Egypt: A rolling revolution
Egypt is the test case for the Arab Spring, politically and economically. It is the Arab world's most populous country and it has the most diversified economy and most mature financial institutions. Other North African economies that have had their own revolutions this year are either too small (Tunisia) or too badly damaged (Libya) to be candidates for much outside investment any time soon.
Egypt is the largest Middle Eastern economy where it is comparatively easy for outsiders to invest; in Saudi Arabia, by contrast, foreigners from outside the Gulf cannot directly own publically traded Saudi equities. Not that the Egyptian stock exchange is anywhere as large or liquid as London or Tokyo's. Brian Bandsma, a senior analyst with the investment management firm Vontobel, went to Cairo to scope out possible investments in 2010. He saw a few public companies that impressed him but the firm decided not to buy any of them because they were too thinly traded.
Western investors, who cheered the revolution, have yet to embrace Egypt as an investment opportunity, largely because of political uncertainty that is, in turn, paralyzing the country's economy. Even before clashes between protestors and the army broke out in November, tourism, a crucial industry, had ground to a halt. When revolution broke out in neighboring Libya, the many Egyptians who worked in that country's oil industry either came home or stopped sending money to their families. Egyptian unemployment, already high before the Arab Spring, has risen to about 40%.
Efforts by the Egyptian Central Bank to support the Egyptian pound and head off inflation had the side effect of making it possible for skittish investors to liquidate their Egyptian investments and take their money out of the country without getting killed on the exchange rate. Meanwhile, the bank's reserves have been nearly depleted and it was widely expected that Egypt, which rejected an International Monetary Fund loan in June, would have to make some kind of deal with the IMF within the next few months.
And those are the things investors know about; what's really keeping institutions out of Egypt are countless unknown factors: What role will the military, which controls a sizable chunk of the country's real estate, ultimately play in the governing of Egypt? How will the Islamists of the Muslim Brotherhood and other parties fare in major elections? (Elections for the lower house of parliament began in late November to be followed by elections for the upper house and for a new president in spring 2012.)
Michael Daoud, head of Middle East equities at Auerbach Grayson, a New York brokerage specializing in the Middle East, says given all the uncertainty there's just no way to know when foreign capital will return to Egypt and other parts of the region that have been thrust into turmoil by the Arab Spring. He's more bullish on Egypt than many: he is tracking stable companies such as Juhayna Food Industries, which dominates the Egyptian market for milk and dairy products; energy products and services supplier Elsewedy Electric, and Cairo-based CIB Bank.
Still, he can't recommend that an interested foreign investor rush out and buy stakes in those companies. Not now, Daoud says. Things won't start to get clearer until the election returns start to come in.
"I'd rather be a little late," he says, "than too early."
