What’s the view on Egypt from the outside? Not of the people managing hot money, but of the major corporates we’re counting on to help us build an export-led economy based on investment in the real economy? In search of answers, we reached out to our friend Tarek El Nahas (LinkedIn), a regional banking and finance veteran who built a reputation as a creative problem-solver during his more than 25 years at Citibank, where he was most recently head of corporate and investment banking for North Africa, Egypt, and the Levant, managing teams across six countries in MENA.

Tarek has since January 2020 been the Dubai-based group head of international banking at Mashreq, the UAE’s fastest-growing bank and good friends of Enterprise. We spoke on two occasions: Over coffee in Dubai just a few hours after the float, and again a couple of days ago when the dust had started to settle. We chewed over how we got here, how Egypt is seen now, where we might go from here, and what the float of the EGP has meant to Mashreq’s plans for Egypt.

KEY TAKEAWAYS-

  • The FX crunch of the past few years was largely a confidence issue, and that’s now unwinding;
  • Egyptian businesses have to invest first if we expect to see significant foreign direct investment coming in;
  • “I don’t go to any country or speak to a single client that doesn’t have an interest in Egypt.” There’s interest in a broad range of industries.
  • Construction and engineering companies and anyone who sells them materials, products, or services could be on the cusp of a once-in-a-lifetime opportunity when you factor in both Ras El Hekma and possible reconstruction mandates around the region;
  • Mashreq has plans for Egypt: It’s bought a state-of-the-art head office here. Egypt is one of three centers of excellence for the bank;
  • The bank sees opportunity in retail and in serving small businesses.

Edited excerpts from our conversation:

ENTERPRISE- Less than a month in, how do you feel about the float?

TAREK EL NAHAS- I’ve told you before, this was a confidence issue more than anything else, and we’re now seeing confidence start to return. I’ve seen this cycle every eight years or so — in 2008, though less dramatically. In 2016, when I was involved with arranging some gov’t funding structures linked to unlocking the IMF agreement. And now it’s 2024.

This is what happens when the parallel market is allowed to run away from the official bank rate. The differential is small at the start, but it grows — and as it does, the volumes flowing into the banking system continue to decline. The structure of Egypt’s foreign currency inflows makes it relatively easy to divert FX into the parallel market: worker remittances, tourism, and services are leaky buckets. A large part of that FX is in Egypt — but it’s sitting in households and corporate safes, not in the banks.

Confidence takes a hit when companies can’t import through L/Cs and when investors can’t repatriate dividends. That lack of confidence snowballs and ultimately overshoots when corporates have to source FX on the parallel market to keep their businesses running. Incremental investment doesn’t come in and the result is growth of the informal, non-taxable, opaque sector.

The upside: Confidence can return very, very quickly as well, and that’s what we’re seeing now.

We’re likely to see things unravel in three phases. First, the panic buyers [of USD] yesterday are panic sellers today. That’s how they work. Second, we’re seeing the carry trade coming back. The panic buyers and sellers? They were opportunistic. So is the carry trade.

The third phase is slower, more challenging, and more meaningful: That’s the real investment phase.

E: So, foreign direct investment?

TN: I don’t want to limit it to FDI, no. Locals have to invest first before foreigners will come in — it’s a confidence issue, and they want to see that Egyptian businesses are confident in the prospects of their economy. That probably takes a bit longer.

E: How are you on the optimism scale right now?

TN: Am I optimistic? I am. For several reasons, and they haven’t changed since I was on a panel at your finance conference [in September 2023]: Egypt has a large, relatively educated population. The cost base is now competitive. It has great trade agreements — Europe, Africa, and the Middle East. Great geographic positioning to sell into all three. Many of the fundamentals are already there.

What Egypt needs to work on is the ease of setting up and doing business. Have another look at the legal system for commercial disputes, employment / residency laws and the global fight for talent (whether local or imported to plug essential technical gaps) and the existing tax system. You cannot grow the pie by continuing to impose taxes and fees on the few companies or employees that are paying taxes now.

E: What sectors do you like today?

TN: It’s not so much about sectors, it’s about the management teams. There are some businesses that used the past couple of years wisely: They took the fat out of their companies and kept the muscle, so essentially got more efficient. They diversified their product ranges and expanded geographically by growing their exports. They’re going to be much stronger companies coming out of this.

The thing about crises is that they clean out the less-fit and should create stronger champions. You must have had a unique and competitive product offering or deep pockets to have ridden this out. Crises weed out people who lack the creativity — and who aren’t willing to put in the hard work — to generate new revenue streams. They also generally weed out the overleveraged with weak capital bases.

