Investors are divided on the future for FDI in Egypt as unrest continues. While there is general agreement that the long-term economic fundamentals of the country are sound and attractive, there is widespread disagreement on what to do in the short term.
Pictet Asset Management’s senior investment manager, Oliver Bell, runs the firm’s emerging markets team and its Middle East and north Africa fund. While reluctant to make a prediction on how events in the country will turn out, he is very concerned about the lack of clarity on what the future will hold with Hosni Mubarak leaving office, and believes that the current crisis undermines the investment case for Egypt.
Mr Bell says: “The economic and financial effects of Egypt’s crisis are not good... One obvious concern would be a run on the banks, but the banking system is very liquid, with a loan-to-deposit ratio of about 50%. Other concerns include the threat to oil transportation through the Suez Canal, although only 2% of global oil passes through Egypt. Worse for Egypt is the country’s reliance on tourism, at 11% of GDP, which is clearly threatened by domestic instability.
“One thing is for certain: the equity risk premium has increased dramatically for the foreseeable future, while the investment case for one of the fastest-growing countries of recent years may have been fundamentally undermined.”
However, Zin Bekkali, the chief executive officer for frontier and emerging market investment firm Silk Invest, presents a more optimistic view. His firm remains committed to its investments in Egypt, believing that the current upheaval may take time to solve but it does not change the country’s positive fundamentals.
Mr Bekkali says: “For investors, this could mean dealing with significant volatility, but they have been compensated for their patience in the case of Turkey and will probably be rewarded if they keep their confidence in Egypt.
“With its combination of a young population and successful entrepreneurs, Egypt will eventually find its way back to investors’ hearts. The events of the past few weeks did not change the fundamentals of the country's companies nor have they altered the opportunities that its economy holds.”
Both men also recognise that Egypt has sizeable reserves of cash to deal with any fiscal issues and does not have to deal with hyperinflation.
Maintaining a silence
The General Authority for Investment, Egypt’s investment promotion agency, is not commenting on the current situation or offering any advice to investors. It does say, however, that Egypt’s minister of investment, Rachid Mohammed Rachid, has been replaced by Dr Samiha Fawzy.
Mr Rachid had recently cancelled his trip to the Davos World Economic Forum. While he did not give a reason, it has been suggested that it was due to the problems in Egypt. However, in a press conference, Mr Rachid had expressed confidence that the discontent could be managed and that the country would not fall into chaos and destabilisation. He had also instructed his staff to issue daily statements about new foreign investments, such as those of Nestlé and HSBC, to give a reassuring message.
Remarkably, oil companies appear to be benefiting from the chaos in Egypt. Share prices of oil majors such as Exxon and Chevron have shot up during the protests. Analysts say that fears for the stability of the Suez Canal have caused oil prices to increase due to concerns that the supply could be restricted.