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Egypt after Mubarak – an Economic Outlook

Guiding Principle

This Article is discussing the status of the Egyptian economy after the 25th of January 2011 revolution, and its effects on business.

As president Obama said, “The people of Egypt have spoken, their voices have been heard, and Egypt will never be the same.” The past few dramatic weeks have witnessed major changes all over Egypt. We all agree with president Obama that Egypt will never be the same again, but the mystery here is the future of Egypt as a major market and a center of many businesses in the region. This is the foggy area for everyone now and the question here is “what will Egypt become?”

Bertil G. Peterson in his article “Looking Ahead” in Business Monthly Magazine March 2011 issue said that protesters were catalyzed not only by political demands, but by high unemployment, low wages and rising prices. To absorb the current unemployment and those entering the job market each year, 9.4 million new jobs will be needed by 2020, which the International Monetary Fund estimates would require GDP growth of 10 percent annually. What was a challenging economic environment on January 24, 2011 is all the more so today.

It is clear that Egypt’s economy paid a heavy price during the 18 days of protests. CAPMAS, the government’s statistics authority, said in a February 17, 2011 statement carrying on the official state news agency MENA, that the revolution had cost the tourism, construction and manufacturing industries a total of at least LE 10 billion. Between January 28, 2011 and February 5, 2011, production in key industrial zones dropped down by 60 percent and the construction sector alone lost LE 762 million.

The vast majority of private sector businesses from neighborhood shops to multinational corporations either closed or drastically curtailed operations. Banks were shuttered and ATMs empty, making it impossible to get cash for groceries or payrolls. Business as usual was simply not possible without funds or customers.

In addition, curfews curtailed foot and vehicle traffic, disrupting the supply chain for the fast-moving consumer goods sector. Dairy producers also took a hit. Hatem Saleh of the Federation of Industries says that companies may have lost 20 percent of their estimated profits for the entire year. Even though production of dairy products returned to full capacity relatively quickly, he expects sales to be down until stores and markets damaged by looters reopen. Nonetheless, “most dairy producers are honoring contracts with farmers despite the drop in sales,” Saleh says.

In the real estate sector, the biggest concern has been the change in the government. Many domestic and foreign companies are in a holding pattern until they see what changes come with the new government. Others are not waiting. Yasser Makram, Chairman of Global Development and Investment, says his firm has taken over stalled negotiations with respect to a LE 600 million deal to develop shopping malls because a Kuwaiti partner pulled out.

Supply logistics was also an issue for soft drink companies, which indirectly or directly account for 1 percent of Egyptian jobs, according to the International Tax and Investment Center. Coca-Cola Egypt President Curt Ferguson says that deliveries were limited at times, primarily to ensure employees’ safety. “Our manufacturing facilities resumed production very rapidly during the first week of February, and we are not making any changes to our 2011 business plans,” Ferguson says.

Indeed, many business leaders see revolution-related economic problems as little more than a temporary setback. According to Coca-Cola’s Chairman Ferguson, long-term plans mean that “you continue to invest despite the short-term challenges and disruptions.”

On January 17, 2011 only a week before the protests began, Nestlé unveiled plans to invest more than LE 1 billion in its existing factories and distribution centers in Egypt over the next three years, adding 500 jobs to its current workforce of 3,000. So far, the revolution has not altered those plans.

On February 21, 2011 German Makro Cash & Carry announced that its plans to expand in Egypt are on track, despite substantial damage and looting at its two existing outlets in Cairo.

Francois Oliver, Managing Director of Makro Egypt, stated that the company will establish 20 additional stores at a cost of LE 3.2 billion, according to Al Alam Al Youm.

All pharmaceutical production facilities are reported to be operating at full capacity. Mohamed El-Bahy, Vice President of the Chamber for Pharmaceutical Industries, told Al Ahram that plants were closed for a few days at the beginning of the protests and operating hours were reduced by the curfew, but there were no shortages, and prices have remained stable.

Finally, Procter & Gamble Co. announced on February 21, 2011 that it resumed normal operations at its Cairo offices and two plants outside the city. P&G Egypt employs about 1,500 people.

For its part, the transition government led by the Supreme Council of the Armed Forces has tried to mitigate the economic impact of the revolution and move forward. Finance Minister Samir Radwan pledged early, that subsidies would not be cut even if global prices for food and commodities rise, saying that public spending would be used as a tool to achieve “social justice.” After Mubarak stepped down, Radwan created an LE 5 billion fund to compensate people for property losses and damage due to the unrest and pay benefits to those who lost their jobs.

When banks reopened on February 6, 2011 the Central Bank pumped $ 854 million from its $36 billion in reserves. A feared run on the banks was absorbed and the Egyptian pound losses against the dollar, as some economists had predicted were averted.

Surprisingly, investors do not seem bothered either by recent events or the future course of the country. David J. Lynch of Bloomberg Business Week, notes that the Market Vectors Egypt Index, an exchange-traded fund of Egyptian assets – stocks, commodities, and bonds – has risen 7 percent since January 27, 2011 when the EGX was shut down.

According to arabicknowledge-@Wharton; an online resource for business insights at the University of Pennsylvania, regional investors and businesses believe that more democratic governments will pave the way for long-term stability and growth.

Mustafa Abdel Wadud, an Egyptian who is a Managing Director of the investment firm Abraaj Capital in Dubai, told the website that he is taking a long-term approach toward Egypt as the country’s fundamental economics are strong.

Analysts’ opinions on politics are divided, he says, but most believe the region is moving in a positive direction. “In the long-term there will be more stability in these investment destinations, which all have high growth but were considered high risk because of their political structures”. “The reality is that this was expected. No one knew protests in Egypt would be this extensive. But [Mubarak’s] succession was coming. It’s just been accelerated”.

April, 2011 Mansour Elaraby
  Meyer-Reumann & Partners – Alexandria Office
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