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Frontier equity duo eye reform-focused Egypt

Frontier equity duo eye reform-focused Egypt

Egypt’s post-revolutionary turmoil sent many investors packing but Thomas Vester and Dafydd Lewis, portfolio managers on the BMO LGM Frontier Markets fund, found a country poised for stability and growth on their recent visit.

Egypt has improved a lot over the last six months but most investors are still very cautious about its prospects.

Nevertheless, our visit to the country this February, has fuelled our optimism. We saw a government undertaking some very bold reforms under President Abdel Fattah el-Sisi.

In August last year the International Monetary Fund (IMF) agreed to loan Egypt $12 billion (€11.3 billion). This deal was put in place to support a reform programme aimed at plugging the country’s budget gap and rebalancing its currency markets.

The IMF wants Egypt to focus on monetary policy to ease its chronic dollar shortage and reduce inflation to single digits. For Egypt this is a big step, but the government is doing what is needed to clean up subsidies and has floated its currency.

Reaching out

It is interesting to note that Sisi was one of the only leaders to visit Trump before he was elected. This was quite a surprise, and whatever you may think of the new US president, you can’t escape the fact that he is leader of the world’s most powerful nation today.

Therefore, Sisi has made a smart ally here. He was also one of the first people to congratulate Trump on his election victory, and relations look set to continue improving.

Egypt also seems to be on very good terms with the IMF. The government has done whatever has been asked of it and, in some cases, even more. The country has also been a strong ally of Israel, especially under Sisi, since the Muslim Brotherhood stepped down.

However, its relationship with Saudi seems to have broken down a little due to the Egyptian court blocking the controversial transfer of Red Sea islands to the Arab nation.

Nevertheless, this may not be such a loss as there are questions over the sustainability of Saudi’s oil-dominated economy in a world where alternative energy is getting cheaper.

Possible pitfalls

We currently have 9.7% of our fund allocated to Egypt, 5.8% of which is invested the country’s largest private sector bank, the Commercial International Bank.

We like the consumer and financials sectors in Egypt, but of course, there are potential risks to any country.

Investors always talk about a demographic yield and the fact that a growing population is great for investors. However, those who have studied history will understand that this can equally be a demographic liability.

It becomes a positive if you can create jobs for all the young people, it becomes a tremendous burden if you cannot.

The Egyptian population is growing by almost a million each year. If the government cannot create jobs, then problems will occur and this is undoubtedly the biggest risk the country faces.

Springing back

The Arab Spring started in Tunisia in 2010, and spread across the Arab world in 2011, encompassing Egypt, Libya, Syria, Yemen, Bahrain, Saudi Arabia and Jordan.

Six years later, we felt safe visiting the country, although security is still extremely tight, which is to be expected. This was clear at Cairo’s International Airport, Egypt’s busiest, which serves as a central hub for several airlines.

Since our last visit to Cairo, a new terminal has been opened, which is a vast improvement on the previous one.

It’s also a positive sign that a number of countries have now agreed to resume running flights to the country.

This brightening outlook was pervasive during much of our trip. Generally, the mood regarding the country’s reform agenda is supportive. While it is widely accepted across the region that these reforms were needed sooner, there is a clear confidence that the government will not row back on these policy actions, particularly given the IMF’s backing.

The next 12 months is likely to be a period of transition as both consumers and companies digest the impact of the changes and currency volatility settles.

Our meetings with management teams across various business sectors were much more positive than they were six months ago and there is optimism for the country’s long-term economic prospects.

These comments originally appeared in the March edition of Citywire Selector magazine.

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