The Enterprise 2017 CEO Poll, Day Four

** The Enterprise CEO Week ends this morning. With today’s installment, we’ll have had 13 top executives offering their view on what to expect in 2017, and we’d like to thank both the 13 execs who’ve taken time out of very busy days to join us as well as all those of you who have written or called with kind words.

Today’s participants are:

• Karim Sawabini, partner and portfolio manager, Moon Capital, New York
• Aly El Shalakany, senior partner, Shalakany Law
• Elwy Taymour, chief executive officer, Pharos Holding

Yesterday’s participants included Raouf Ghabbour (GB Auto), Wael Fakharany (Careem), José Maria Magrina (Suez Cement) and Magued Sherif (SODIC). Tap here for part one of the series, or here for part two.

The government’s eurobond roadshow planned for next week continues to drive the conversation this morning. A source told Al Mal the expectation is that Egypt would have to pay around 7%, “following the Fed’s move to raise rates.” This is higher than the 5.5-6% Deputy Finance Minister Ahmed Kouchouk had projected back in August. Al Mal’s source said a second issuance will likely be in 2H2017 with both tranches likely listed in England.

…Separately, the IMF agreement is going to the House: Finance Minister Amr El Garhy said the government has finished reviewing the terms of the USD 12 bn IMF agreement and, according to the cabinet, has approved it. The Council of Ministers will now add its economic projections to it and send the agreement to Ittihadiya and to the House of Representatives for approvals. El Garhy denied there is an agreement to keep the terms of the agreement secret, saying the delay in making them public them was due to the holiday period. He added that the agreement will be reviewed and revised quarterly. El Garhy also gave a snippet on the government’s fiscal performance saying the first six month of FY2016-17 saw the budget deficit fall to 5% of GDP, compared to 6.3% a year ago.

CBE Governor Tarek Amer is leading a delegation on a five-day visit to London to promote investment, Al Masry Al Youm reports.

The Health Ministry will announce the full list of meds set for a price increase today, Ahram Gate reported. Price increases to meds will only include around 3,000 types out of 12k on the market, Health Minister Ahmed Rady told Al Masry Al Youm. Chronic illness medication will make up less than 10% of meds that will see a price hike.

A delegation of Russian officials is in Egypt until 16 January to examine security at the Sharm El Sheikh and Hurghada airports ahead of the anticipated return of air travel between both countries, Al Borsa reported.

Attijariwafa Bank will complete its acquisition of Barclays Egypt and begin operations under new management this month, according to an official from the Morocco-based bank, Al Borsa reports. The banks were supposed to have finalized the move last month.

The Ismail cabinet’s approval of the IMF loan agreement was the focus of the talking heads last evening.

Minister of Finance Amr El Garhy spoke with Mehwar’s TV 90 Minutes on the sidelines of a cabinet meeting yesterday that discussed the IMF loan. Cabinet reviewed the economic reform program with a focus on reducing the budget deficit. The long-term plan is to wean Egypt off international loans and reduce the nation’s debt, said El Garhy. Commenting on the exchange rate, El Garhy reassured viewers that a weaker EGP was better in the on long run, as it would help draw in foreign direct investment. The minister said that the Egyptian economy “will completely change” in three years, adding that Egypt’s economic outlook is perceived in a more positive light by international institutions than it is at home (watch, runtime: 7:34).

Al Hayah Al Youm’s Tamer Amin focused his program on the merits of sending the IMF agreement to the House of Representatives at this late stage after the ink has dried. Cabinet spokesperson Ashraf Sultan stated in in a call-in that the lapse between the agreement and the approval came from the IMF, which required time to finalize drafting. He added that House effectively approved the agreement by having ratified the Ismail cabinet’s reform agenda last March (watch: runtime: 3:01).

House Economics Committee member Bassant Fahmy backed up Sultan’s comment on the House’s tacit approval, saying that Parliament knew the financing gap will be covered through loans from international lenders. As an MP, she couldn’t help but revert to grandstanding mode and criticized the government for not sending the agreement to the House for taking an official position on the loan (watch: runtime: 2:45).

Cruz wants to designate Ikhwan as terror organization: Amr Adib discussed US Senator Ted Cruz’s introduction of a bill that would designate the Muslim Brotherhood a terrorist organization (watch: runtime: 3:23).

