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Wednesday, 21 October 2020

Where CDC is targeting its investments in Egypt this year + how it sees the private sector leading post-covid growth

Where the UK’s CDC plans to invest in Egypt this year + how it sees the private sector leading post-covid growth: CDC Group, the UK government’s development arm, has been investing in Egypt since 2003. The group sees Egypt as a “priority market” for its investments as it looks to support private sector-led growth. We spoke with Sherine Shohdy (LinkedIn), CDC Group’s coverage director in Egypt, for a closer look at the group’s investment priorities in Egypt going forward and how it sees the private sector leading the post-covid economic recovery. Edited excerpts from our conversation:

As of the end of 1Q2020, CDC’s portfolio value in Egypt this year hit USD 146.6 mn with investments in 29 Egyptian companies across a wide range of sectors, including infrastructure, manufacturing, trade and microfinance, healthcare, business services and financial services. Across the continent, CDC has a portfolio of investments worth USD 3.3 bn. Our investments in Egypt currently directly support over 28k jobs, with many more created indirectly in the wider economy through our supply chains.

Egypt is a priority market for CDC's investment activities. My appointment and the establishment of a permanent presence in the country are key to achieving our objectives and a strong signal for our commitment to doing more in Egypt. Our strategy is to drive origination by leveraging our links with Egyptian entrepreneurs and the broader investment community to identify attractive ventures where our flexible, long-term capital and operational expertise can help scale businesses. By working hand in hand with our portfolio, we are able to create sustainable employment opportunities, grow our investee businesses and improve their environmental, social and governance (ESG) practices and business integrity standards.

Investment pipeline focuses on human development, improving livelihoods: While CDC does not comment on specific transactions and speculative investments in our pipeline, I can say that our forthcoming investments in Egypt will be a combination of direct investments and intermediated investments via the local private equity and venture capital funds we have invested in, such as Ezdehar and Sawari Ventures. Our pipeline in Egypt currently includes investments in food & agriculture, healthcare, education, manufacturing, infrastructure, financial institutions and telecommunications — all sectors that accelerate human development and enhance livelihoods.

Our vision for Egypt's economic development is one of sustainable and inclusive private sector-led growth. Encouragingly, we believe Egyptian authorities are committed to this vision and the ongoing structural reforms, which will create jobs and reduce poverty and inequality, even in the current context where covid-19 has reshuffled medium-term priorities.

The main challenge the private sector faces relates to access to finance, with many SMEs facing liquidity strains now amplified by the pandemic. Persistent challenges in obtaining credit and a lack of integration between banks and the broader investment community are also important challenges. There’s no shortage of promising Egyptian businesses led by ambitious entrepreneurs who are seeking investment to accelerate the growth of their businesses. The pandemic has also shone a light on the vulnerability of global supply chains. But there's opportunity here too — within some sectors, businesses are pivoting to local production instead of imports. We are proud to have been one of the first development finance institutions to be given clearance to provide Tier 2 capital to Egypt's banking sector with a USD 100 mn package for CIB to support its lending to over 1 mn Egyptian customers and to export-oriented sectors.

Renewed investment from the private sector will be key to accelerating countries’ economic recovery from the pandemic. In many emerging and frontier markets, governments do not have the fiscal manoeuvring space to sufficiently stimulate the economy. In these countries, private investment — from international financiers or local sources — becomes doubly important. CDC is committed to leveraging its extensive networks across its priority markets to identify, structure and finance bankable projects that will accelerate growth, create long-term jobs and improve economic resilience.

Small SMEs are best supported through CDC’s intermediated funds business — where we invest in local private equity funds such as Ezdehar, who then invest in SMEs — because CDC’s direct investments are typically too large to be absorbed by small businesses. Our direct equity investments typically involve influential minority stakes ranging from USD 10 mn to USD 150 mn. SMEs are the backbone of economies across Africa. It’s vital that the investment community continues supporting and investing in the SME segment, particularly in the context of covid-19.

Egypt has a strong track record, having successfully completed its home-grown economic reform program over the last few years, resulting in strong growth, falling unemployment, increased reserves and a reduction in public debt.The country's growth prospects were among the strongest in emerging markets prior to covid-19. The government and central bank have taken decisive steps to respond to the crisis, protect the economy and vulnerable sectors and individuals, while also strengthening the healthcare system. Continuing the government's support in creating a stable environment to attract much needed local and foreign investments over the coming period will be vital. Nonetheless, the country faces a high degree of uncertainty in the context of domestic and global economic disruption.

The diversified nature of the Egyptian economy, its large population, and commitment to economic reform will all help growth rebound to an estimated 6.5% in FY2021-2022. While certain sectors such as tourism, manufacturing, real estate and trade have been particularly affected, construction, oil refining and agriculture remain relatively robust. Moreover, the banking sector has remained stable, liquid, profitable and well capitalized.

Our 2021-2025 strategic framework, which we are currently drawing up, will see gender and climate change play an increasingly important role. Our long-term priorities will remain the same: Investing to create jobs and sustainable long-term economic transformation to reduce poverty. The pandemic has shown that we can act with rapidity and agility in times of crisis, using a flexible approach to support specific companies with financial or technical assistance, or to inject systemic liquidity into Africa’s financial markets. This new, more responsive way of doing business is a principle we’ll be embedding in our organization going forward.

Addressing gender inequality is a core priority for CDC. All our investments are made with gender in mind and we work closely with our investee businesses to help create jobs for women. We are also working to get more women into senior positions and boardrooms across our portfolio. CDC is a founding partner of the 2X Challenge, an initiative launched by development finance institutions in 2018 to unlock resources that will help advance women in emerging markets as entrepreneurs, business leaders, employees and consumers. The initiative has already mobilised USD 4.5 bn to support women’s economic empowerment.

As part of our response to the covid-19 pandemic, CDC remains committed to investing in Egypt and across its key markets, both directly and via private equity funds that we partner with. This will ensure a quicker medium- and long-term economic recovery, and is part of our three-pillar response strategy. We believe the pandemic is a chance to “build back better” and address structural weaknesses and inequalities within our societies. Our USD 100 mn commitment to Helios Investment Partners in early July forms part of this pillar.

Our primary focus is preserving the viability of our existing portfolio of investees. To this end, we are providing targeted support and technical assistance where it is most needed. We are also providing systemic liquidity to Africa's financial systems via existing partners and financial intermediaries. We've recently announced a USD 100 mn risk sharing facility with Societe Generale and a USD 75 mn trade finance facility with Absa. These facilities will help protect vital supply chains, sustain trade and enable importers to continue operating, with a particular focus on the food & agriculture and healthcare sectors — which we believe will attract increased attention post-pandemic.

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