s morning show, where he takes visible delight in offering contrarian — and exactly on point — commentary.

2017 will be a year of reforms, and the biggest challenge for the economy will be in the implementation. Apart from subsidies and the general economic reform program, the most important thing was the currency. The float was unquestionably the right move, but letting the currency go without ambitious reforms and improving the business environment — and the latter is what is going to bring FDI back — doesn’t help much. That said, there is a clear and strong will for reform, which is made evident by the government’s recent moves. The key challenge is the business environment: bring back tourism (which is already picking up), make it easy for investors to get land and licenses for new factories, et cetera. If the local private sector has the confidence to effectively play their expected key role in the local economy, foreign investors will follow. 2017 needs to achieve this; otherwise, the currency will continue to depreciate if we don’t achieve positive net inflows into the economy.

Banking will do very well in 2017. The wider economic recovery will bring corporate lending back, with all of the positive implications that entails. I also see nascent sectors such as healthcare and education doing well, and the consumer sector will perform more strongly in the second half of this year. The market will adjust to the new reality when it comes to inflation.

My theory is that the informal economy is probably much bigger than the formal economy — it is multiples of the formal economy in my view, which always helps support purchasing power in Egypt. Look at the pictures from shopping malls on Black Friday after the float and you will soon jump to the same conclusion that consumers still have purchasing power. They seem to be negatively affected right now, but I don’t think it will be as severe as many people expect. There is income from the grey economy that, as an economist, you cannot put in numbers. It is unquantifiable, but is definitely a major force that enhances economic activity, in my view.

The float is bringing liquidity from the informal economy into the formal economy. Today, you don’t have two exchange rates — that was the first challenge. There is no longer an incentive to go to the parallel market. The second aspect is confidence, which is extremely important. In my view, the EGP is not going to appreciate towards its real fair value until confidence fully returns. The currency isn’t doing as well as some expected after the float given the FX backlog that has been building up over the years. Everyone thought the currency would overshoot and cool down as liquidity moved into the formal economy. However, it hasn’t cooled down yet given outflows and USD needs. This will adjust in the medium term, and we should see a stronger EGP, especially as capital controls are removed and confidence in the free movement of capital regime builds up. I believe the government is keen on supporting and promoting a free market, which is very positive.

On the stock market side, many foreign investors are still a bit hesitant because repatriation isn’t yet completely resolved. It’s totally understandable if this is a second priority given the size of our import bill, but it needs to happen soon, and I believe the government should be comfortable opening it. In the onset, you might see outflows, but if valuations are attractive — and they are indeed as Egypt is very cheap in USD terms — the money will come back.

What sector do I see underperforming next year? Consumer will likely underperform early in the year before it recovers in the second half. I actually see property being stable, because the weakening of the EGP has made real estate attractive in USD terms. Another sector that might underperform is perhaps cement, given the market is already oversupplied and more capacity is coming on line. However, if we’re right about the reforms and they start to kick in this year? I don’t see many sectors underperforming after the first half.

Our clients on the issuer side are asking about demand for Egyptian equities, and I’m telling them that demand is always there at the right price. And valuations are attractive today, so if you price your instrument right, then that is great.

Fund managers definitely have appetite for Egypt. South Africa has the heaviest appetite given their mandate to invest in Africa ex-South Africa. Nigeria has a number of problems, and Egypt is both much more attractive and weighted heavily. They’re asking a lot about consumers right now, but I think the key question they’re asking is about the shape of the economic recovery and whether we’re going to become an industrial economy. My answer is that we’re not — not in the short term. That’s going to take time, and the bureaucracy isn’t to going to help. That needs to change first. For us to become a manufacturer on the order of Turkey and Morocco is going to take significant (but needed) legislative changes, and that’s going to take time. We have little to offer in terms of export now apart from tourism, which should be our primary focus.

But tourism is an export, and Egypt is cheap. If security is good and you invest in the service industry to support hotels, people will come. The problem is that if you as a tourist have a bad experience, you are less likely to come back no matter how cheap it’s going to get. We need to invest in and improve our services industry.

Many people are overlooking how important remittances will be in 2017. They’re huge — it’s a USD 18-19 bn flow that fell to eight, and over the last two years, that’s mostly been channeled through the parallel market. You lost money that was going to the banks. Today, there’s no excuse, and people are transferring home now. Property prices have been cut in half in USD terms, so it’s a great opportunity for the Egyptian diaspora.

