By Richard Banks, Director, Emerging Markets, Euromoney Conferences
Last Wednesday, I had the great pleasure of attending the 3rd EFG-Hermes MENA Conference in London. In a room packed with MENA businesses and interested London investors the star of the show was the impressive Mostafa Hegazy, presidential advisor for strategic affairs. He delivered an erudite and powerful talk on the realities of the Egyptian situation and the prospects for foreign investors.
Taking questions (including, I must admit, one from me) Hegazy addressed some, but not all, of the issues facing foreign direct and portfolio investors in Egypt. I also had the opportunity to speak to some of those investors and find out what was concerning them and what, therefore, Egypt must address if capital is to flow again.
Highest among their concerns was not, as you might expect, the physical security situation. In fact, the only people interested in that were the journalists. What was important to investors was security of their profits and capital. They want to be sure that, if they put the money in, they can get it out. Institutional investors (those who invest in the stock market or funds) have compliance teams that will not even let them invest unless the repatriation of those investments at will is assured – the attractiveness of the market or the opportunity is irrelevant if the profits can’t be realized.
So Egypt has to address this concern and fast. Interestingly as I write, news has come in that Egypt has returned $2bn to Qatar – so I suppose that the process has already started. Jokes aside, the ability and willingness of the Central Bank of Egypt to return these funds to Qatar demonstrates, to me at least, confidence – not crisis. Reserves have risen from $13.4bn in March to $18.8bn in July. The bank has recently held exceptional currency auctions worth $1.6bn. The foreign currency situation is still challenging, but Egypt is not, repeat not, in the midst of a massive currency crisis.
The Bank’s decision, to me, shows that it would rather return the money than pay too high an interest rate on it. The other alternative – default – was not considered as far as I know. Egypt is paying its debts unlike many nations in the Eurozone – no one is talking of a Qatari ‘haircut’ or Egyptian default. Since the money was returned, the pound has been stable – which shows market confidence too. FX markets, always the most liquid trade, are the bellwether of short-term confidence.
Restrictions on capital flows will be lifted eventually and Egypt will return to its usual high standards of openness to international capital. The sooner that happens, the better it will be for investment.
However, that’s not all that’s needed to restore the confidence of the international markets. Egypt’s leaders have to act on resolving outstanding investment disputes, removing the threat of retroactive legislation on investments and draw a line under some of the anti-investment decisions made over recent years. They have to give proof of their commitment to the creation and maintenance of a best-practice investment environment. That’s what the investors want. They can bear insecurity, they can bear political uncertainty – in fact some of them see that (correctly in my opinion) as a buying opportunity. But if their investments are going to be mired in legal disputes or risk expropriation of whatever form – then they will stay away.
It is not the “political turmoil” or the “security situation” that is keeping investors away – it’s the investment climate that has resulted from that turmoil. That’s a good thing, because the investment climate is something the policy-makers of Egypt’s ‘foundation’ government can quickly address. I hope they do. I shall press them on it at the 19th Euromoney Egypt Conference in Cairo on 11 November.