By Matthew Spivack, Practice Lead - EMEA
The dust has not yet settled from recent political events in Egypt. However, it is already clear that the reinvestment timeline is delayed for foreign companies due to increased political uncertainty, which will drive short-to-medium term economic deterioration.
There is an uncertain political outlook due to several recent developments, including the military's decree that weakened presidential powers, the judiciary's decision to disband parliament, and an uncertain future for the body tasked with writing the country's new constitution. While direct confrontation is not inevitable, the potential for conflict with the Muslim Brotherhood will increase as the military delays or annuls important political decisions.
There are serious ramifications for Egypt's economy. Egypt's efforts to secure a US$3 billion IMF loan are undermined by the absence of a parliament and ambiguity regarding President Mohammed Morsi's powers. This could jeopardize much-needed aid from other institutions, such as the European Union and World Bank.
Ongoing political turmoil increases the likelihood of a disorderly currency devaluation of up 15% to 30%. This would significantly raise food and fuel prices, increasing social tensions. Egypt has around US$15 billion in foreign currency reserves, which can only support the pound for roughly four months.
Given the new constitutional provisions that enshrined expansive military powers, the transfer of power is purely symbolic. Decision making about the economy will be opaque, taking place behind closed doors, adding to the uncertainty surrounding reinvestment.
High risk environment
With recent events, risk will remain high, altering the risk/return profile for companies interested in the market:
This assessment is driven by several risks:
Unclear government commitments: Without a parliament, the military may issue high-level decrees on the economy or large government projects, but these decrees may be reversed or difficult to implement.
Reputational degradation: Supporting policy decrees by the military could undermine brand equity, particularly among MENA customers. If President Morsi is able to extract meaningful concessions from the military, then this risk could be neutralized.
Currency depreciation: Egypt's currency is extremely vulnerable to capital flight, reduced hard currency flows from tourism, and a drop in remittances due to fears of ongoing political uncertainty.
Higher cost of doing business: Numerous fault lines threaten Egypt's stability, which could disrupt regular business operations, especially in big cities like Alexandria and Cairo.
Risk mitigation strategies
Companies should implement risk mitigation strategies to protect investments in Egypt:
Maintain relationships with experienced bureaucrats: The bureaucratic core of the government will stay in place regardless of political upheaval. Senior executives should establish close relationships with career bureaucrats that handle product registration, taxation, and tariffs.
Leverage Saudi partners: Egypt's stability is in the interest of Saudi Arabia, which will pour in money to support the military's efforts to spend domestically and promote stability. This might be a good time to utilize your Saudi partners to expand presence in Egypt.
Focus on people for long-term sales growth: Companies can differentiate themselves as employers of choice and improve retention levels by prioritizing the safety and well-being of staff amid political and economic instability. This is also an opportunity to hire staff away from other multinational companies that are freezing expansion plans as a result of uncertainty.
Set up alternate/satellite locations for the workplace: Position your organization to overcome transportation disruptions if there is a return of demonstrations, clashes between the police and protesters, or industrial actions.
There are benefits for companies with a high risk tolerance:
Brand loyalty: Demonstrate your support by continuing some level of investment. A marketing campaign to accompany investment can build brand loyalty in turbulent times. Maintaining visibility is critical for future investment.
Undervalued acquisition targets: Assets will be trading at extremely low valuations after a currency devaluation of the Egyptian pound, which seems to be inevitable. Now may be the time to shop for companies and deepen your presence in the market.
Stronger local partnerships: Companies can strengthen relationships with partners by offering short-term financing amid tight credit conditions.
Market share gains: Multinational companies with risk mitigation plans will be positioned to gain market share while competitors are scrambling to respond to events in Egypt.