The Catalyst Partners’ Perspective
Historical Market Developments
In 1991 a US-led military coalition supported by Egypt initiated a massive strike to Iraq’s forces in response to the Kuwait invasion. During the early 1990’s the Gulf War negatively impacted the Egyptian economy, widening the budget deficit, lowering foreign currency earnings, slowing GDP growth and increasing inflation. With external debt reaching 105 percent of Egypt’s GDP in FY1990/91, the need for serious reform to the economy was evident.
The government took positive steps to stabilize the economy and stimulate growth by signing agreements with the IMF in 1991 and Egypt’s Reform and Structural Adjustment Program (ERSAP) with the World Bank and others, which required the state to approve and implement a privatization program. ERSAP aimed to provide economic stability, make structural adjustments to stimulate medium and long-term growth, improve social policies, adjust polices to reform public enterprises, and liberalize prices including interest rates. Simultaneously the government rescheduled and wrote off its debt to the Paris Club members.
Privatization began with the decree of Law 203 in 1991, governing privatization and public investment, and Law 95, which created institutions for privatization including 17 holding companies in 1993. The proceeds of the privatization program amounted to EGP7.8 billion as of June 1998, 55% of which was used to settle debts, 35% for early retirement schemes and 10% for labor restructuring. In 1992, the state issued the Capital Market Law and its executive regulations, which revived the Egyptian Stock Exchange. As part of the reform era, Egypt eased many price controls, decreased subsidies, eased inflation, reduced taxes, and to an extent liberalized trade and investment.
During this period, cross-border investment also grew significantly, with developed countries increasingly attracted to emerging markets. In the early 1990’s, the financial community perceived emerging markets as too illiquid and risky to trade and institutional investment in these markets was relatively minimal. Now, markets like Egypt are part of international portfolios representing a strong investment proposition, particularly for the expanding base of hedge funds.
The region is in the midst of a significant transformation, moving from an economy fueled largely by an abundance of natural resources to a diversified knowledge-based economy with a broad range of industries. The transformation began several years ago, when regional manufacturing and services companies were started, sovereign wealth funds began making major investments in companies, and local governments established free trade zones to attract foreign businesses and skilled workers.
Several recent changes, including the establishment of NILEX in 2008, have also created a fertile ground for SME growth and investment. In the wake of the 2011 Egyptian revolution, the government is expected to focus resources on SMEs to achieve its political and economic goals by creating a more attractive business environment and to tackle unemployment, inflation, increase foreign direct investment and accelerate GDP growth.