Many cheered Egypt’s convulsive revolution in 2011 and its aftermath. EFG Hermes, the country’s dominant investment bank, was not among them.
Foreign investors and tourists fled. The economy collapsed, and the bank’s top two executives faced corruption charges because of their ties to the family of Egypt’s ousted president, Hosni Mubarak.
Now, with the Egyptian economy experiencing a remarkable revival under its autocratic president, Abdel Fattah el-Sisi, EFG Hermes has re-emerged as the go-to investment bank in Egypt — bringing companies public and funneling foreign investor money into the country’s booming stock market.
In what has been a generally lackluster year for emerging markets, Egypt’s stock market has stood out, soaring more than 30 percent in 2014 (as of Dec. 1), a return that trails only the Indian stock market among large developing economies.
As with India under its reforming prime minister, Narendra Modi, the bullish case for Egypt presumes that Mr. Sisi can fulfill his radical promises to overhaul the country’s economy by cutting energy subsidies, increasing private sector investment and reducing the budget deficit.
The Egyptian economy grew 6.8 percent in the first quarter of 2014, a six-year high, and economists expect growth to hit 4 percent this year — a level that would outpace former growth stars Brazil and Turkey.
And while questions remain about Mr. Sisi’s hard-line approach to the main opposition group, the Muslim Brotherhood, a growing number of investors argue that his bet that a broadly improving economy will weaken his political opponents is worth supporting.
“You don’t see anything close to large-scale demonstrations of recent years,” said Charles Robertson, an emerging market analyst at Renaissance Capital in London. “The majority of Egyptians want stability, and Sisi is offering that.”
In just about every developing economy, the fortunes of the local investment bank are intertwined with a head of state’s ability to deliver long term and sustainable economic growth. This is especially so in volatile areas of the world like Russia, Turkey and Egypt.
So, after EFG’s near-death experience after the Tahrir Square uprising — in 2013, the firm lost 335 million Egyptian pounds (about $46 million), one of the largest losses in its 30-year history — Mr. Sisi’s consolidation of power has been a godsend for EFG.
“The country was in pretty bad shape — but now there is strong leadership and a president who is very dynamic,” said Karim Awad, co-chief executive of the firm. “He wants to improve the investment environment and he understands that there are major structural issues in the economy that must be dealt with.”
Mr. Awad, a longtime investment banker who has been at EFG for 16 years, assumed the leadership slot in late 2013. He has experienced the company’s highs and lows and says that EFG was able to survive its “darkest days” by aggressively cutting costs and increasing its focus on its core Egyptian market.
Now the hard work is paying off. After a three-year drought in initial public offerings, the deal-making environment in Egypt is heating up, led by the wildly popular initial public offering of the Arabian Cement company, one of Egypt’s larger cement companies. The deal raised $110 million — with global investors requesting billions of dollars in stock — and Mr. Awad said that the offering’s success had led to a full pipeline of six companies looking to test the market next year.
Given the long dry spell and the upturn in the economy, Mr. Awad said that Egyptian companies were now “lining up to raise capital.” And he said he expected foreign investors to play a leading role in these offerings.
Zoran Milojevic, who covers the Middle East for Auerbach Grayson, a New York-based investment boutique that focuses on emerging and frontier markets, said that in recent months he had been receiving many queries from United States investors about visiting Cairo and how to participate in some of these new I.P.O.s.
Auerbach Grayson has a partnership with EFG and distributes its research to its investor base in Europe and the United States. Mr. Milojevic pointed out that even when the situation in Egypt seemed to be at its worst in early 2012, EFG insisted that Egypt was too big an economy to be ignored — no matter how bad the politics became.
“They were under a lot of pressure at the time,” he said, referring to their suspected links to the Mubarak government. “But they remained cautiously optimistic.”
Since then the stock market is up more than 100 percent in dollar terms, and EFG, with its dominant market share as a trader and deal maker, has reaped the benefits.
Mr. Milojevic said that the Egyptian market now traded about $90 million a day, making Cairo one of the most liquid stock exchanges in Africa. Local investors make up about 60 percent of the daily trading volume.
While that may be a lot for Africa, it is a tiny number compared with other large markets in the region like Turkey and South Africa — far below, as well, the volumes Cairo generated before the 2011 revolution.
Mr. Awad accepts that the challenges for Egypt and his firm are considerable and that the country still needs to prove that it can grow at a rate that can absorb the hundreds of thousands of people who enter the work force each year. He points out, too, that the 6.8 percent growth rate of the first quarter was a bit of an anomaly given the low base of comparison.
It is also true that for all its accomplishments, the Sisi government will be presiding over a budget deficit of about 11 percent of gross domestic product this year and that the country remains dependent on billions of dollars in financial largess from countries like Saudi Arabia, Kuwait and the United Arab Emirates. As oil prices plunge, these handouts could well diminish over time, regardless of Mr. Sisi’s reform accomplishments.
Moreover, Mr. Sisi, who was elected president this year, has effectively disenfranchised the Muslim Brotherhood, which just two years earlier had its own duly elected president in Mohamed Morsi, who is in prison.
How such a large segment of Egypt’s population responds to Mr. Sisi’s continuing crackdown remains to be seen.
As one might expect, Mr. Awad says he thinks that Mr. Sisi’s strategy to focus on lifting the economy as a way to win the affection of disgruntled Egyptians will succeed.
“The economy is the key driver,” Mr. Awad said. “What is important is to create sustainable jobs and to make sure that Egyptians have a decent livelihood.” More»