Highlighting the private sector’s role: We sat down with our friend EFG Hermes Head of Research Ahmed Shams El Din (LinkedIn) to discuss the role the private sector plays in turning Egypt’s economy around and what needs to be done to once again reel in foreign institutional investors.

Egypt is starting to turn a corner, but the sustainability of our path forward is reliant on how economic reforms take shape: Egypt has been sick for some time, and has recently taken some pain relievers, in the form of new liquidity and large FDI injections announced over the past several weeks — including USD 35 bn from Abu Dhabi sovereign wealth fund ADQ, Shams El Din told Enterprise. “The three main fundamental challenges for the country relate to its competitiveness, investment, and trade. The three of them are directly correlated to the labor market reform — we’ve done three or four legs of reform since 1990 and every time, we do the monetary side well, but miss the mark on the other real economic areas,” but hopefully this time can be different, he said.

The key: It’s all about the private sector. “Without boosting private sector competitiveness, I fear that any improvement that we’ll see in our twin deficit and external balances might not be sustainable,” Shams El Din said. In the short term, this new batch of fresh liquidity will be very good for the economy and will allow room for the correct policies to be set in the short term, but the use of the proceeds remains unclear, he noted. “How this money will be deployed into the economy to make it a sustainable improvement in competitiveness and avoid another bottleneck in three to four years down the line is the critical thing to watch for.”

Inflation is likely going to trend downwards over the coming period, because markets were already pricing in a much weaker EGP before the Central Bank of Egypt moved to float the currency, Shams El Din said. Markets were pricing in an exchange rate of EGP 50-55 against the greenback before the float, he said, whereas the official rate has consistently closed below the EGP 50 mark in the weeks since then. “That means that the devaluation actually isn’t going to cause inflation to accelerate, because traders had already overshot their pricing when they had to rely on the parallel market. The float will not hurt consumers,” he said.

Expectations and sentiment have improved massively in Egypt over the past several weeks, Shams El Din noted. “Prior to the float, it was impossible to price anything in the market, whether that’s a product or service. The economy and assets were simply mispriced, and the priority for most people was to secure FX. Now there’s a price and a benchmark, and there’s FX liquidity.”

Capital markets over the past period have mirrored all of these issues: “The external imbalances that we’ve had have impacted the stock market, of course, because there was a significant queue of foreign institutional investors with pending orders or repatriation requests. These investors were therefore hesitant to invest again in Egypt because there was already a backlog,” Shams El Din told us. “The second issue with capital markets is a product of the FX crunch and the USD. Foreign institutional investors start with USD-generating stocks like fertilizers and all exporters, and from there, there’s a trickle down into the domestic stories like real estate and consumer players. Now that the devaluation has happened, however, the priority of the investors in capital markets is no longer to hedge against the USD.”

A big reason why Egypt fell out of favor with foreign institutional investors is the lack of representation of economic sectors in capital markets: “The financial sector and real estate alone, together account for 60-65% of the market cap. Egypt is simply lacking depth.” Shams El Din said. “We need more offerings from sectors like healthcare, education, and tech. Right now, there are two education companies that are listed on the EGX, and while both are great with excellent management, a country like Egypt should have ten educational companies in the market.”

Private sector competitiveness is the key that’s going to help move all of this along. “We need to have a governance-based private sector with a strong regulatory framework in place. Boosting private sector investments is very crucial for a country like Egypt,” Shams El Din said. “I’m very happy to see the UAE investing in Ras El Hekma, but I want to see investors from Europe, China, Japan, and the US all investing in technology, healthcare, and education. There’s nothing wrong with the investors we have now — regional investors are more than welcome, but diversification is very important for Egypt.”

Fundamentally, Egypt has always been a great market for investors: “I think the potential is huge — on the service sector specifically — Egypt can deliver beyond expectations, whether that’s tourism or logistics. We tick all the boxes that are needed to continue to grow and continue shifting our economy into a more innovative, knowledge-based economy, which comes with service and technology.”

We’re doing well, but we want to prove to investors that we are pro-market and that we’re working on improving the competitiveness of the economy, and that we will not bite off more than we can chew and digest, Shams El Din told us.

“Egypt is making a lot of progress when it comes to increasing competitiveness, especially when it comes to tech and digitization,” Shams El Din said. “In the areas of the economy where there are decentralized capital allocations, we can make magic happen. We already have areas in our economy where we’re digitizing, such as the financial services, the supply chain, and the retail industry, and that’s going very well because it’s decentralized. When it’s decentralized, Egypt does very well.”

Critically, Egypt has the talent to make progress on tech and digitization: “Just look at regional VCs and how keen they are to hire Egyptian talents — the market for hiring is 5x as big as it was five years ago. I think Egypt could potentially see significant growth in tech, because it’s a sector that’s built on innovation, talent, and market. We have the first two, and now it’s about the market. When you can see ease in inflows and outflows and capital exits, we will go beyond expectations,” Shams El Din said.

“We are certainly in direct competition over our talent with markets like Saudi Arabia and the UAE, but we have an oversupply,” Shams El Din told Enterprise, adding that “if you look at Saudi’s Vision 2030 or the UAE’s Vision 2031, both are heavily reliant on sourcing talents from around the world, even though they have a good amount of local talent supply.” For Egypt, “our talent pool being hired by GCC firms is a form of exports — we export talents and high caliber services and we can be a center for these types of service exports. This is an area that will — or at least should — heat up in Egypt,” Shams El Din continued.

What that means for the local market: “It’s all going to be about the pricing of talent. The pricing structure is held hostage right now because of the high level of demand in our neighboring markets and by the lack of benchmarks or reference points,” Shams El Din said. “There will be a market-based price for talents and will help Egypt attract and retain the talents it needs.”

** We also sat down with Shams El Din recently to discuss how asset managers underweighting Saudi Arabia are missing the boat. You can check out the story on EnterpriseAM KSA here.