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.