On 25^th January 2011, hundreds of thousands of Egyptians – many organised through social media – took to the streets across the country on the ‘Day of Anger’ to demand an end to police brutality, state of emergency laws, corruption and a lack of free elections. They were fighting for freedom of speech, greater employment opportunities and higher wages. The chants that filled Tahrir (‘Liberation’) Square in Cairo spoke volumes: “Bread, freedom, social justice” and “We won’t leave; he should leave”, referring to President Hosni Mubarak.

And leave he did. After 30 years, on 11^th February, Mubarak’s rule came to an end following 18 days of nationwide protests. The Supreme Council of the Armed Forces took over and dissolved Parliament. After an extended election period, in which the Muslim Brotherhood won nearly half the seats, the presidential elections took place at the end of June 2012, putting Mohammed Morsi of the Muslim Brotherhood in power.

But the inability of the government to improve the everyday lives of Egyptians culminated in enormous demonstrations on the anniversary of Morsi’s electoral victory. As a result, Egypt’s military chief General Abdel-Fattah el-Sissi installed Chief Justice Adly Mansour as interim president. Mansour is currently leading a transitional government with ‘full powers’ until presidential and legislative elections can be held, possibly in March or April 2014. The current constitution will be amended at the same time.

Andrew Long, Deputy Chairman and CEO of HSBC Bank Egypt, believes that if the government can adhere to the proposed roadmap for a referendum and parliamentary and presidential elections, then this will be a major improvement and will have a positive impact on the business and the country as a whole.

It is clear that for many Egyptians the reforms are not moving fast enough, nor do the different governments inspire confidence that real change will happen. Tarek El Mahdy, CFO at Sphinx Glass, an independent float glass manufacturer based in Cairo, says: “We have had two revolutions in this country – the first phase in January 2011 and the second in June 2013 – in order to change things, but unfortunately things are not changing. The government aims are to stabilise the situation and not provoke anyone. Many people hoped that they would see a revolution in economic growth, regulations, tariffs, treasury, roads, culture and the mind-set of the people – but what was started on 25^th January 2011 is not yet finished.”

The state of the nation

The tumultuous political situation has not helped Egypt’s reputation in the eyes of the credit ratings agencies. On 5^th July, Fitch Ratings downgraded Egypt to B- from B, with a negative outlook. Paul Gamble, a Director in Fitch’s Sovereign Group, says: “This reflects a high level of political uncertainty, a very weak fiscal position and a weakening of the government’s commitment to implement economic reforms. Egypt’s budget deficit is the highest of any country we rate and the authorities do not appear inclined to reach an agreement with the International Monetary Fund (IMF) that will involve measures – notably subsidy reform. Government debt has risen rapidly and shortages of foreign exchange (FX) are hindering the private sector.”

On 9^th July 2013 Saudi Arabia announced a $5 billion aid package for Egypt that included a $1 billion cash grant, $2 billion worth of petroleum products and natural gas, and $2 billion as a deposit in the Central Bank of Egypt (CBE), free of normal financing costs. The same day, the UAE offered a grant of $1 billion and an interest-free loan of $2 billion. On 10^th July, Kuwait followed suit with an aid package worth $4 billion.

But the IMF’s willingness to provide a lifeline for Egypt cooled considerably following Morsi’s removal. On 26^th July, it stated that there were no plans to restart negotiations for a $4.8 billion loan until the country’s military-backed transitional government gained recognition from the global community. However, by this time three Gulf states had stepped into the gap.

Anthony Skinner, Director and Head of Middle East and North Africa (MENA) practice at risk analytics company, Maplecroft, says that at least the authorities know that they have the support of Saudi Arabia, Kuwait and the Emirates, which they didn’t have before. “The negotiations between former president Morsi, his team and the IMF were quite difficult. However, now the Egyptian authorities feel that they don’t really need to worry about the IMF and its conditions because of Gulf aid. In a sense, the authorities feel like they have more breathing room to engage in fiscal reform and stimulus to ease some of the economic pressure by generating growth. But this is misleading because painful structural reforms still need to take place.”