A new income tax act is in the works: Finance Minister Amr El Garhy announced yesterday that his ministry is working on a new income tax law, explaining that any amendments designed to bring the tax code up to international standards need to come in the form of a new tax code as the existing legislation has been amended extensively and it would be better to start from scratch, according to Al Masry Al Youm. El Garhy did not outline the nature of the changes, nor did he hint at tax increases. The minister has in recent months made clear his preference that taxes not be raised, although a faction in the House of Representatives has been agitating for a shift to a progressive income tax system with higher rates. El Garhy noted that his ministry aims to boost tax revenues to 16% of GDP within the next four years without resorting to changes in existing tax policies, AMAY noted separately.

The World Bank expects the Egyptian economy to grow 4% this year “as fiscal consolidation begins and as private consumption slows with rising inflation,” according to its recently published Global Economic Prospects 2017: Weak Investment in Uncertain Times (pdf). The WBG sees growth accelerating to 5.1% in 2018 and 5.4% in 2019. “Growth in emerging market and developing economies (EMDEs) is expected to pick up in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. Weak investment and productivity growth are, however, weighing on medium-term prospects across many EMDEs,” the report’s executive summary reads. The report puts global growth in 2016 at 2.3% and is forecasting 2.7% for this year.

Finance Minister Amr El Garhy stated that the government’s growth target for this year is in line with that of the report, according to Al Mal.

Cabinet, CBE agree to help businesses struggling to repay LCs: Prime Minister Sherif Ismail agreed to step in and help find solutions to businesses claiming to have been caught upside-down with open letters of credit after the float of the EGP, AMAY reported. An official cabinet statement on the issue gives few details, but an industry association official tells Al Mal that one of its cornerstones is allowing companies to repay their debts in installments over seven years. We had noted that some of the ideas floated during the government’s talks with local companies last week include repayment in installments over three to five years at fixed exchange rates negotiated with banks.

Brilliance Bavaria Auto says it will assemble Jinbei model cars in Egypt and could build a USD 120 mn assembly plant in the Suez Canal Economic Zone, said Brilliance GM Khalid Sa’ad. The company (a subsidiary of BMW assembler and distributor Bavaria Group) is looking to access incentives in the proposed Investment Act that allow car companies to deduct 40% of the value of their capex outlay from their taxes, he tells Al Mal.

Egypt and Iraq have an agreement for 1 mn barrels of crude per month: Egypt and Iraq have moved forward with signing an agreement which would see the latter supply Egypt with 1 mn barrels of crude per month, according to statements by Iraq’s ambassador to Egypt Habib El Sadr picked up by Al Shorouk. The amount of oil supplied in the agreement, which El Sadr says will take effect in the coming days, can be extended in the future.

Beyond signing off on the USD 12 bn IMF facility, the Ismail cabinet also approved a number of decisions during last night’s weekly cabinet meeting including:

• Approving a proposal to merge the Mortgage Finance Fund and Social Housing Fund into one entity, Al Mal reports;
• Establishing an authority to monitor and develop land freight and passenger transport and ensure Egypt’s compliance with international and regional road safety benchmarks.

The government’s ownership of a large number of real estate properties is not doing the country any good, argues Patrick Werr in his weekly column in The National. He takes the case of the Continental Hotel, for which a demolition order was issued recently. Werr says that “this demolition order in my mind demolishes one of the main arguments this and other state real estate holders have used to justify their presence in the property market, that by owning historic buildings they are somehow protecting the country’s national heritage.” He suggests that the sale “property holdings could help to tide it over. But more importantly, the sale of these assets would attract dynamic private sector investors, helping to revitalise Egypt’s main cities.”

GOP senators shun Rex Tillerson: US President-elect Donald Trump’s choice for secretary of state, former ExxonMobil CEO Rex Tillerson, failed “to win over key GOP senators” during his confirmation hearing on Wednesday. NPR has Tillerson’s full opening statement here and ABC has clips from the hearing here. Politico is describing Tillerson’s performance as “rocky.”

Elsewhere in Trumpland: The Donald on “Nazi” witch hunt: Also yesterday, Trump held his first press conference since winning election. The encounter focused in depth on the president elect’s ties to Russia, the alleged kompromat folder and a handful of domestic issues. The New York Times has a solid piece on presser, along with a “10 key moments” breakdown.

The FIFA football World Cup will be expanded to host 48 teams, up from 32, starting from the 2026 tournament. FIFA president Gianni Infantino has been behind the move, saying the World Cup has to be "more inclusive" and that it would also benefit "the development of football all over the world," according to the BBC. FIFA’s own research projects a GBP 521 mn increase in profit from a 48-team format, BBC notes.

