Business opportunities in Egypt after the IMF deal

Egypt’s multibillion dollar deals with the International Monetary Fund (IMF) and the United Arab Emirates will help Africa’s third-largest economy free its currency, boost reserves and ease investor fears, unlocking new investment and boosting export sectors.

In a sign that the Fund was more comfortable with Egypt’s economic and funding outlook, the country secured in March an agreement to more than double the IMF aid to U.S.$8 billion. The deal went through after the Egyptian central bank devalued the pound by 40% in a bid to meet the IMF’s conditions. ¹

The Arab world’s most populous country had been in talks with the IMF to revive and expand the original U.S.$3 billion, 46-month Extended Fund Facility signed back in December 2022 to tackle a prolonged economic crisis.

That required committing to a comprehensive policy package aiming to move towards a credible flexible exchange rate regime along with accelerating the economic reform programme to boost private sector-led business activity.

Besides eliminating the parallel currency market, the package also seeks to impose fiscal discipline, preserve debt sustainability, and restore price stability.

It also includes a new framework to slow down infrastructure spending including projects that have so far operated outside regular budget oversight.

UAE investment

The IMF deal came on the back of Egypt’s agreement with ADQ, an Abu Dhabi-based sovereign wealth fund, to receive U.S.$35 billion by late April, the biggest single investment in the country’s history that helped the central bank unshackle the currency and raise interest rates.

The ADQ agreement included an investment of U.S.$24 billion of new funds, around 6.3% of GDP Fitch Ratings estimates ², to develop 170 million square meters in Ras El-Hekma on Egypt’s Mediterranean coast as well as a conversion of U.S.$11 billion of deposits in the central bank for new projects in Egypt. ³

The deal provided much needed breathing room for Egypt’s external finances and an opportunity to restore confidence, but the durability of the improvement will depend on the implementation of reforms to prevent renewed imbalances, such as a more flexible exchange-rate regime and policies to develop a more competitive export sector, Fitch Ratings said.

Located at a strategic global trade crossroads between Europe, Africa and Asia, Egypt has always played a vital role in global trade. Around 12-15% of global maritime trade volume normally pass through the Suez Canal. The 193k Suez Canal was opened in November 1869 and remains the shortest route between Asia and Europe.

However, due to ongoing regional tensions, it is estimated that the volume of trade that passed through the Suez Canal has dropped by 50% year-over-year in the first two months of the year, straining Egypt’s government budget revenue. ⁴

Confidence improvement

Both the IMF and UAE deals have boosted investor confidence in Egypt, triggering a rating outlook review and opening the door, if the reforms are sustainable, for more funds from multi-national institutions and other donors as well as private investors.

The reform agenda is essential for restoring investor confidence and unlocking fresh money inflows. The increased confidence can help attract not only FDI but also portfolio investment, which can benefit companies by providing access to capital, technology, and markets.

Structural reforms such as reducing trade, investment and administrative barriers make it easier for foreign companies to do business in the country attractive for its young population and strong demand and have a positive impact on trade flows in general.

The opportunities for investors are numerous in North Africa’s biggest market with a population of over 111 million that has been expanding by 2% on average over the past decade, according to the World Bank data.

Moody's Ratings changed Egypt’s outlook to positive from negative and affirmed its Caa1 long-term foreign and local currency issuer ratings to reflect significant financial support and marked policy steps that will, if maintained, support macroeconomic rebalancing. ⁵

The agreements could now pave the way for Egypt to receive over U.S.$20 billion in additional funding from other partners such as a U.S.$3 billion loan from the World Bank, and other funds from the European Union, African Development Bank and Arab Monetary Fund, according to Egypt’s Finance Minister Mohamed Maait. ⁶

Separately, Egypt is also seeking an extra loan from the IMF's Resilience and Sustainability Facility which promotes climate transition financing. The loan could reach U.S.$1.2 billion, according to the country’s Prime Minister Mostafa Madbouly. ⁷

A successful exchange rate adjustment and absence of the parallel rate could also support increased remittance and portfolio investment inflows, which have been constrained by expectations about a further devaluation of the Egyptian pound, a report by Fitch Ratings said. ⁸

Export boost

A renewed focus on reforms will help boost Egypt’s competitiveness, improving the business climate, and aiding growth in the export sector and the green transition.

The economic stabilization on the back of the IMF aid can help Egypt’s manufacturing sector. Access to credit and a more competitive exchange rate can stimulate growth in industries such as textiles, chemicals, renewables and food processing and other export-oriented businesses.

The IMF’s assistance could also help Egypt ease its external debt and balance of payments issues, improving its ability to meet its international financial obligations along with a reputation of a reliable trading partner.

Following the IMF agreement, some global companies have already started expediting business deals with Egypt and clearance in the volumes of importation documents that were backlogged.

According to BMI, the IMF programme will allow for the settlement of about U.S.$6 billion in import backlog and higher import financing through the banking sector. ⁹

Trade represents around 37% of Egypt’s GDP, according to the World Bank, with Turkey, Spain and Italy the country’s top three export partners in 2022, while imports mainly came from China, Saudi Arabia and the United States.

Another potential winner could be Egypt's tourism industry, which may see higher visitor numbers thanks to higher investor confidence and security, increased investment in hospitality infrastructure, and more jobs in related services.

Despite its decreasing share on GDP, agriculture remains a significant sector in Egypt, and the IMF-supported reforms could lead to increased investment in irrigation and new technologies. That would have a positive impact on productivity of farms, higher exports as well as employment opportunities in rural areas.

Tech, renewables focus

Egypt has been also investing in developing its information technology sector, and the IMF financing could further accelerate this growth, supporting innovation in the IT and digital services industries.

Given the government’s strong support for renewables, the IMF deal could also attract green-minded foreign businesses.

According to its Integrated Sustainable Energy Strategy (ISES 2035), the government has set targets for renewables to make up 42% of the country’s electricity mix by 2035, based on rapid solar and wind deployment.

A study by the International Renewable Energy Agency (IRENA) estimates that Egypt could supply as much as 53 percent of its electricity mix from renewables by 2030, double current expectations. ¹¹

Moreover, the IMF backed reforms could also improve access to credit for businesses, which can help some of 2.5 million small and medium-sized enterprises (SMEs) in particular as they often face challenges to access traditional lending. SME’s account for an estimated 75 percent of the country’s labour force.

HSBC Bank Egypt is committed to supporting businesses of all sizes that contribute to the ongoing growth, modernisation and diversification of the Egyptian economy.

The bank’s leading innovative digital banking solutions, combined with nearly 40 years’ experience in Egypt alone and global connectivity across 64 countries, offer a seamless and secure experience to its customers along with access to over 90% of the world’s trade flows.

Securing the expanded IMF deal is a positive step for Egypt if it can sustain the move to a flexible exchange rate system, tightening of monetary and fiscal policies, and a slowdown in infrastructure spending, while supporting private sector growth. These policies will help preserve macroeconomic stability and restore confidence, opening the way for investment inflows.