Amid Chaos, A Glimmer of Hope

Investors seem to prefer a military regime in Egypt | “It’s more likely we’ll get stabilization than a civil war”

Peter Coy, with Ahmed A. Namatalla, Alexia Underwood, and Caroline Alexander

A Mursi supporter is cleared by security forces in the eastern Nasr City district of Cairo


Investors in Egypt are taking seriously the Rothschildian dictum that the time to buy (or at least hold) is when there’s blood in the streets. While lamenting the violence that has taken about 1,000 lives, they appear to be betting that the military-backed government will consolidate power and run the Egyptian economy better than did the Islamist government that it overthrew in July. Whether their tentative optimism is justified is hard to say.

“I’m comfortable with this kind of military regime,” says Lutz Roehmeyer, a Berlin-based fund manager at Landesbank Berlin Investment who oversees €11 billion ($15 billion). “We’ve seen this from time to time in emerging markets, and it usually serves as a force of stabilization.” He adds: “It’s more likely that we’ll get stabilization than a civil war because Egyptians can easily look across at Syria to see a clear example of where they do not want to head.”

The Egyptian Exchange’s volatile EGX30 stock index fell less than 5 percent from Aug. 13 to Aug. 21, a period in which Cairo and other cities were wracked by fighting and the government arrested the spiritual leader of the Muslim Brotherhood. The market is still up 15 percent from where it was before June 30, when massive demonstrations helped force the downfall of President Mohamed Mursi.

The bloodshed hasn’t driven the government’s borrowing costs skyward, either. The yield on a benchmark bond maturing in 2020 hit 9 percent on Aug. 21 — up from its early-August low but still well below the 10.4 percent that investors demanded on July 3, the day of the military coup. The perceived riskiness of Egyptian debt, as reflected in the pricing of credit default swaps, is lower than that of Argentina, Greece, Cyprus, Venezuela, Pakistan, and Ukraine. The bottom line: Violence aside, “Investors take a very pragmatic view of the markets,” says Philippe Dauba-Pantanacce, London-based senior economist for the Middle East and Turkey at Standard Chartered Bank.

The case for investing in Egypt now is that things are bound to be better than they were under the Mursi government, which though duly elected was disastrous for business. Critics accused Mursi of trying to cement power by rewarding friends and punishing enemies. He alienated the International Monetary Fund by backing away from ambitious commitments to raise taxes and cut subsidies for fuel and food. The economy’s growth rate, foreign-exchange reserves, and investment from abroad fell, while unemployment and inflation rose. The interim government has assembled a team of technocrats who will focus on jobs, investment, and expunging corruption, says Nasser Saidi, who runs a Beirut-based economic consulting firm. Among them: Finance Minister Ahmed Galal, a long-time World Bank economist with a Ph.D. from Boston University.

Optimists take heart that Saudi Arabia, Kuwait, and the United Arab Emirates, which oppose the Muslim Brotherhood, won’t let Egypt’s new regime fail. They have pledged $12 billion to the new government, and the Saudi foreign minister promised in Paris on Aug. 19 to make up for any cutbacks in assistance from Europe and the U.S. Egypt earns hard currency from industries including oil, textiles, cotton, tourism, and shipping.

“As soon as the dust settles, there is going to be a wave of reconstruction, of opportunity,” says Habib Haddad, the Lebanon-based chief executive of Wamda, an organization that finances entrepreneurs in the Middle East and North Africa. “Hopefully it isn’t going to take more than a few weeks or days.”

Those hopes could be dashed if the army’s campaign against the Muslim Brotherhood leads to more bloodshed. “The more the Muslim Brotherhood is persecuted by the state, the more likelihood there will be instability,” says Anthony Simond, emerging-market investment analyst at London-based Aberdeen Asset Management. “The interim government cannot put through any of their potential policies ... until they have calm on the streets.”

Tourism has all but disappeared for the moment. Many small businesses are barely hanging on. “There’s no money coming in. We used to stay open until 11; now we close at 5 p.m.,” says Sara Adil, who owns a small women’s clothing store called Sara. Haddad, the Lebanon-based financier, says the head of an e-commerce startup in Egypt told him he’s thinking of relocating to Dubai.

Saidi, the economic consultant, predicts the military-backed government will eventually give the Muslim Brotherhood some kind of voice, and once that happens it will be possible to refocus on the economy. Investors seem to be assuming so, too. “I’m optimistic on Egypt in the medium to long term. The risk premium is high enough to pay for the risk,” says Roehmeyer, the Berlin-based fund manager. “That’s simply what we investors are constantly looking at.”

The bottom line Bloodshed and despair don’t deter investors who see economic opportunities in Egypt after the army’s coup.


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