Tapping Egypt’s youth is critical for “unleashing Egypt’s vast potential,” International Cooperation Minister Sahar Nasr writes in a piece for The Washington Times. She says the goal of increasing the economic growth rate and “creating jobs through efficient utilization of Egypt’s young human capital requires the transition from an efficiency-driven economy towards a more innovation one.” Nasr reiterates that the “government is strongly committed to engaging the youth as a positive force for change, and creating and supporting the enabling conditions that will allow them to flourish. The fundamentals — the market size, the young, enthusiastic population, and the government’s commitment to support entrepreneurs with high-growth potential — are all key indicators that Egypt believes in its youth as its hope for a more prosperous future.

Al Arabiya reminded us that dealing with the nation’s bureaucracy is like stepping into an episode of The Walking Dead with the story of a man who went to renew his ID card only to be denied on the grounds that he had died a year ago and was already issued a death certificate, which would, naturally, bar him from issuing a new ID card. René Descartes would have had a blast here.

Other stories about Egypt in the international press worth noting this morning:

• An “exclusive source” from Hamas told right-wing Breitbart News that Hamas and the Egyptian government have come to an agreement that will see the latter allowing more goods and vehicles to pass through the Rafah crossing to alleviate the blockade on the Gaza Strip.
• The South Sudan armed opposition is accusing Cairo and Juba of conspiring to keep South Sudan President Salva Kiir in power amidst an agreement to sabotage the GERD, a senior opposition member tells the South Sudan News Agency.

Few US investors have the insight on Egypt that hedge fund manager Karim Sawabini does. Don’t take our word for it: We’ve included him in our inaugural CEO poll because his name has come up consistently in discussions with some of the smartest guys we know on the global investment circuit. Moon Capital has a 20-year track record and spun out of Oaktree Capital — the largest high-yield distressed debt player in the world, where founder John Moon ran the equities business until spinning out in March 2005. Headquartered in New York, Moon has offices in Singapore and Dubai and takes a long / short approach focusing largely on global emerging markets, where it is predominantly a public markets specialist with some private equity investments. Edited excerpts from our conversation:

2017 will be the year of progress. Stop-and-go progress, but ultimately progress in the right direction.

The biggest challenge of the year will be in the potential for disconnect between market expectations and the reality of how long it will take for Egypt to really get going. The market is now frontrunning news that is yet to come, and there will be some setbacks along the way. The risk in the near term comes down to execution. In the long term, it will be about improving education and skilled job opportunities, but that’s a common issue across emerging markets.

Consumer will underperform in 2017. It’s already suffering in the downdraft now, but it will start to recover in the second half.

Real estate has historically been a great place to invest after a large devaluation, but I suspect that this time might be the exception. Prices have already run up considerably. Egyptians have traditionally seen safety in real estate and turned to it when they couldn’t get money out of the country, resulting in increased speculation through multiple home purchases. Look at the very significant increase in prices of North Coast homes over the past four to five years. So whereas you would normally say, “Buy the heck out of real estate stocks” post a devaluation, I don’t expect real estate to lead the rally. The industry ran ahead of itself and affordability is substantially lower than in previous years.

Industrials will outperform in 2017, posting gains because they’re getting access to natural gas. You’re going to see a large positive impact from improved utilization. I’d look, too, at other sectors where natural gas is an input. Financials have done well, but the currency needs to strengthen a bit for them to really grow their loan books — I don’t like the implications for capital adequacy with the EGP at 18-19. If I saw it at 15, I’d like them a lot more.

What’s going to knock us off our horse? People are being patient now because they think the economy is going to get better, so there’s risk that continued weakening of the currency and continued high inflation could lead to social discontent / unrest. I don’t expect that, but you’re asking about the dark horse. The other thing would be oil going to USD 80 or USD 90 per barrel along with a commodities spike. Egypt’s a large importer of commodities, so that’s another dark horse. Again, I don’t expect it to happen. And the last thing would be if tourism doesn’t come back — if we see more Turkey-style security episodes.

Your view on where the EGP closes the year has to also factor in where you see the USD moving in 2017. I wouldn’t be surprised to see 16.00, 16.50. It could strengthen more, but that would demand solid execution on the reform program and a weakening of the USD in the back half of the year. If the US Fed does go for three rate hikes in 2017, it will hit the US economy negatively, and the USD will start to weaken. At any rate, the USD is at a 14-year high, and a strong USD isn’t good for US exports; it’s not good for bringing jobs back to the US. I see the USD strengthening in the near term and then it will turn, which will be positive for emerging-market currencies.