The IPO outlook is very, very interesting. We’re going to have quite a few offerings, and good businesses will be an easy sell. The only real downside risk is the possibility of the offerings being too small. So there’s a risk of some crowding if you have a bunch of USD 5,10, 15 mn offerings that just don’t go anywhere. But the market is smart — these will get filtered out. The noise will drop off.

If I’m positive on IPOs, I have to be positive on M&A activity. There are always people who want out of the market and others who see the opportunity as now being very attractively priced in USD terms. Whether you’re selling a portion of a company via IPO or M&A, it doesn’t matter. It’s going to be a combination of all of it, and we’re busy on all fronts.

Outside of Egypt, I like Saudi Arabia in 2017. I think it will be very interesting. Reform is a very new concern in Saudi — they’ve never done something so extensive, and they’re actually slashing subsidies and changing. I think the market has so far priced in all the negative elements. It’s time for it to move, because the market is cheap.

If I was going to start a new business today, it would be high-end restaurants in Egypt. There’s very little outside the hotels, and they’re incredibly expensive. If there’s even a tiny portion of the population that can afford it, that is still a huge number in absolute terms, and the supply side is non-existent.

Ahmed Badreldin, Partner, The Abraaj Group

If you’re looking for investment ideas, you could do far worse than watching what Ahmed Badreldin does next. A partner at emerging markets private equity giant The Abraaj Group, Badreldin oversees the firm’s investments in the Middle East and North Africa and led its push into healthcare (Cleopatra Hospital Company, Integrated Diagnostics Holdings) and education (CIRA’s Future Schools). Abraaj was also an early investor in ride-sharing app (and newly minted unicorn) Careem. Badreldin joined Abraaj from Barclays Capital in London. A mechanical engineer by training, he was earlier with oilfield services outfit Baker Hughes and serves on boards across the MENA region.

2017 will be the year of concern in certain areas. The primary issue for the businesses in which we’ve invested will be wage and cost inflation headwinds, followed fairly closely by uncertainty on the foreign exchange front. We will probably start to see the fruits of the float in the second half of 2017 as the currency begins to strengthen and likely stabilise given the inverted forward curve.

High interest rates will definitely make investment decisions more difficult for some businesses. When you’re looking at deposit interest rates at 19-20% for 18 months offered by some banks, investing in capex and new capacity will demand higher returns compared to simply parking liquidity in a time deposit. And with interest rates high to attract interest from investors in the EGP carry trade, rates are unlikely to come down significantly until you have FX stability.

It’s counterintuitive, but I think we need to ask what happens if interest rates were to be lowered as a form of stimulus. Assume that inflation is running high right now because of the one-time impact of the float. Interest rates aren’t going to be an effective means of transmission in that scenario — and they hit businesses hard. Most businesses are borrowing at a floating rate — the more rates rise, the more they pay. It’s going to make investment decisions more difficult and prompt some hard decisions about how you raise capital.

Inflation and interest rate headwinds are the biggest barriers to an optimistic outlook on the IPO pipeline. Foreign public market investors are keen on Egypt now that the discrepancy between the parallel and official market rates is gone. They believe that from a macro perspective, you can’t afford to miss out on Egypt. But the question is whether it’s going to be cheaper to raise capital from an IPO or via a loan from a bank. If you see the bank funding rate staying high or going higher, it will nudge companies toward an IPO. The flip side, though, is that if you’re a public market investor, you need to believe that you’re going to make more than 20-25% per year to be able to put money into Egyptian stocks against parking them in the carry trade in a bank at 18-20% in a time deposit risk free. This is the biggest headwind for public markets.

And remember: As inflation rises, valuations will have to come down. There’s an inverse relationship between P/E ratio and inflation. If you look at other markets — take Brazil — you’ll see that when the country had high inflation, P/Es were in the low single digits. That’s a key concern.

Is hyperinflation in the cards? It’s certainly true that some economies that have seen inflation rise to 20% have gone on to hit 30%+ if not managed — it’s a vicious cycle, particularly for an import-dependent country that’s just gone through a float. You need to create employment, which means you need the private sector to invest. And if they’re going to invest in new capacity and job creation, they need the funding. That funding can take the form of equity or debt, and the direction will be shaped by the cost of borrowing. If the government sees inflation as a one-time adjustment in response to the float, the way forward may be to reduce interest rates to stimulate investment.

