The past several months have been a whirlwind for businesses and consumers in Egypt – they encountered a new value-added-tax, extreme currency volatility, and cuts to subsidies, among other ad hoc policies from the government. Egypt is now in the process of adjusting to – and continuing to implement – IMF imposed reforms. In 2017, economic growth will likely be modest, primarily supported by investment and a slight improvement in exports. Despite modest growth, the country’s huge population, strategic location, and increased commitment to structural reforms make it an important market for MNCs in their MENA portfolios, justifying careful refinement of their strategy in Egypt’s transitioning, but also challenging, environment.
To remain competitive, MNCs should integrate the following methods into their planning:
Monitor the correct signposts of economic improvement: Many positive headlines are coming out of Egypt – the stock market is one of the best performers among emerging markets, appetite for government bonds and treasury bills is strong, and the pound went through a period in which it appreciated by 15% in its value to the US dollar. These events provide a short-term boost to market confidence; however, they do not necessarily translate to real improvement on the ground for businesses.
To achieve sustainable growth and stability, MNCs must look for growth in industrial production and improved levels of liquidity coming into the market from tourism receipts, Suez Canal receipts, remittance inflows, and greater exports. It is also important to understand that appreciation or stabilization in the pound is not an indicator that Egypt’s economic problems are resolved. The country must continue with reforms to its subsidy program and improving the investment environment through updated legislation to resolve outstanding challenges in the market.
Prioritize competitiveness while reacting to immediate challenges: Businesses in Egypt will face numerous challenges in the next several months. As the pound goes through a period of price discovery, there will be ongoing volatility and fluctuations in its value. Alongside managing the impacts of a highly volatile exchange rate, MNCs must also react to heightened price-sensitivity across all customer segments through methods such as adjusting prices, correctly timing promotions and marketing campaigns, initiating customer loyalty programs, expanding into new customer segments, or shifting their product portfolio. Increasing operational costs from taxes and higher fuel and electricity prices translate to muted demand from B2B customers, while MNCs might also face greater competition from local businesses who can maintain competitive prices. These challenges require a re-assessment across all business functions – from MNC’s customer chain, marketing, finance, supply chain, to their personnel. Adapting these functions to Egypt’s transitioning market will set up MNCs for more success in the medium- to long-term.
Evaluate long-term opportunity to withstand current challenges: It is easy to become distracted by short-term challenges, but executives should look to Egypt’s long-term trends to guide their strategy and investments. In the medium- to long-term, the economy and consumers will gradually adjust to a free-floating exchange rate system, to the recently increased prices, and subsidy reforms, creating more consistent demand, as well as allowing for improvement in export-oriented industries. Additionally, Egypt’s energy supply will improve as LNG discoveries and investments in the sector begin to bear fruit. Egypt has the potential to be energy self-sufficient and become an LNG exporter by 2019. The government will also have improved sources of revenue in the long-term that will support public demand. LNG exports and VAT implementation would add to government coffers, while an expanded Suez Canal will accommodate future rises in global trade, increasing transit receipts. With Egypt’s positive long-term outlook, MNCs should consider making strategic investments or acquisitions while assets are cheap in the present.
As MNCs plan their Egypt strategy for 2017 and beyond, it is necessary to take a comprehensive approach to how the challenges in the market are impacting business operations across all functions. For a more in-depth study of Egypt’s 2017 outlook and how executives can best manage the short-term challenges, FSG clients can refer to our Egypt Market Spotlight for 2017. As Egypt goes through an unprecedented period of acute difficulties, executives must manage their expectations for recovery and integrate the market’s long-term view into their short-term planning.