Having the largest population in the MENA (Middle East & Northern Africa) region, one of the shortest trade routes between Asia and the West and a diverse and dynamic real sector, Egypt is attracting strong interest from foreign companies that see positive momentum in the country’s investment climate. Many multinational corporations (MNCs) are increasing their growth expectations for Egypt due to improvements in the outlook for economic and political stability.
However, companies need to manage their expectations for the Egyptian market’s immediate potential. Political stability remains tenuous and government reforms that aim to improve the business environment could also intensify short-term economic and operational risks. Senior executives must prepare their Egypt businesses for three major risks in 2015.
1. Subsidy removals: The hardest part is not over
Subsidy rollbacks form a major part of government efforts to reduce the budget deficit and win the praise of multilateral organizations. Lowering subsidy expenditures will remove price distortions in the domestic market and allow more public resources to be allocated to infrastructure projects and to critical sectors such as health and education. However, the immediate impact of more subsidy rollbacks could be painful for Egyptians.
Last year, partial subsidy removals led to a rise of up to 78 percent in domestic fuel prices. The government is planning to remove subsidies on electricity, food commodities and public transport in the next two to three years. Another sudden increase in prices would hurt discretionary spending levels among Egyptian consumers.
- Action: Ensure that your strategic plan factors in further increases in domestic prices in 2015 and 2016. Demand could ease and consumers could trade down as a result of Egyptians adjusting to new prices.
2. Currency: Further depreciation is looming
Egypt’s central bank is increasing the size of its weekly dollar auctions in order to provide more dollars to the official market and reduce black market trading of the pound. Improving the availability of foreign currency will also depend on how quickly the country can re-attract tourists and foreign investment to boost Egypt’s foreign exchange reserves. Meanwhile, the central bank is also allowing the Egyptian pound to depreciate at its auctions in order to close the gap between the official and black-market rates.
- Action: Assess how a weakening Egyptian pound against the dollar will impact your 2015 plans, particularly your ability to set and achieve sales targets. Determine whether the devalued Egyptian pound will make your products more expensive locally and whether you will need to alter your pricing strategy accordingly.
3. Political stability: It cannot be taken for granted
The military-backed government of President Abdel Fattah al-Sisi has been focusing on demonstrating to foreign companies that the outlook for stability is improving in Egypt. Economic activity is returning to normal and the government is organizing an investment conference in March to showcase Egypt as an attractive FDI destination. However, there are serious threats to stability that could disrupt Egypt’s reemergence as a top destination for foreign investment.
- Action: Monitor major risks to stability in the Egyptian market. These include:
- The rise in Islamist insurgent activity: A spread of frequent militant attacks to Cairo and the Suez Canal has the potential to deter foreign and local investment and hurt consumer confidence.
- Political unrest in reaction to government decisions:Street protests could disrupt daily operations if the government cannot provide a safety net for the poorer segments of the population as it removes subsidies. Individual protests could escalate to wider unrest and instability if security forces continue to use violent measures against protestors.
Egypt’s transformation into an attractive FDI destination is a process that is only in the early stages. The country will witness further economic and political challenges that will disrupt the operations and profitability of MNCs. However, these short term risks shouldn’t overshadow Egypt’s potential but rather highlight the need to prepare strategic plans that account for threats to domestic demand as well as costs in 2015.