When twin bomb attacks hit Coptic churches in Egypt in April, they turned Palm Sunday celebrations into scenes of carnage, killing 47 and wounding over a hundred more.
The violence highlighted the country’s vulnerability to terrorism. It also dashed hopes of a nascent recovery in tourism, historically an important source of foreign currency. The number of tourist arrivals in March had risen 46 per cent from the same month in 2016, raising the prospect that visitors could at last be returning after six years of post-revolutionary turmoil and terrorist outrages. Now they are expected to stay away.
But not everyone has been put off. Investors have been returning to the country since the end of last year, scenting opportunity — and bargains. Foreign holdings of Egyptian treasury bills rose to $1.2bn in January, according to data from the central bank, up from just $30m a year ago, but still significantly lower than the 2010 peak of $11.4bn.
Foreign holdings of Egyptian treasury bills in January, up from just $30m a year ago
“Given the size of Egypt, its demographics, the level of education, the low-hanging fruit of reforms — in terms of longer-term opportunity, the country is one of the big ones,” says Andrew Brudenell, head of frontier markets at Ashmore. The UK-listed asset manager has exposure to Egypt across its global frontier fund, its Africa fund and its Mena fund. In the latter, Egyptian pound-denominated assets have risen from 3.8 per cent at the end of November to 8.3 per cent in April.
Most investors either left Egypt or cut their exposure after the 2011 revolution, during which President Hosni Mubarak was overthrown after three decades in power. This ushered in a period of instability that led to Mohamed Morsi, the country’s first democratically elected president, being ejected in a coup, albeit one that was supported by many Egyptians. His successor, former general Abdel Fattah al-Sisi, clamped down on political opposition and ended the brief democratic experiment.
The country’s economy suffered amid the turmoil. Inflows of foreign currency dropped as investors stayed away. Political violence and terrorist incidents, including the downing of a Russian airliner in 2015, crippled the tourism sector. A slowdown in global trade meant that receipts from the Suez Canal, the other big currency earner, also declined.
With the budget deficit widening and foreign reserves plummeting, the central bank imposed capital controls that starved the private sector of foreign currency, hitting a number of industries. Mr Sisi drafted in military-owned companies to plug the gap in food supply and other areas that were usually the domain of the private sector.
To ease the crisis, the government turned to the International Monetary Fund. Last November, it finally implemented the fund’s demand that the Egyptian pound be floated, one of several painful reforms the Sisi government has instituted. The currency’s value against the dollar immediately halved and Cairo received the first tranche of a $12bn three-year loan.
Cairo has received plaudits for allowing the currency to float and for a number of other reforms. These have unlocked some bilateral assistance to the government. A further injection of funds has come from bond issues. The latest, for $3bn in the final week of May, was four times subscribed.
The currency float was a game changer for many investors. “After the devaluation, we became bullish on Egypt,” said Akhilesh Baveja, lead portfolio manager for the Charlemagne Magna Mena fund. Charlemagne has been investing in Egypt for more than a decade and its Mena and Africa strategies put together have more than $100m in assets under management. “When the currency was mispriced, all the flows in and out of the country were misplaced and distorted.” He believes the currency has reached equilibrium. “We have passed the worst,” he says.
Ordinary Egyptians might disagree. Twenty-eight per cent live below the poverty line and millions more hover just above it. Youth unemployment is around 40 per cent by some measures. Annual inflation rose to 31.5 per cent in April, and food prices jumped 43.6 per cent ahead of the month of Ramadan, when demand is high because of night-time feasting after the daylight fast.
“For the longer run, it is good for Egypt that you have had this devaluation,” says Simon Kitchen, head of macro-strategy at EFG Hermes, the Middle Eastern investment bank. “But a big devaluation like this has huge side-effects. Real incomes have been hit very badly, so it is going to take a long time for consumer spending power to recover.”
Investors see Mr Sisi’s readiness to confront potential popular discontent less as a risk than as a measure of his commitment to reform. “In the past year or two, Egypt has done some very bold reforms,” says Thomas Vester, chief investment officer of BMO Global Asset Management’s emerging and frontier markets team, whose frontier fund has $1bn in assets under management.
“I think we should give Mr Sisi credit for what he is trying to do. You could say there was no alternative, but there are countries around the world that you would say have no alternative and they still continue to behave in a very backward way.”
Mr Vester’s fund has increased its exposure to Egypt through investments in core consumer companies and, like other asset managers, sees Egypt’s private sector banks as a positive area for investors. Many also regard the debt markets as attractive.
But despite the positive outlook, analysts caution that the current upswing may not be sustainable.
“The economy is better now than at any point in the past five years, but there is little reason to believe it can be maintained,” says Crispin Hawes, managing director for the Middle East and north Africa at Teneo Intelligence, the advisory company. He says he is “very bearish” on Egypt’s medium to long-term outlook.
“Investor appetite for Egypt is opportunistic,” he says. “It doesn’t reflect the need for fundamental structural change and the weakness endemic in the structure of the economy.”
Weaknesses include an unwieldy bureaucracy, the risk of militant violence that is crippling tourism and a repressive political environment. The role of military-owned companies is a question many are fearful to raise in public. Under Mr Sisi they have expanded into many areas of the economy and it is unclear whether they will now take a step back.
Frontier investors remain sanguine about these challenges. Mr Baveja of Charlemagne points out that despite the upheaval in the past five years, the net asset value of his fund is at an all-time high, thanks to Egyptian stocks along with selected Gulf nations. Like other asset managers, he believes that Egypt’s size and strategic position outweigh many of its weaknesses.
“Demographics are the single most powerful force for growth,” he says. “As a nation, Egypt has a long, strong identity. The future may not be perfect, but demographics will bring things back.”