If every company implements a 20% wage rise, we’re going to see inflation next year at 25%. The way we approach it is simple: Wages should go up by no more than high single-digits or low double-digits, and if you need to do more than that, then it needs to come in the form of variable compensation and improved productivity and efficiency. And I think it’s obvious that the wage catch-up needs to be higher for lower wage earners than for those in more senior positions. We’re looking to reward middle and senior management with variable compensation so that there’s an incentive to grow the company rather than just clip the salary.

What sectors will underperform? To start, I would look beyond regulated sectors, which can be problematic in the context of a structural devaluation. Pharma will underperform unless price controls are loosened, particularly with almost all of the raw materials being imported; they need breathing room. Housing and construction could also face some headwinds given erosion of purchasing power and inflation on the raw materials side. Beyond that, look at sectors that have high human capital costs with a heavy wage component and limited ability to market pricing power.

Healthcare services will likely continue to outperform. There may be some inflationary pressure on the wage side, but pricing is market-driven. Pharma will do well if regulation is relaxed and price increases allowed. Margins are being compressed in food, but they’ll catch up given how strong and robust demand is. Power generation and related sectors should do well, as should infrastructure, all on the back of strong fiscal stimulus.

We’ll definitely be investing in healthcare. We see room in healthcare services to consolidate and to invest in medical technology and capacity growth with a focus on patient care and safety. We also see room to invest in capacity growth in education. We would also consider investing in pharma, depending on the opportunities that arise and developments with pricing and regulation.

Our North Africa fund is invested almost equally across Egypt, Tunisia and Morocco with some exposure to Algeria. Egypt certainly has the largest volume of dealflow, though one of the impediments to investing in 2016 was the spread between the parallel market and central bank FX rates. It should be more attractive to deploy capital this year given the float. Last year, Tunisia was our number one market by deal volume, while Egypt was second.

Within private equity in Egypt, there’s a significant discrepancy between the high- and low-volume players. Some are getting great dealflow, others are struggling to find transactions. The question for us hasn’t been dealflow but the fact that in many cases valuations haven’t reflected reality on the ground, particularly when you consider the inflation and supply-demand situation in some sectors. But volume is definitely there in Egypt — it’s one of the few regional economies that has such a diverse number of sectors. That’s a key positive. And the intermediaries, particularly the investment banks, have done a good job sourcing some M&A opportunities, developing transaction ideas and spending time before private equity comes in to prepare sellers. Overall, Egypt is one of the most promising markets for private equity in the region.

The most common questions we’re asked by limited partners: What’s happening with the foreign exchange situation? Where’s the EGP going? Also: What’s going to happen with inflation and its impact on wages and corporate profits?

What haven’t you asked me? You didn’t ask me where things stand in terms of ease of doing business. You hear all of this chatter about how Egypt is difficult and bureaucratic. Our experience — and we have been investing here for over a decade — is that things have been on a positive trajectory, and we honestly can’t say we faced difficulties. The government has really streamlined approval processes, and policy makers are willing to listen and take action to create an enabling framework for investors. Our activity in Egypt is a testimony to this.

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EGP / USD CBE market average: Buy 18.0231 | Sell 18.2640
EGP / USD at CIB: Buy 17.86 | Sell 18.11
EGP / USD at NBE: Buy 17.86 | Sell 18.11

EGX30 (Sunday): 12,891.39 (+0.52%)
Turnover: EGP 1.537 bn (253% above the 90-day average)
EGX 30 year-to-date: +4.42%

THE MARKET ON SUNDAY: The EGX30 ended Sunday’s session 0.5% up. CIB, the heaviest stock on the index closed 0.2% down. Sunday’s top performing stocks were Porto Group, Telecom Egypt, and GB Auto. Sunday’s worst performing stocks included Domty, Emaar Misr, and ACC. The market turnover was EGP 1.5 bn and local investors were the sole net buyers.

