2017: A Turning Point?

December 9, 2017

 

Is it just me, or has this year gone by really quickly? The clichest of clichés, I know, but it really does seem like an eventful year and, dare I say it, a turning point? While the region lives up to its billing with one crises after another with never a dull moment, we have, for the most part, somehow managed to fly under the radar for a change. And, whether you like it or not, business tends to like a boring, predictable and drama free life style.

 

As 2017 comes to a close, as ever, there are highlights and lowlights, but it’s safe to say that there are more things to be positive about and the general sentiment is cautiously optimistic (if you can excuse such a lawyerly phrase!). Let’s have a look together on how we fared this year.

 

The Good

 

This time last year, we were in the midst of real economic upheaval, with the government making tough decisions and implementing much needed, yet highly unpopular, IMF “suggested” reforms. We floated the currency and the Egyptian pound lost half of its (official) value overnight. We implemented VAT for the first time. Energy prices were adjusted upwards. 

 

Yet, all hell did not break loose. Over the course of 2017, people gritted their teeth and adjusted to this new reality. Those who could adjust the quickest fared best, while those who either did not want to or could not change, have fared worse.  In some cases, much worse.

 

So what do we have to show for it? Quite a bit actually. Foreign exchange has stabilized, almost all FX restrictions have been removed and there is decent level of freely available FX in the formal market. Our FX reserves are at pre-2011 levels. GDP growth is at a very respectable level of 4% plus. Tax revenue collection surpassed targets this year. Issuance of foreign debt has been managed very well and there is a lot of appetite in the Egypt story. The EGX has done very well and there are so many IPOs happening it feels like almost daily announcements. Unemployment figures are coming down. There are almost no disruptions to the power grid. Oil and gas are freely available, again with almost no disruptions to supply.

 

When you put it that way, it’s no wonder we have become the poster child of the IMF and World Bank for 2017.

 

But that’s not all.

 

We continue to make great progress in nurturing entrepreneurship and there has been a real turnaround by the government in embracing small and medium enterprises and startups as a vehicle for economic development. The CBE continues to try to push the banks to lend at favorable rates to SMEs and the government is considering further incentives. The CBE are, for what seems like the first time ever, going against their naturally conservative inclination and investigating how to promote and regulate FinTech. The government has launched Egypt Ventures with the aim of promoting and deploying investment in startups. The state of startups regionally and in Egypt continues to go from strength to strength. For those who attended RiseUp this year, the buzz in the air was truly infectious and inspiring.

 

On the renewable energy front, Egypt has managed to close two significant projects, the FIT program, which was mostly for PV solar projects, as well as the 250MW Wind Farm IPP project in Gabal El Zeit. It took us 3 years to get the deals done, but we got there in the end and managed to attract over USD 2.5 billion in FDI and, more importantly, the backing of some of the best international developers and financiers globally. Closing these deals is the best endorsement for foreign investors that Egypt can be attractive for long term investment projects.

 

Last, but certainly not least, Egypt has managed to shift gears and focus on promoting more trade and investment in Africa. Companies are exporting more and more Egyptian products to African markets, where we have a competitive advantage. We are also seeing a lot more interest from Egyptian companies in investing in Africa and I expect this trend to continue more aggressively in 2018.

 

The Bad

 

Inflation continues to pose a problem for businesses and, more acutely, for regular people. Those of us who are privileged enough to have a high level of income might like to whine or vent about how they will be spending their new year’s vacation in Egypt this year, as opposed to the regular pilgrimage to Beirut, Dubai or London, but they should really consider themselves very lucky indeed.

 

Those less fortunate are struggling to make ends meet on a daily basis. Hundreds of thousands of Egyptians have been submerged or further submerged under the poverty line. The middle class has taken a battering, with many, if not most, having to re-adjust their basic lifestyle (read: where to send their kids to school and university) to accommodate the new reality.

What gives me hope is the truly amazing resilience the Egyptian people have demonstrated since the economic tsunami of the last 12 months. Things could have gone very differently and we should count our blessings that the system, although under severe stress, has not buckled. Putting terrorist attacks and sexual harassment to one side, Egypt remains a country with a relatively low level of street crime and a place where, by and large, one feels safe.

 

Next up: interest rates. I am not sure what more I can about this than my previous article Serenity Now. I remain, let us say, dumbfounded by the persistence of the CBE with this policy. Many businesses that employ thousands of people are at a real risk of going bankrupt if these credit card levels of interest rates persist. The market is hoping, if not praying, that reason will prevail at the next Monetary Policy Committee at the end of this month and that they will bring down interest rates as sharply and aggressively as possible.

 

Public debt levels, especially foreign debt, are at a worrying level. Yes, we needed the money badly to stabilize the economy. Yes, with credit card level interest rates on the Egyptian pound it makes sense to borrow in foreign currency. I am not looking a gift horse in the mouth, but we now need to take stock and re-evaluate how much debt we are taking on, what projects these funds will bankroll and whether we can balance the books. It’s a really tough balancing act, but we need to be careful because one or two wrong moves and we can find ourselves in default territory.

 

Another area of concern is the ever increasing direct involvement of state actors in the market. On the one hand, I can understand the rationale that state actors operating in certain markets, especially basic commodities, can somehow mitigate perceived price gouging by the private sector. At a time of hyperinflation, many people will sympathize with this populist move. On the other hand, what private sector investor in their right mind would invest in a market where they would have to compete with the state, which does not necessary have profit as a primary motivation?

 

If this trend continues, we will see further retraction from these markets from the private sector, which will lead to state actor monopolies. The government needs to make up its mind – are we going for a private sector led economy, where the government’s primary function is to regulate markets, or are we going for a more soviet style socialist economy where the state controls the markets directly? You can’t have it both ways and giving mixed signals will mean you might end up with a distorted and muddled economy that is not in the best interest of the consumer in the long run.

 

Finally, my biggest personal worry: the population explosion. Lest we forget, we are now 104 million people and rising rapidly. All of these grand designs will be for naught if we don’t find a solution to this problem. For more on this, you can check out my previous article, Late Long and Few.

 

The Ugly

 

First and foremost is the human tragedy that has resulted from the war on terror. This is not my area of expertise so I will limit any commentary to some common sense observations. The government is on record with a clear policy of confronting the terrorist threat, but it seems that the current strategy is not working. We need to find a new strategy that works. This is not only a purely national security issue, but an economic issue – as I have said before, business works best when things are boring and predictable.

 

We live in a neighborhood where crazy things happening is the norm. Nothing in that sense is new. What is a little bit different nowadays, however, is that we live in an era of unpredictable leaders and very quickly shifting alliances. These can represent dangers and opportunities. Let’s hope we continue to work hard on the foreign policy front to ensure that we fall on our feet and protect our long term best interests.

 

So what does the future hold for 2018? More on that anon. For now, I wish you and yours all the best and a very happy and prosperous new year.

 

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