Other stock markets we like right now? It’s about valuations for us. We still like Russia, but it’s starting to get crowded by fast money. Turkey could get interesting in the next few months given skepticism is high — and rightfully so — and there’s pessimism on the street, so valuations could get interesting if the currency weakens further. Argentina could be interesting given the recent pullback. We’ve been out of Nigeria for three years now, and I would love to get involved. But I need a sense that something is going to happen on the currency front, that they’ll really float it. I could get interested again.

It’s not really a top-down thing for us, though. It is a focus when there are economic imbalances that would likely lead to large FX rate adjustments. Egypt is top-down, maybe, but we also look for great businesses. We’re invested in 40 countries now, but we don’t choose the countries as much as we look for great businesses at very attractive valuations, and that usually coincides with an economic shock and currency devaluation. We often take large stakes in businesses others haven’t heard of before, but which are market leaders and which have outperformed GDP growth over the long term and/or are at an inflection point underappreciated by the market.

What are we asking the companies in which we invest? Same as always: What are your opportunities? What are you doing with your capital? What challenges do you see? What pricing power do you have? What does demand look like? What about supply? It all comes down to the basics, and we’re typically much more interested in free cash than the income statement. We definitely want to understand the mindsets of management and of the owners, and we’ll go talk with their competitors, with their regulators, and with government officials.

What do we hold? Go look at the filings. We filed EK Holding last year — we have a large holding there. We’ve been very large holders of Global Telecom Holding over the past year, year and a half and have been buying industrial names since the devaluation.

It’s not what everyone on Wall Street gets wrong about Egypt, it’s what they get wrong about emerging markets. EM are the most interesting when there’s uncertainty — that’s when the risk-reward tradeoff gets interesting. When valuations collapse and the balance changes. You want to assemble a portfolio of assets that are dispersed geographically and that offer great risk tradeoffs — think tradeoffs of 4:1 or 6:1. Do that consistently, and you’ll generate attractive risk-adjusted returns.

What the “masses” get wrong about violent moves is that they want to buy when it looks like everything is getting better. They miss the massive initial move — that’s why we plowed money into Egypt in February when it got crushed, took profits in the summer, and then bought again after 3 November. We have seen stocks that have already moved 50% in USD terms since the devaluation. Anyone coming in now has missed the initial move, even though stocks remain relatively cheap on a two-year view.

There’s not a lot of attention being paid to Egypt by Wall Street, but there’s a growing awareness the currency looks cheap and that typically what you want to do in EMs is buy economies where there’s going to be improvement after a collapse, where currency and valuations are cheap and where earnings growth is in the cards. This is why Egypt should be interesting.

The big thing is going to be repatriation, where some investment firms are hamstrung by compliance and so I have less competition.

I think the IPO outlook should be good. It comes down to valuation, and there’s a lot of cash on the sidelines. It will come down to how good the companies are and what are the valuations.

I see M&A activity picking up as the year goes on. It will be slow initially because strategics will want to see where the currency settles and they’ll need comfort on repatriation. But three to four months from now, you should see an uptick in both M&A and FDI.

If I were going to start a new business in Egypt today, I would look at import substitutes and exports, particularly exports in any industry that’s really labor-intensive. Also, anything of which the country is a large importer, which involves natural gas and it’s a product sold in USD.

On the policy front, I get worried any time the government comes in and says it’s going to dictate prices or the amount of natural gas a company can get. That changes the economics of the business and makes it really difficult to forecast the business. I don’t like hearing things such as, “I’ll give you all the natural gas you need, but you need to bring your prices down.” The ideal is to get market rates on everything.

What the government needs to do is give the private sector what it needs to grow and prosper. The private sector is, by definition, the most efficient allocator of capital. They need to not crowd out the private sector. When disincentivized capital leaves a market, it takes time for it to come back.

The biggest challenge for the hedge fund industry in 2017? Ten or fifteen years ago, people paid you for beta. You would lever up your portfolio and if the market did well, you did well. Investors have become more sophisticated these days. They can create their own beta. What they want is people who create alpha. If you can create alpha and mitigate risk, that’s ideal. The challenge for asset managers generally is alpha. If I can buy a low-cost passive ETF that captures most of the market move in a rising market, why am I paying two and 20 [two percent management fee and 20% of profits earned, the standard hedge fund compensation structure]?

