Egypt’s prolonged instability and currency slump are primary risks for investors – new report
With the potential for a devaluation of the Egyptian pound, continuing political instability and rising security risks Egypt is posing a wide-ranging set of risks for foreign investors. Maplecroft’s Country Risk Report on the Egypt provides in-depth analysis of the challenges facing companies in the country, including political and security risks; the economic situation; legal and regulatory developments; human rights issues; and environmental concerns.
Egypt is undergoing a prolonged period of instability which shows no sign of abating in the short or medium term. This will continue to adversely impact the legislative agenda, the economy and business confidence. Recent moves by President Mohammed Morsi to push through the draft of a new constitution have reignited street protests and entrenched an ever-widening political divide between liberal-secular groups and Islamists. The draft constitution is a significant source of controversy and will sustain, if not increase, tensions in the foreseeable future. The document is widely viewed by the opposition as Islamist-oriented.
According to the report, one of the most significant concerns for foreign investors will remain the current state of the Egyptian economy and the risk of a disorderly devaluation of the pound. The recent escalation of civil unrest and the government’s decision to delay talks with the IMF, in combination with weak global conditions, bode ill for the Egyptian economy. The IMF loan is needed to help stave off a crisis in Egypt’s balance of payments and a disorderly devaluation of the pound.
The central bank is running out of options to defend the currency. It has already used 60% of its foreign currency reserves leaving these dangerously low and it has recently started regular auctions for US dollars, which pushed the pound down to an 8-year low against the dollar. Meanwhile, there is little scope for policy stimulus. As Egypt’s negotiations with the IMF progress, the country is likely to enter a period of fiscal austerity, leaving no room for stimulus in the near term. At the same time, monetary easing is unlikely as the central bank continues with its policy to support the pound.
As with Egypt’s tenuous political situation, the report forecasts that significant security risks are likely to persist in the medium term at least. Widespread and often violent street demonstrations pose risks to company personnel, assets and private and public infrastructure. Such protests are likely to be a continuous feature of Egypt’s cities as the political landscape becomes even more divided. Foreign businesses have not been directly targeted, but there is a significant risk that personnel and property could be caught in violence, and business severely disrupted.
More direct security risks are unlikely to diminish in the short or medium term. Kidnapping and crime represent a substantial threat in post-Mubarak Egypt. The risk of kidnap is especially acute in Sinai, including around major tourist sites such as St Catherine’s Monastery. Moreover, armed robbery and carjackings, sometimes resulting in fatalities, are becoming more common in greater Cairo. A number of serious attacks on security facilities in North Sinai highlight an increasing threat of terrorism in the peninsula and 16 attacks on oil and gas pipelines since the fall of the Mubarak regime in February 2011 continue to have a negative impact on the Egyptian economy.
It comes as little surprise that Egypt’s business environment is primarily defined by the current level of social and political turbulence. Large worker strikes pose direct risks to business operations and supply chains. Businesses also risk reputation damage as a result of worker sit-ins and strike action. Whilst positive regulatory reform may take place in the long term, this is unlikely to be a priority for the authorities in the short term despite efforts to sustain and preferably increase private sector and foreign investment.
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