What happens to those champions? They’re looking at an opportunity on a scale and at a speed that Egypt has potentially never seen before. As an example, there are huge investments coming into real estate in the years ahead. That’s going to need contractors, it’s going to demand building and finishing materials, white goods, textiles, and services of all forms.

Now look around you: Countries like Saudi Arabia and the UAE are investing at a major scale. Take Neom alone: If and when it materializes as expected, many of the same corporate champions in Egypt will have the opportunity of a lifetime to do business there, too.

I don’t think Ras El Hekma is where it stops. Consider the size of our land bank — large parts of our coasts remain completely underdeveloped. We’re no longer talking about building out small compounds, but about master-planning and developing destinations. Egypt needs to start thinking differently now.

E: What about manufacturing?

TN: It’s the same thing in industry: You have to masterplan. Take the Renault auto plant in Morocco as an example. Line up a clear strategy and incentivize strategic players to enter and it transforms everything. Look at the development of feeder industries, of ports, of services around that plant and the export proceeds it now generates. It took planning.

This ad-hoc way of doing things cannot continue. From real estate to manufacturing to value-added exports, Ras El Hekma with its master plan and the ambition behind it becomes something you have to apply to different parts of the country.

USD 35 bn. People are obsessed with that figure. But if you get the tourists in, if your local players are investing and producing, if you attract the bolt-on FDI, if real estate sales target domestic and foreign buyers, if you’re smart about manufacturing and services and exporting? You’re talking multiples of USD 35 bn — that number can become anything.

E: Are we a hub for reconstruction?

TN: Absolutely. That feeds into it. Just next door, Sudan, Libya, and Gaza will all need to be rebuilt as well as Syria and Iraq further down the road. Egypt has developed the contracting might, the engineering know-how, the human talent who know how to do that at scale. The magnitude of what Egypt has built in recent years — the roads, bridges, tunnels, skyscrapers, ports. Add to those factors the proximity, land access, and competitive labor, and Egypt could very well become a construction hub. It’s the tip of the iceberg if we get it right.

E: Is it too early to ask if you’re seeing a return in appetite for Egypt among Mashreq’s clients?

TN: I don’t go to any country or speak to a single client that doesn’t have an interest in Egypt. That’s the one country in MENA that comes up every single time I go into a meeting due to the sheer size and potential of the market. And I’m talking every industry: FMCG, retailers, traders, residential and commercial real estate, and export-driven industries.

Manufacturers are absolutely looking at Egyptian companies as part of regional plays. Look at what happened with [oil driller] Ades and [snack food maker] Abu Auf. What are they about? Are they about the local market in Egypt? That’s attractive, sure. But no: They’re pools of talent and know-how that you can take and scale across the region.

E: How has Mashreq’s view on Egypt changed since the float?

TN: We already had a good appetite for Egypt. There was no knee-jerk reduction in overall exposure in the face of macro challenges. Egypt is a market we understand very well. We believe strongly in the retail banking proposition and we know that most of our wholesale clients have weathered many storms in the past. We’ve continued operating, and led some of the largest transactions in the market throughout the period.

We have the market knowledge and we have the right corporate client base. We’re definitely going to be investing in our GTB proposition including a platform that will be second-to-none when it rolls out in early 2025. [Editor’s note: That’s global transaction banking, which covers cash management, trade finance, and supply chain finance.]

We expect to see more regional players arriving in Egypt, particularly those who have partnered with major multinationals. If we’re providing regional transaction banking solutions for large players like Al-Futtaim or Alshaya in the GCC, we need to offer them the same capabilities in Egypt.

On the retail side, the model is changing just as it has in the UAE. We’re not going to be increasing the number of branches in Egypt — we’re going to be aggressive in going after online and mobile channels and accordingly we’re investing heavily in our online platforms.

Watch that space on retail: It’s about massively augmented online capabilities and strategic partnerships, all of which will help us address the Central Bank of Egypt’s financial inclusion targets.

We’re also interested in small businesses, NeoBiz in the UAE is a market leader just like our retail banking Neo proposition. It’s just a question of what we need to tweak to scale it to Egypt, because the model is already tested and successful.

And the third thing is our Mashreq Global Network, or MGN, which includes centers of excellence in Egypt, India, and Pakistan and we have some of our most senior talent in all three. The MGN is not a low-cost back-office model. It’s been assembled to try to attract the best talent in multiple geographies, including with WFH agreements that allow women with childcare or eldercare responsibilities to work from wherever they need to be. I think you should view our decision of purchasing a substantial new state-of-the-art head office in Egypt as yet another sign of the depth of our long-term commitment to the country.

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