Egypt is fun in some respects because the market is still overrun by retail investors. You want to be the only professional at a poker table so that it’s not all professional fund managers slugging it out. You can make a lot of money when you know the companies and the facts, when you can talk to government.

Why would I buy equities when interest rates on deposits in Egypt are at 18%? Here’s my advantage: I don’t look at where interest rates are now, I look at where they will be and thus, ultimately, where the discount rate will fall. The sell-side says the discount rate is 18%, but if the EGP stabilizes over the next 12 months, inflation will fall. And as it comes down and currency stabilizes and there are inflows and a strong reserves base at the CBE, they can cut rates. That’s when debt investments start to become less attractive. So what happens when you look beyond the spot rate the sell-side people are using today and see rates coming down 400 bps over the next 12-18 months? Valuations go up significantly. Interest rates come down, the weighted average cost of capital comes down, and these highly levered industrial businesses suddenly have access to natural gas? When they’re paying 12% on their variable-rate facilities and their EBITDA and earnings are dramatically improving because they have access to gas, their valuations change massively.

It’s all about the ability to look forward and see a different environment. I like industrials, and I’ve liked them from the day of the devaluation. I knew that was the space I wanted to target.

What I love about our business at Moon is that we focus largely on global emerging markets, and we’re not afraid of illiquid markets, so you don’t have all of the quant funds, the large hedge funds, the global funds. They tend not to play in emerging markets, and in illiquid EM even less, because they need to be able to liquidate and get out of a market fast. I can live with less liquidity and get paid for it.

Aly Shalakany is senior partner at Shalakany Law Office, which he joined from Linklaters in London. Aly is a noted specialist in finance, projects and mergers and acquisitions — he’s also our Weekend Edition columnist, where his Beyond the Rubicon offers an “inside baseball” look at the intersection of business, economy and finance from the point of view of a practitioner at the top of his game. We respect Aly’s legal chops — particularly his insights into energy and infrastructure transactions. But longtime readers who know that Enterprise was first conceived as a print magazine about entrepreneurs will not be surprised that, as talented a lawyer as he may be, we really love him for his passion for entrepreneurs: Aly is the chairman of The Cairo Angels, a group of about 50 members (almost all of them Egyptian) who invest their personal money and leverage their experience and network to benefit the businesses in which they invest.

2017 will be the year of more economic reform. It’s also going to be a year where we start to see upside stories in oil and gas, banking, and fintech.

Why fintech? The Central Bank of Egypt has addressed the major issue for the banking system — the FX piece. That will definitely still be a work-in-progress throughout at least the first half, but they’ve made clear their next big priority is innovation, and the CBE is taking fintech seriously. Look at the micropayments regulations they’re discussing. And then banks have heard this — two have launched fintech accelerator programs. They have to become more efficient, they have to grow through rising financial inclusion, and they have money to invest in this. VC funds in Egypt and throughout the region can see the story, and they’re well-capitalized to invest.

I would have said tourism would be the sector to outperform, but that was prior to the terror attack on the Coptic Cathedral compound, but I no longer see it as being something we can positive about for the first half of 2017. Maybe at the back end of 2017. Oil and gas looks set to have a very strong year — Rosneft’s investment in Zohr underscores strong global interest in the Egypt story, and we’ve been receiving a lot of interest in smaller deals from the right sort of investors. The interest is primarily in upstream, but midstream is looking increasingly interesting. There’s significant interest in refining, and when Qalaa’s Egyptian Refining Company comes online, that will be proof of concept. If it takes off, it we’ll see other transactions.

I remain hopeful, though not entirely optimistic, that Egypt will become a regional energy hub. That would be a game changer for years and years to come.

From what we’re seeing right now, there will still be lots of interest in energy and infrastructure projects in 2017, driven in no small part by the liberalization for the power market over the coming few years. We’re seeing larger-scale renewable energy investments outside the feed-in tariff. Infrastructure, from roads to the metro to rail, could be on the table. Water and desalination have been on the back burner and there’s an expectation they could be tendered in 2017.

