Insights from Egypt: Adjusting to the new reality

My latest visit to Egypt since the country’s shock therapy program with the IMF began in late 2016 aimed to unearth how Egyptians have been adapting to the country’s economic transition. Last week in Cairo, I met with business executives, economists, and bankers to understand how the business community has been adjusting to the new challenges. Certain things in Egypt remain the same – the infamous Cairo traffic persists and the pyramids stand strong as a reminder of Egypt’s golden past – but under a new reality. Severe currency depreciation, hyperinflation, and tough reforms are changing the way people spend, and forcing businesses to become innovative and savvy. Below are the key observations from the ground:

MNCs’ customers are under pressure, but pockets of opportunity still exist

Consumers: Reforms and austerity measures are eating away the purchasing power of Egyptians, especially the middle and upper classes who are the main supporters of the economy. Consumers across most segments are foregoing quality and are trading down for cheaper brands from China and Turkey. The middle-upper and upper income segments are choosing to cut from saving and forego other discretionary spending in favor of maintaining private education and healthcare expenses. There are some signals, however, that spending may start to normalize as consumers have adjusted their spending in the eight months since the devaluation – the new orders component of Egypt’s purchasing managers index (PMI) stabilized in July.

Businesses: Business customers are also squeezed for spending as they face higher business costs, including production and wages. Additionally, a total of 7% increase in interest rates since November 2016 makes it difficult for businesses, especially SMEs, to increase their investments. Customers may be delaying or cancelling purchases altogether. However, large Egyptian or foreign firms in the market with deeper pockets are likely to continue investments, though may turn to lower-cost options.

Government: Despite an expansionary budget, the government is also displaying price-sensitivity because of high levels of inflation. When offering tenders, the government generally awards companies who offer a lower price, and preferential treatment based on past partnerships is not always guaranteed. The government and the military do remain a large customer, however, with public sector investments in construction and infrastructure providing opportunities for MNCs, especially in the technology and industrial sectors.

To adapt to Egypt’s new reality, MNCs are focusing on evolving their businesses in several ways:

  • Creating a leaner and more efficient organization
  • Cutting costs through headcount, travel, sponsorships, and mega-events
  • Utilizing technology to increase productivity per head
  • Creating a flexible process to change prices and package sizes
  • Localizing operations more deeply
  • Becoming more export-oriented

Despite the turbulence, Egypt remains an important opportunity with its population of more than 90 million, diversified local economy, and strategic location. Businesses who want to optimize their performance and stand in an advantageous position when the economy normalizes in the medium- to long-term should continuously develop a targeted and aggressive strategy to stay ahead of their competitors and become pioneers of innovation and efficiency. More details from our research findings and long-term macroeconomic outlook will be shared in our upcoming report, Egypt 2022: Outlook and Scenarios.

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