Economy

Egypt’s real GDP slightly improved during the first nine months of fiscal year (FY) 2012/2013, growing by 2.3%, compared to 1.8% during the same period last year, according to the Ministry of Finance’s August bulletin. However, inflation has increased from 4.7% in December 2012 to 10.4% in October 2013.

Net inbound foreign direct investment (FDI) fell by 25% in fiscal year 2012/13 from the previous year, according to the CBE. Rising unemployment levels – at 13.3% in 2Q13 compared to below 9% five years ago – represent another obstacle to the government, while those living below the poverty line reached 25% in 2010/2011.

In the medium term at least, Saudi Arabia, Kuwait and the UAE will continue to provide enough aid to prevent a full-scale economic crisis. Egypt’s FX reserves have hovered just under $19 billion since July due to such support. However, although the loans and aids from Gulf countries are soft loans, with mild conditions compared to other sources of finance, they will still increase Egypt’s debt. According to the budget, it is expected to reach 89% of GDP in 2012/13, compared to 85% a year earlier.

On 31^st August, the interim cabinet announced an economic stimulus plan worth $3.2 billion (later increased to $4.2 billion), which it said is aimed at creating a 3% growth rate over the current fiscal year, maintaining social justice and creating new job opportunities. On 11^th November the government announced that a second stimulus package of $3.5 billion would be launched by the end of the year. A major share of the stimulus will be spent on infrastructure projects, such as electricity grids, roads, housing and public transport, as well as raising the minimum wage from $106 to $174 per month by January 2014.

In addition to shorter-term fiscal fixes, the government launched a long-term developmental vision, ‘Egypt 2022’, aimed at achieving a “sustainable and contained growth”, according to the Ministry of Planning. In tandem with the fiscal stimulus, this programme focuses on developing basic infrastructure – especially in Upper Egypt, New Valley, Sinai and the Suez Canal – in a way that serves industry, agriculture, trade and transportation.

“Having a fiscal stimulus in place is important in order for the economy to chug along, but it is just a stop-gap measure,” says Skinner. “The Egyptian economy is on a lifeline, which is being extended by Saudi Arabia, the chief provider of funds and aid, as well as the UAE and Kuwait. But by relying on this external liquidity, the authorities are just delaying the necessary economic reforms to get the economy back on its feet.”

Banking and markets

Over the past ten years the CBE restructured the banking market in Egypt and the number of banks were brought down to 40 from approximately 60. In addition, the central bank oversaw a recapitalisation of the banking sector. According to HSBC’s Long, this is why there haven’t been bank failures during the period post the January 2011 revolution nor has there been any evidence of large amounts of corporate provisioning during the past two and a half years of recession. Clearly, the banks have an appetite to lend and often have an average maturity of their lending book which is typically longer than seen in countries with debt capital markets.

Very few global banks have opted to leave the market. BNP Paribas and Société Générale (SocGen) sold their subsidiaries in Egypt but this was mainly to meet new capital requirements, rather than due to concern about the Egyptian market. Two Gulf Co-operation Council (GCC) banks stepped in: Qatar National Bank (QNB) bought SocGen’s National Société Générale Bank (NSGB) and Emirates NBD bought BNP Paribas Egypt. Both deals were done at the end of 2012.

However, the markets have not fared as well – since 2011 the amount of trade on the Egyptian Exchange (EGX), which has 234 listed firms, has nearly halved. As a result, the exchange is revising listing regulations, developing new mechanisms for exchange traded funds (ETF) and rights issues, and working to increase trade on its fixed income market. In addition, there is talk of a bond trading platform that has been ten years in the making potentially starting early next year.

Doing business

Unsurprisingly, Egypt has dropped in ranking in the International Finance Corporation (IFC) and World Bank ‘Ease of Doing Business 2014’ report – but only by one place. It is now ranked 128^th out of 189 economies. In the ‘ease of starting a business’ it dropped six places, while in ‘getting credit’ it dropped four places in comparison with last year.

The country has faced a number of specific challenges, which has caused Egyptian business activity to shrink for the 13^th month in a row, as of October 2013. For example, most of Egypt has been under night-time curfew since mid-August, when security forces broke up sit-ins of supporters of Morsi. However, the seasonally-adjusted HSBC Egypt Purchasing Managers Index (PMI) for the non-oil private sector rose to 49.5 points in October, up from 44.7 points in September and moving closer to the 50 mark separating growth from contraction.

