Egypt 2.0: The Investor Perspective

by Nina Curley, September 7, 2011

Spring’s fervent revolution has given way to a dry summer in Egypt. As demonstrators streamed back into Cairo's Tahrir Square recently to protest the prime minister’s new cabinet, benchmark index EGX 30 ebbed to a two-month low, only 20 points above its March nadir. With the World Bank predicting that the country’s economic growth will sink to 1% this year, given hits to vital tourism and industry sectors, the pace of recovery threatens to emulate a Cairene rush hour.

Yet, as Walid Bakr of Abraaj Capital’s small and medium-sized enterprise (SME) investment fund, Riyada Enterprise Development (RED), attests, there is no time like the present for investing in scaling small businesses in Egypt. Last year, SMEs provided an estimated 80% of Egypt's employment while producing only 25% of GDP, demonstrating a clear productivity gap and opportunity for growth.

Now, Bakr sees SME investment opportunities accelerating over the next few years, as post-revolution spirit fuels public interest in entrepreneurship while short-term economic downturn drives small businesses to approach global markets more quickly.

Wamda spoke to Bakr about how an investor approaches the tumultuous Egyptian market, and what the government can do, aside from extending import and export license validity, to entice investors to rebuild the Land of the Nile.

 
Is now a good time to think about investing in Egypt?

Yes. While the revolution has brought about significant reforms, order has been restored much faster than anyone expected.

There has been short-term adverse impact on the economy, yet because, as a private equity firm, we invest in long-term growth opportunities, I don’t forsee long-term negative impact on our operations, for the following reasons:

Firstly, more companies will be looking to diversify and scale, due to cash flow pressures and the realization of new markets opening up. Thus we will be able to access more opportunities in the market. 

Secondly, I predict a general rise in entrepreneurial activity. For the first time in Egypt, we have a young labor force that is highly motivated for a better future. Sixty per cent of the population is under the age of 30, and for many years, this labor force had few options for growth. Yet today, people are repainting the streets and looking to rebuild businesses here.

Are any sectors a better bet for investment than any others?

While Egypt has large advantages in certain sectors, such as tourism- due to the fact that it holds two-thirds of the world’s monuments- we look for sectors that are less saturated so that we can invest in a few winners. There are certain sectors we prefer, but these days it pays to be sector-agnostic in this region, because many sectors are still developing and there are attractive opportunities across the board.

How have the revolutions affected SMEs?

Of the two Egyptian companies that RED has invested in, commodity trading company AgroCorp and IT services and consulting firm OMS, Agrocorp has fared slightly better, as it exports 100% of its products and was able to manage any operational disruptions in Egypt.

OMS, which conducts 50-60% of its business in Egypt, was more affected by local banking closures and clients delaying payment. Ironically however, both benefitted from the situation due to the devaluation of the Egyptian pound.

In general, businesses that address a purely local market have been affected the most. Many local companies that were in the lead are coming back to the drawing board and realizing they should diversify their market and seek investment in order to scale.

Will the current economic climate push Egyptian companies towards exporting?

Yes. I think that companies are assessing the bigger picture and increasingly looking to export their products and knowledge.

For a company selling physical products and goods, a natural first step is towards regional expansion, because companies can take advantage of fewer tariffs between Arab countries. North Africa is also a natural gateway to the larger, swiftly growing African market.

In the tech space, it makes more sense to go global, as the barriers to entry are much lower. The Levant and Egypt together are becoming a global hub of tech development that is competitive with India. I think we won’t have to wait long to see another big global company emerge from Egypt.

What steps does the new government need to take in order to maintain a good climate for SMEs?

Small business creation in Egypt was previously gaining traction due to existing policies. The biggest concern today, however, is uncertainty. There is concern that new laws could create social regression if the government does not take a long-term approach.

For example, a law created a few years ago set corporate tax at 20%. Now this law is coming under scrutiny. If corporate taxes are raised, this will have an adverse effect on investment, stemming the recent influx. Business owners need reassurance that the government will work to restore investor confidence by maintaining prior incentives.

 
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