I think real estate — residential in particular — will be challenged this year. I see better prospects for retail and office space in the coming year. Residential could come back sooner rather than later if ever there is a government-led, private-sector implemented program to build affordable middle-class and low-income housing. That’s not a pipedream. I was speaking with a Moroccan developer that specializes in that segment and they’re very profitable because the government has set in place the right structure. Real estate is a strong lobby, and it’s an easy win for the government from a public point of view. This should be an easy sell.

The biggest opportunity for the economy is in the 17 points outlined by the Supreme Investment Council — I have a lot of love for those points. I think this is perhaps the first time we’ve had a cohesive policy statement as a roadmap; it’s something businesses can use to prepare the investment plans and their budgets. But to make this happen, we need to make progress on multiple fronts, not least of which making it easier to do business, providing access to finance for SMEs and accepting tax incentives. On the incentives — it’s wrong to simply maintain we won’t do them. If we want to be competitive, we need all of our cards on the table. With SMEs, they’re our largest employers. If you want to cut unemployment, you need to bring them into the fold with carrots, not sticks. Give them tax breaks, because they’re not paying it anyway. Give them access to funding, like the CBE is doing with the initiative it now has on its drawing board. The big obstacle there could wind up being the banks — they just don’t know yet how to loan to SMEs. And on the bureaucracy, I would love to see them extend what they’re doing with permits and licenses for industrial projects to other areas: Get a temporary permit. Get into business. Then we’ll talk later about full licenses and environmental and all the rest of it.

Biggest challenge for the legal industry has been the influx of law firms from abroad over the past few years, which has translated into additional competition. Competition forces everyone to up their games, but it brings additional pressure and you start to ask: Is it a growth market or is it quite saturated?

There are very difficult conversations happening now on fees and retainers after the float, but I think most in the industry are being sensible. You can’t suddenly pass on the full impact to your longstanding clients. We’re seeing shared pain, splitting the difference right down the middle. That’s going to drive efficiencies in the market.

On the IPO front, you’re going to continue seeing private-sector-led IPOs in safe sectors, the demographic plays. So food and beverage, consumer products, retail — sectors where the main drivers are purchasing power and population growth, because purchasing power will crawl back up. I see a lot of M&A activity in the same sector. You’re going to see growth and then consolidation.

Then, of course, you have the government program, which looks set to start with oil and gas. With state-owned enterprises, I always look at the upside. If it’s done well and accompanied by institutionalization and capacity building, you can have great success. Look at Telecom Egypt. It’s not an easy business, but it’s well-run and well-led, they’ve put a solid governance structure in place, and it makes solid profits. A series of strong offerings will really boost capital markets. We need more liquidity.

If I had to start a new business today? Angel investing, without question. One of the joys of being an angel investor is that you get a back-set view of multiple sectors. There are so many industries I find fascinating, so this really ticks the box for me. Of course angel investing isn’t for everyone — it’s a very risky asset class — but I’m passionate about it, and if you don’t risk more than you can afford to lose, it’s fantastic. And remember, there are many very successful angel investors who target SMEs, not startups. Look at Neveen El Tahri and the success she’s had in this space. If you want exposure to something really vibrant, it’s a great ride. You meet amazing people, get to bounce a lot of ideas around with companies you would never have imagined yourself involved in.

What question will we be asking at the end of this year? “What’s a stabilized rate for the EGP?”

Elwy Taymour is the founder of Pharos, the full-fledged investment bank and top-ranked Egyptian brokerage that’s particularly well-known for its advisory practice, which has handled some of the most interesting M&A transactions in recent years. A quick thinker on markets and the economy, Taymour has earned our respect for his entrepreneurial approach to finance. Yes, he was CFO at LinkDotNet, Vice President at Auerbach Grayson & Co in New York, and worked at Merrill Lynch and EFG Hermes. But in addition to building Pharos, Elwy is also the founder of ArabFinance, the regional financial website offering online trading to the Egyptian market — and the first sponsor of Enterprise. To him, the last word. Edited excerpts from our conversation:

2017 will be fundamentally binary. It’s going to be the year in which we discover the fruits of a very hard decision that simply had to be taken and — we would hope — see a lot of money coming into the economy and positively impacting indicators across the board. Or it will be the year everything collapses. I don’t see anything in between, and I do think that the former will happen. The government is very serious about the program they are implementing and they know that any U-turn would be catastrophic.