Whether business sentiment improves, comes back to the question of the government and its vision for the future, says Maplecroft’s Skinner. “It is the uncertainty of what Egypt will look like in a year or two as many businesses take a wait-and-see approach to making future investments, whereas others have decided not to push ahead with Egypt at all and are investing elsewhere.”

HSBC’s Long agrees. “If you are going to invest for the future, you need some sort of clarity as to what that future will look like. There is uncertainty at the moment, and this has persisted for a while, which is reflected in recent reports of the HSBC PMI which have been negative for some months. The good news is that we have seen a slight improvement in November’s PMI and I hope we see more improvement in the coming months, which would be a good indication for the future.”

When asked what he did to protect his business during the past few years, a regional treasury manager at a large multinational headquartered outside of the country, lists three things:

1. Tried to keep calm.

2. Obtained weekly updates from subsidiaries.

3. Obtained counter guarantees in sales.

Sphinx Glass’ El Mahdy says that his company focused on controlling its cost. “It is very difficult to control revenue, so we needed to be as efficient as possible to reduce our costs through in-depth cost analysis.” The company improved its working capital management by maintaining receivables as controlled and low as possible.

He explains that every time a new government minister starts to approach companies and manufacturers to get to know their problems, by the time he understands the business and what is needed, he is gone and another put in his place. Then the whole exercise starts over again with a different strategy.

Major challenges: FX and fuel

FX is the biggest challenge facing the regional treasury manager of the multinational. At the start of 2013, the CBE imposed new monetary FX regulations, in order to help curb speculation on the US dollar in the domestic market and maintain a low rate of inflation. It also introduced a new mechanism to provide local banks with foreign currency through periodical auctions, aimed at conserving foreign reserves.

“There are shortages of currency for importers under traditional letters of credit (LCs) and collection bills, but also for those paying by direct transfer to their subsidiary or parent,” says HSBC’s Long. “There have been efforts by the central bank to provide foreign currency in the market through an auction process but the availability was less than what the inter-bank market used to offer 12 months ago. I remain hopeful that the situation will improve in the near future.”

El Mahdy agrees that FX is the one of the biggest issues “because it affects everything”. He says Sphinx Glass exports more than 50% of its products and therefore generates its requirements in US dollars. But he knows that the banks operate a priority list of companies in “essential” sectors, such as health care or food. Companies that can’t access foreign currency are forced to tap the black markets, which is costly and insecure. Although currently – specifically after the Gulf’s aid package – FX is stable and the banks are providing for the needs of almost all industry sectors, the question is how long this will last?

The limited availability of gas and electricity is another major challenge. According to Maplecroft’s Skinner, the government is struggling to pay companies in the oil and gas sector, where the state debt is estimated to be $5.4 billion. The state-run oil company, Egypt General Petroleum Corporation (EGPC), has entered negotiations with energy companies to restructure the resultant state debt. “This has been a significant challenge for oil and gas companies because a lot of gas has been diverted to the domestic market rather than being exported. Although there is a restructuring programme in place, it is far from ideal,” says Skinner.

El Mahdy agrees: “Energy is a problem in Egypt. Gas price, compared with other countries in the region where prices are much lower, is affecting our cost structure and our ability to compete.”

Although there were many power cuts leading up to 30^th June and into July, these have now stopped. “The country runs quite close to its power capacity all the time, so it is important that part of the stimulus package is earmarked for building more power stations because manufacturers need power to run their machines,” says Long.

The future

Fitch’s Gamble is cautiously optimistic and believes that Egypt will become relatively more stable after a period of extreme uncertainty. “Financial inflows from the GCC should support the currency and with political tensions likely to be contained there should be a modest improvement in growth. Nonetheless, performance will be well below potential.”

El Mahdy highlights the opportunities present in a market that encompasses 90 million people. But he believes there must be a robust plan in place to take advantage of these opportunities. “They talk of 2022, but what will happen in 2014? In a developing country such as Egypt there are so many quick wins that can be achieved, but we need a strong administration that can take bold decisions. We didn’t lose three years of our lives in business just to go back to square one.”