Egypt has been through a turbulent six years, marred by political instability and insecurity. Finally, with the acceleration of long-awaited economic reforms in late 2016 and 2017, Egypt is in a phase of transition. Given the economic developments and the challenges businesses are facing, MNCs should evaluate Egypt on its long-term outlook, even as they engage in their 12-month planning. Integrating long-term opportunities and risks into the 2018 planning process will ensure MNCs are taking the necessary steps now to remain competitive in Egypt.
Government policy will guide Egypt’s trajectory:
The government is embarking on a comprehensive reform and development program to stimulate growth in the economy. MNCs should monitor the government’s agenda and align their strategies with key policies. On the reform front, Egypt has and will continue to implement several key policies such as exchange rate liberalization, eliminating capital controls, subsidy reform, increasing public revenues, and boosting the SME sector. Some policies will be carried out more effectively than others, namely exchange rate liberalization and subsidy reform, both of which will improve investor confidence and cut out inefficient spending. On the other hand, increasing public revenues to a sustainable level will be difficult; despite the implementation of a 14% VAT, funds are largely being raised through borrowing. Improving the SME sector will also be challenging because of the obstacles many SMEs face to join to formal sector.
MNCs should also align their strategy with the government’s development agenda, which includes national projects, attracting FDI, achieving energy stability, and improving the health and education sectors. Due to underfunding for complex plans and slow implementation, the aggressive development agenda will not materialize into real benefits for MNCs in the short-term. However, MNCs can find pockets of opportunity: the new investment law provides incentives for foreign investors, and developments in the energy sector will provide more consistent energy supply, resulting in more efficient operations for businesses. MNCs, especially in the industrials and technology sectors, can find emerging opportunities as the New Administrative Capital and the Suez Canal Economic Zone are being developed. MNCs should monitor the relevant projects and plans, and begin targeting them as they see improvements in funding and acceleration in implementation.
When taken in tandem, Egypt’s reform and development agenda create implications for MNCs’ existing strategies in the market. MNCs need to understand these implications to prepare their operations for Egypt’s new economic reality.
Implications for MNCs:
Rising operating costs – MNCs faced a significant rise in costs at the end of 2016 and 2017 because of severe depreciation in the pound and inflation reaching more than 30%. Over the coming years, costs will continue to rise because of the phasing out of energy subsidies that will increase utilities costs, the continuance of relatively high inflation, and potential short-term currency fluctuations.
Evolving customer demand – B2C, B2G, and B2B customers will display prolonged price-sensitivity, driven by the last shock of FX depreciation, the implementation of a VAT, subsidy cuts, high interest rates, and insufficient wage growth. Markets that faced similar economic downturns like Russia, Brazil, and Argentina witnessed drawn-out periods of dampened demand in which customers traded down, even permanently in some cases. MNCs must build new capabilities to attract hesitant customers in this environment
Localization pressures and incentives – MNCs are likely to face pressures and incentives to increase their local presence both from macroeconomic factors and from the government’s policy to attract FDI. Some sectors, like pharmaceuticals, will face greater pressures than others, while those who produce niche products will face less pressure. Nonetheless, the drive for localization may shift the competitive landscape, but can also isolate operations from FX volatility and allow MNCs to take advantage of Egypt as an export hub
What should MNCs do?
- Evolve all business functions – MNCs need to adapt to Egypt’s economic transition by taking a flexible approach to adjusting their operations in all functions, including customer chain, finance, marketing, supply chain, and talent
- Look to other markets – Countries like Russia, Brazil, and Argentina witnessed similar economic downturns and periods of prolonged dampened customer demand. MNCs should connect with their Russia or Latin America teams to understand how they dealt with similar challenges
- Think in scenarios – MNCs should utilize scenario planning as uncertainty persists in the market. Scenarios for exchange rates, political and economic developments, allow businesses to track external developments that would significantly impact their business performance and react faster than their competitors
- Monitor potential disruptors – Several events could derail Egypt’s recovery over the next several years. Egypt will have two presidential elections, one in 2018 and one in 2022. While the likelihood for political instability is low, MNCs should still prepare contingency plans as the impact would be high. Other disruptors to watch are reform fatigue, an oil price spike, heightened insecurity, and a housing bubble
For our latest updates and insights, FSG clients can access FrontierView to view Dalia’s Egypt 2022: Outlook and Scenarios report.