The biggest challenge for the economy? I actually think there are two. The first is inflation, particularly imported inflation. It will take time for local manufacturers and products — neglected for a substantial period of time — to substitute for USD-denominated imports. This will eat into disposable incomes and lead to a slowdown in the economy. That’s the biggest challenge. The second is the risk of a U-turn on policy as a result of social pressure arising from very necessary economic reforms. We were a welfare state, and the sense of entitlement really compounded the matter. We think the government should give us everything — and we give nothing in return.

The biggest challenge for our industry is convincing foreign investors that the government — which is demonstrably moving in the right direction — is serious about reform. It’s out of my control, and it’s really unpleasant for that. But think about it: My industry is fundamentally reliant on investors coming into the economy, whether that’s promoting a greenfield investment, an M&A transaction, or hot money coming into treasuries and the stock market. I think the term “hot money” is seen as a negative, but it’s a positive: Look at February 2010, when we had USD 11 bn in the stock market and treasury bills — and that was a constant feature of the landscape as people came in and out.

The biggest opportunity is the reforms themselves. With no U-turn and so long as the government remains serious about being business-friendly, this market could double or triple in size.

Yes, everyone is talking about salary rises, but how you tackle it is colored by where you see inflation going. Is it primarily imported inflation? Is it a one-off? Employees are expecting a lot — disposable income is down, and prices, from schools to food, are up. The challenge for us is that we generate revenues in EGP. We need to see the reforms bear fruit, and that’s what’s going to allow us to raise salaries, so we’re looking at a mix of salary increases and bonus compensation. Salaries will increase 10-15%, but we’ll supplement that with bonus compensation. We could always look at a secondary increase in July, depending on how the market does.

We’re going to be keeping a close eye on regulatory changes. The Egyptian Financial Supervisory Authority is becoming more and more involved in the sale and acquisition of companies. This is new, not something to which we’re accustomed. The CBE is increasingly active in areas that touch on our industry. We need to understand why. What’s surprising about some of the regulatory changes we’ve been seeing is that industry leaders haven’t been consulted, and that’s contrary to how things are usually done, when there’s a round of consultations.

The IPO outlook? We’re hearing as many as six to seven offerings coming out of the public and private sectors, and it could be good for the market if this happens, if it adds liquidity and depth. But I’m concerned about the size of the individual IPOs. Investment banks and their clients need to make sure to offer large chunks of big companies if they want serious foreign investors. An EGP 300-600 mn offering is now USD 15-30 mn. That’s not sufficient for large investors to come in — they obviously would be worried about liquidity. Nothing below EGP 2-3 bn is really worth bringing to the market; something around USD 100-150 mn is the minimum ticket size anyone should look at. Going the route of EGP 200-300 mn is not going to work.

Over the last year, we had three large M&As in advanced stages, but as the USD began to rise in April and May, they were put on the backburner. There was a major issue in terms of pricing these transactions: Nobody knew where the USD was heading. It started at “x” and then moved to half “x” in USD terms, and that obviously didn’t bode well for sellers. Things changed very substantially after 3 November — the transactions are back on track. Even smaller transactions where sellers pulled back are actually coming back to the table. I think overall it will be a very good year for M&A. We have a lot of people who were on the sidelines who are now looking at transactions in Egypt.

Which sectors will be hot for M&A? We’re very focused on retail and food. We have some pharma and education transactions in the pipeline. That’s where we’re focused; others may be elsewhere.

It’s not about which sector will outperform in 2017. It’s about who can export, and exporters with USD revenue streams and local currency expenses will really outperform. But I think there’s a case for optimism on the consumption front, too. Even with sectors like retail and food — they’re having problems now, but they’ve proven resilient over the past years and they’ll do well. We love to shop, we love to eat. That’s not going to change.

The worst-performing sectors will be importers. Cars. Pharma. Chemicals. All of these companies will suffer this year, some of them significantly.

I am actually starting two new businesses this year — microfinance and leasing. Think about it: 90% of Egyptians lack a bank account and access to finance, so microfinance is very attractive. The model in Egypt has proven very successful, and there’s strong demand even with the high premiums. On leasing, I’m going to focus specifically on SMEs — it’s a neglected segment.

On the regulatory and legislative fronts, it will be important to see what the CBE is doing with repatriation of foreign funds. It’s been unclear — are they doing it or not? If they’re pausing it now, when will it resume? Anyone who wants to bring money into Egypt wants to know they’re going to be able to get their profits out. I’m also concerned about taxes: Any step to increase the tax burden is the wrong move. The legislature needs to look elsewhere — raise taxes and you promote evasion. The real issue is growing the tax base by bringing in the gray economy.