After a bailout brought Egypt back from the brink, new foreign investment and a robust local banking sector signal a return to growth.
When conflict broke out in Gaza last fall, Egypt’s economy, already weakened by the war between Russia and Ukraine and the Covid-19 pandemic, was on the brink of collapse. In early 2024, the Arab world’s largest country faced the risk of a regional conflict on the Sinai border and default on its foreign debts, prompting urgent recovery measures.
The first lifeline came from the United Arab Emirates (UAE). In February, ADQ, Abu Dhabi’s sovereign wealth fund, signed a $35 billion deal, including $11 billion in existing UAE deposits with the Central Bank of Egypt (CBE), to develop Ras el-Hekma, a new tourism hotspot in the Mediterranean Sea area. Shortly afterwards, the International Monetary Fund and the European Union each promised aid packages of $8 billion, while the World Bank added another $6 billion.
“The scale of investment was enormous and gave Egypt a second chance at stability,” said Thys Louw, emerging markets debt portfolio manager at Ninety-One, the London-based South African investment manager.
The timely injections have rejuvenated investor confidence. In the weeks following the bailout, foreign buyers rushed to Cairo’s debt market, buying one-year government bonds and other short-term bonds and seizing new opportunities in multiple sectors. Authorities say the Ras el-Hekma project alone could attract up to $150 billion in investment.
The latest IMF agreement came at a price; Egypt promised exchange rate flexibility, fiscal discipline, a slowdown in infrastructure spending and measures to boost private sector growth. In March, the CBE raised the key policy rate by 600 basis points to 27.75% and left the currency floating. The Egyptian pound fell 40% that day, but the CBE stood by its decision.
The business community remains hopeful that the rescue plan can bring about long-term reforms.
“The authorities’ recent efforts to restore macroeconomic stability have had a positive impact on investor confidence and private sector sentiment,” said Omar El-Husseiny, Head of the Treasury Group at Commercial International Bank (CIB) , one of Egypt’s largest private lenders. . “The government’s implementation of various policies and initiatives to attract foreign direct investment has focused on sustainable growth and removing investment barriers, thereby increasing investor appetite.”
Overall sentiment is gradually improving “in light of the stabilization of the exchange rate situation and the disinflation trajectory of recent months,” said Mohamed Abou Basha, Managing Director and Head of Macroeconomic Analysis at EFG Hermes Research. “Lower interest rates and structural policy changes are the most important next step to boost investor confidence.”
Privatization starts
Privatization is another major challenge in a country where the state and military still control large parts of the economy. To attract foreign currency and increase competitiveness in the local market, authorities agreed in 2022 to sell stakes in 32 state-owned companies, including Telecom Egypt, luxury hotels in Cairo, bottle manufacturer Safi, gas company Wataniya and financial institutions including Banque du Caire, Arab African International Bank and United Bank of Egypt. Last year, foreign direct investment rose to almost $10 billion, the highest level ever.
Gulf sovereign wealth funds and banks were the main buyers, followed by European companies such as Denmark’s Maersk, which announced last fall that it would acquire a 51% stake in the Zafarana wind farm complex, and Britain’s Actis, which is in the process of acquiring another wind farm, Gabal el Zeit. It is striking that American investors are also taking steps. In May, Philip Morris bought a 14.7% stake in Egypt’s Eastern Tobacco as Carlyle Group looks for hydrocarbon assets.
“Egypt’s diverse sectors, including tourism, education, healthcare, infrastructure and green energy, offer significant opportunities for foreign investors,” El-Husseiny said. “These sectors continue to offer substantial growth potential.”
To date, about half of the planned privatizations have actually taken place. A few more are expected to be completed by the end of the year, but the government, which initially set a $6.5 billion privatization target for 2024, has since scaled back its ambitions.
“It wasn’t just lip service, but the question is: After this first phase, will there be a push to do a second phase?” says Louw. “With this [Ras el-Hekma] Because the deal is effectively organized from the top down, this gives the authorities even less incentive to continue with privatization.”
Despite ongoing problems, Moody’s, Fitch and Standard & Poor’s have all upgraded Egypt’s outlook to positive in recent months. The IMF forecasts GDP growth of 3% for 2024, with inflation expected to fall from a level of 38% last year.
The Ras el-Hekma deal has boosted Egypt’s economic prospects, but serious questions remain, including over the government’s ability to manage the structural budget deficit and achieve debt sustainability. With the prospect of a new multi-billion deal with Saudi Arabia, which could further fill the public coffers and buy time, the question now is whether the authorities will use the extra breathing space to implement the promised reforms.
Banks weather the storm
However, throughout the financial crisis, Egypt’s banking sector has remained robust. Local banks, buoyed by high interest rates, reported record profits last year. Bank assets and capital adequacy ratios are solid, with the five largest banks accounting for 63% of sector profits, according to the CBE.
After the bailout, the central bank’s reserves are at a record high. Local banks expect an increase in foreign currency inflows from international investors and improved remittances from Egyptian workers abroad, which have fallen by 30% in 2023. Greater liquidity should encourage banks to lend more to small and medium-sized enterprises, which would promote the growth of the local private sector.
“The Egyptian banking sector has benefited greatly from the higher interest rate environment, with net interest margins, profits and returns on equity at record highs, especially for private banks,” argues Elena Sanchez, Managing Director and Head of Financials at EFG Hermes research. “Credit quality has proven remarkably resilient against the challenging macroeconomic backdrop in 2022-2023, and banks in general have used the strong revenue growth to expand their provisioning buffers.”
El-Husseiny credits the CBE’s introduction of tighter monetary policy with easing inflationary pressures and putting inflation itself on a downward trajectory.
“The implementation of a flexible exchange rate has successfully eliminated foreign exchange shortages,” he added. Egypt has floated its currency several times, but always quickly reversed its decision as the devaluation accelerated. Since March, all eyes have been on the CBE and its willingness to stay the course.
“I think this is one of the biggest things for any investor,” Louw argues, “because it doesn’t help if you can put money in if you can’t take money out. So, [the central bank’s] The willingness and ability to adhere to this program will be critical to sustaining foreign inflows and foreign investment into the country.”
The other benefit for investors: a currency drop. Some local assets seem quite cheap now.
“Egypt has become a competitive manufacturing destination given the extent to which the foreign currency has weakened,” said Abou Basha of EFG Hermes. “However, foreign investors are still waiting for more clarity on policy directions, geopolitical risks and interest rates.”
Investors in Egypt have run into problems in the past, “so there is still some caution,” Louw notes. “You have to come in with your eyes wide open. Any country with returns approaching 30% is not risk-free. But I think you are at the stage of the investment cycle where I would feel quite comfortable putting money to work in Egypt.”
Only time will tell how sustainable Egypt’s economic recovery will be, but local banks are already using technology to explore new growth opportunities.
The CBE is expected to issue new digital licenses this year, further strengthening Egypt’s position as a regional fintech leader. In addition, banks and other private financial services providers are looking at regional expansion in the Middle East, Africa and beyond.
In July, MNT-Halan, one of Egypt’s largest fintechs and the country’s first unicorn, announced the full acquisition of Tam Finans, Turkey’s leading non-bank lending service for small to medium enterprises, with a local credit book of $300 million. A few months earlier, it entered Pakistan and acquired Advans, a microfinance bank.
Founded in 2018, MNT-Halan is now one of the fastest growing fintechs in the Middle East, offering a range of services including digital payments, e-commerce tools, and business and consumer lending. It raised $157 million in June alone, after raising $400 million in 2023.