Foreigners: Net short | EGP -1.8 mn
Regional: Net short | EGP -37.4 mn
Domestic: Net long | EGP +39.2 mn

Retail: 79.8% of total trades | 81.7% of buyers | 78.0% of sellers
Institutions: 20.2% of total trades | 18.3% of buyers | 22.0% of sellers

Foreign: 9.3% of total | 9.2% of buyers | 9.3% of sellers
Regional: 7.6% of total | 6.3% of buyers | 8.8% of sellers
Domestic: 83.1% of total | 84.5% of buyers | 81.9% of sellers

WTI: USD 53.82 (-0.31%)
Brent: USD 56.99 (-0.19%)
Natural Gas (Nymex, futures prices) USD 3.25 MMBtu, (-1.16, February 2017 contract)
Gold: USD 1,173.90 / troy ounce (+0.04%)

TASI: 7,138.86 (-0.83%) (YTD: -0.99%)
ADX: 4,623.82 (+0.48%) (YTD: +1.70%)
DFM: 3,692.22 (+1.77%) (YTD: +4.57%)
KSE Weighted Index: 386.95 (+0.54%) (YTD: +1.80%)
QE: 10,725.98 (+0.08%) (YTD: +2.77%)
MSM: 5,792.54 (-0.00%) (YTD: +0.17%)
BB: 1,209.75 (+0.28%) (YTD: -0.88%)

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Calendar

13 January (Friday): Egypt to attend Africa-France Summit 2017 in Mali.

15 January (Sunday): 19th session of the Egypt-Jordan Business Council, Cairo, Egypt.

15-17 January (Sunday-Tuesday), International Conference on Improving Sustainability Concept in Developing Countries, Cairo.

17-18 January (Tuesday-Wednesday), Underground Infrastructure & Deep Foundations Egypt, Nile Ritz-Carlton, Cairo.

22-31 January (Sunday-Tuesday): 28th African Union Summit, Addis Ababa, Ethiopia.

24 January – 26 January (Tuesday-Thursday): Global Oil & Gas Middle East and North Africa 2017, Cairo International Convention Center, Cairo.

25 January (Wednesday): Revolution (police) day, national holiday.

28-29 January (Saturday-Sunday), International Conference on Computers, Data Management and Technology Applications, Intercontinental City Stars, Cairo.

January 30-February 1 (Monday-Wednesday): Beltone Financial’s Africa’s Era, Egypt’s Moment Conference, Cairo.

30 January – 2 February 2017 (Monday-Thursday): Arab Health Exhibition, Dubai International Convention & Exhibition Center, UAE.

14-16 February 2017 (Tuesday-Thursday): Egypt Petroleum Show 2017 (EGYPS), CIEC, Cairo.

15-16 February (Wednesday-Thursday): International Conference for Globalization & Emerging Economies, Alexandria.

21-23 February (Tuesday-Thursday): Egypt Energy Investment Summit, Nile Ritz-Carlton, Cairo.

06 – 08 March: 13th EFG Hermes One on One Conference, Dubai, United Arab Emirates.

07-09 March (Tuesday-Thursday): Microfinance forum, Nile Ritz-Carlton, Cairo.

09-11 March (Thursday-Thursday): Egypt Projects Summit, Cairo International Convention Center, Cairo.

29-30 March (Wednesday-Thursday): Cityscape Egypt Conference, Nile Ritz-Carlton, Cairo.

31 March – 03 April (Friday-Monday): Cityscape Egypt Exhibition, Cairo International Convention Center, Cairo. Register here.

03-06 April (Monday-Thursday), Agri & Foodex Africa, Khartoum International Fair Ground, Khartoum, Sudan.

08-10 April (Saturday-Monday), Pharmaconex, Cairo International Convention Center, Cairo.

16 April (Sunday): Coptic Easter Sunday.

17 April (Monday): Sham El Nessim, national holiday.

24-25 April (Monday-Tuesday), Renaissance Capital’s Egypt Investor Conference, Cape Town, South Africa.

25 April (Tuesday): Sinai Liberation Day, national holiday.

30 April – 3 May (Sunday-Wednesday): Cement & Concrete 2017, Riyadh International Convention & Exhibition Center, Saudi Arabia.

01 May (Monday): Labor Day, national holiday.

27 May (Saturday): First day of Ramadan (TBC).

26-28 June (Monday-Wednesday): Eid Al-Fitr (TBC).

30 June (Friday): 30 June, national holiday.

23 July (Monday): Revolution Day, national holiday.

02-05 September (Saturday-Tuesday): Eid Al-Adha, national holiday (TBC).

22 September (Friday): Islamic New Year, national holiday (TBC).

06 October (Friday): Armed Forces Day, national holiday.

01 December (Friday): Prophet’s Birthday, national holiday.

01 January 2018 (Monday): New Year’s Day, national holiday.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594). Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2016 Enterprise Ventures LLC.