Egypt’s $57 Billion Windfall Cues Top Emerging Market of Tomorrow

Ten years ago, I ranked Egypt among a small group of countries with potential to become strong emerging market growth stories by 2025. It’s been a disappointing decade – until this year. 

I can’t claim to have had any great foresight in predicting Egypt’s pharaonic turnaround. Its inclusion in my book Frontier: Exploring the Top Ten Emerging Markets of Tomorrow was the result of an extensive survey of the biggest and best performing emerging market investors of the time – those who had bet correctly on the last major growth economies: China, India, Brazil. I put three questions to each of the investors: Which frontier markets do you favour most for the next ten years? When are you visiting these countries? And can I come along? 

There were few signs of a future thriving economy when I arrived to do my research in Egypt. The mood was tense. Four bombs had exploded in Cairo in the past 48 hours. Tahrir Square was surrounded with razor wire. Amidst heightened security, I was detained in custody for a full day, questioned by police and army chiefs about references in my notepad to bombs, Mubarak and the Muslim Brotherhood. It took my wife, photographer, lawyer, embassy officials and a random hotel bellboy called in as a translator to convince them that I was writing about the economy. 

The economy has mirrored this heightened state of nervousness throughout the decade:  inflation has more than tripled to 33 percent - a result of one of the world’s steepest currency depreciations driving up costs of imported basics such as wheat and fuel, and lifting the nation’s dollar-denominated debt to crisis levels at more than 90 percent of gross domestic product.

Bad turned to worse with escalating neighbourhood conflicts in the Red Sea and Gaza. Beyond deterring tourists to the region, Egypt’s revenue from the Suez Canal has plummeted as shipping companies fearful of Houthi attacks reroute from the Red Sea to longer but safer voyages around the Cape of Good Hope. The country’s considerable gas export earnings have been hit as Israel’s security crackdown has halted all deliveries from its main Tamar gas field for liquefication and re-export from Egypt. Meanwhile, Israeli plans for a major offensive in Rafah raise the prospect of Palestinians flooding across the border, expanding the conflict and refugee crisis into Egypt, which is responding with rapid construction of a miles-long border wall. 

Rather than promoted to the investment world’s premier league of emerging markets, as my book had signalled, Egypt was instead about to be relegated to “unclassified market status” by FTSE Russell as foreign-currency shortages frustrated investor attempts to withdraw their capital.

And then, in the space of a few weeks in early Spring, everything changed. Abu Dhabi’s state investment company ADQ agreed to invest in developing Egypt’s Mediterranean resort of Ras el–Hekma, with a humungous projected investment of US$150 billion. Egypt’s largest-ever foreign direct investment by far includes $35 billion upfront for immediate injection to shore up the currency and help ease inflation. 

Flush with foreign cash, Egypt allowed its currency to become freely determined by the financial markets – and thereby fulfilled a key requirement from the International Monetary Fund for its own long-discussed $3 billion assistance package. The IMF not only promptly approved the financing – but more than doubled the amount to $8 billion, with Egypt overtaking Ukraine as the Fund’s second biggest borrower after Argentina. The coordinated package was completed by the European Union matching the IMF with a further $8 billion, and the World Bank adding $6 billion. The total support at $57 billion upfront is equivalent to about 15% of Egypt’s entire economy. 

What triggered this synchronised rush of support for Egypt? The same factors that made its economy so vulnerable: proximity to the world’s most inflammatory and divisive conflict zone. And on top of that, intrinsic awareness of untold risks for the US and its western allies in the event of economic calamity in Egypt – a country that has long displayed divided international loyalties. At the time of my book a decade ago, 85% of Egyptians questioned by the Pew Research Center expressed an unfavourable view of the US, the highest proportion of anti-American sentiment anywhere; Russia ranked fourth. President Abdel Fattah El-Sisi’s first public engagement outside of the Arab world upon seizing power and once again after winning the presidency was with Vladimir Putin. On the agenda: supply of MiG-29 fighter jets, Kamov Ka-25 attack helicopters and Kornet anti-tank missiles. The two countries have since progressed with major joint projects including the Dabaa nuclear power plant, financed through a $25 billion Russian loan and with Moscow’s Rosatom State Nuclear Energy Corporation supplying the nuclear fuel, training, and operation and maintenance. 

