Like most emerging and frontier markets, Egypt has seen a sharp pullback this year as a stronger US dollar has been associated with a selloff throughout the space. Nordic Investor interviewed two frontier market specialists who invest in Egypt: Vergent Asset Management’s Ali Al-Nasser, and Tundra Fonder’s Mathias Althoff.
Egypt’s currency devaluation and IMF programme in November 2016 provided the catalyst for Tundra Fonder to enter the market. “The market was effectively closed due to FX issues, and the IMF programme also involved a long list of reforms including subsidy cuts. We found attractive valuations. Sticky inflation and delayed interest rate cuts are two worries, but we think Egypt’s economy will continue to recover.” says portfolio manager, Mathias Althoff, who recently visited the country.
The IMF has recently downgraded global growth forecasts in general, but remains relatively upbeat on Egypt, forecasting growth of 5.5% in 2018 and 2019, rising to 6% out to 2023. “As such, Egypt is amongst the fastest growing economies in either emerging or frontier markets, and is somewhat unusual in being a very small part of both emerging and frontier market equity indices: de-listings and the currency devaluation have reduced Egypt’s representation in emerging market indices, but privatisations and IPOs could increase it in future” says Vergent Asset Management portfolio manager, Ali Al-Nasser.
After five tough years of declining investment and demand, drivers for growth now include a new investment law, a bankruptcy law, a recovering tourism industry, and oil and gas discoveries, not to mention some FDI. There are also hopes that lower interest rates could reignite credit and capital spending cycles, and let companies make use of their spare capacity.
“A large population of 100 million people, growing at 2.2% per year, with a median age of 24, and a GDP per capita of around USD 3,000 bodes well for future consumption growth that can be both scalable and exponential given its starting at a higher base than many African countries” says Al-Nasser.
Political turbulence – seen in changes of Government, death sentences for Islamists, confiscation of Muslim Brotherhood assets – goes with the territory in many frontier markets, but Althoff overall judges that politics has stabilised as President el-Sisi pushes forward with unpopular reforms related to the IMF programme. “We do not see a repeat of 2011-2013 as the population are generally content and want stability, so long as the economy grows” he says.
“The actions against the Muslim Brotherhood appear to be an isolated case and should not be viewed in the context of a wider approach to private sector investment in the country. In fact, Egypt has been open to foreign investment for a few decades now, and arguably the framework for attracting foreign investment has seen good improvement in the last few years. Egyptian companies have been involved with foreign investors for a long time and so we find that they rank highly in areas like investors relations and transparency when compared to other frontier markets.” says Al-Nasser.
The local investor base is 60% retail and 40% institutional, of which 60% are locals and 40% are foreign. The foreign category is broken down into 25% non-Arab and 15% from Arab countries as per the Egypt Exchange classification. Locals tend to be more active in real estate and state-owned enterprises, while foreigners are more involved in larger caps and financial services and consumer. “Local participation drives the market” says Althoff.
Debt and FX
Moodys suggests that Egypt is vulnerable on the debt side, and on the face of it a debt to GDP ratio of 90% of GDP with interest rates of 20% results in very high debt service costs. But default is not expected as the debt to GDP ratio is coming down and should fall further as GDP accelerates – and if interest rates come down.
Another currency crisis seems unlikely as, partly thanks to the 2016 IMF programme, foreign exchange reserves have reached USD 44.5 billion, which covers 8 months of imports. Moreover, expanding oil production should improve the trade deficit, which is down to 2.5% of GDP. “Long term the Zohr Gas