Egypt’s jumbo financial booster immediately took its desired effect. Investor jitters over a looming debt payment crisis have subsided, with the perceived risk of default easing from 50% to below 30%. Writing in New York-based Frontier Markets News, FIM Partners’ head of macro strategy Charlie Robertson revealed his firm’s “exciting trade” now was shifting from investing in dollar-denominated Egyptian government debt to buying local-currency treasury bills: a strengthening currency combined with interest rates around 29% in March “provides a very appealing US dollar return.”

The turnaround was enough for Egypt to stave off relegation in the investor league tables from FTSE Russell: “Market participants report that previous delays in the ability of international institutional investors to repatriate capital from Egypt have been addressed.”

Can Egypt sustain this positive economic momentum? Western investor confidence hangs on continued commitment to a flexible exchange rate combined with tough anti-inflation targeting and reductions in the budget deficit. They will be watching for further privatisation and a reversal of the deepening involvement of the army across sectors from construction to food and pharmaceuticals.

But beyond the gyrations of western investor sentiment, less fickle support comes from the Gulf region. While this year’s whopper investment by Abu Dhabi topped everything to date, it continues a trend of ever-growing commitment from the GCC. A $20 billion strategic investment platform created in 2019 between Abu Dhabi’s ADQ and The Sovereign Fund of Egypt (TSFE) aims to help advance Egypt’s development through joint investment in key sectors such as healthcare and pharma, utilities, food and agriculture, real estate and financial services.

Most of companies I cited as case studies in my book a decade ago have received significant investment from Gulf investors. Last year, Ghabbour Auto, Egypt’s largest automobile manufacturer, agreed to sell a 45% stake in its leasing unit GB Lease to Abu Dhabi-based Chimera in a deal estimated at around $34.6 million.Juhayna, the country’s biggest dairy and fruit juice producer, is 15% owned by Baladna after the Qatari food industries company increased its stake last year.Egypt’s privatisation program last year saw Emirati company Global Investment Holdings buy 30% of shares in Eastern Company, providing $150 million to replenish the tobacco manufacturer’s imported raw material supplies.

In 2022, ADQ-owned companies invested EGP 28.5 billion ($1.8 billion) to acquire shares of five major publicly traded Egyptian companies along with purchasing 60 percent of Auf Group, an Egyptian snacks and coffee manufacturer. Abu Dhabi Ports Group bought 70 percent of the shares of the International Cargo Subsidiary, which is owned by Egypt-based Transmar and Transcargo International (TCI). Chimera has also bought shares of Belton Financial Holding, a unit of Orascom Financial Holding, which is owned by Egyptian businessman Naguib Sawiris.

While there is every reason to expect this level of Gulf support to continue, even these huge inflows are dwarfed by the costs of Egypt’s famous mega-projects: the extension to the Suez Canal and the New Administrative Capital (NAC) east of Cairo promising Africa’s tallest skyscrapers and a Ministry of Defence buildingseven times bigger than the Pentagon. During a more recent trip as a guest lecturer at the American University in Cairo, I checked in at the Westin in the NAC, resplendent with an immaculate 27 hole golf course and luxury spa. I didn’t see a single resident. It had the same empty feel of other newly constructed state capitals like Naypyidaw in Myanmar. 

It is these ambitious projects that simultaneously carry the greatest threat to Egypt’s sustainable growth through unmitigated public spending, and the prospect for bold economic expansion.

This year’s coordinated international injection into Egypt has spawned a once in a generation opportunity as it has resolved the dollar shortage that impeded all aspects of economic activity and the immediate risk of debt default. Additionally, there is investment flowing and momentum but, equally significantly, substantial pressure from international backers to address the main contributor to Egypt’s fundamental economic imbalance: interest payments on colossal debt and fuel subsidies.

With time, given Cairo’s busting streets, the NAC will become a bustling metropolis. It will get there fastest if progress on such mega-projects is tempered by the overriding need to keep the country on a fundamentally sound financial footing. 

*Gavin Serkin is the author of Frontier: Exploring the Top Ten Emerging Markets of Tomorrow, Journalist and Editorial Consultant on emerging & frontier markets and technology, with particular focus on Africa, blockchain, ESG and impact investment.