Corporate Treasury & FX in Egypt

Commentary

Several countries with the worst financial crises have decided to implement painful measures to improve their economies. We recently covered Turkey; this report is about Egypt, and Argentina will follow soon.

The measures are well known: significant devaluation (usually more than 40%), and raising interest rates to punitive levels - 30% to 50% is the norm. The impact on the domestic consumer is significant, but the early signs are that there is some improvement. Inflation levels are generally coming down, foreign exchange shortages have begun to ease, and foreign businesses are starting to have greater confidence, though all remain cautious.

This is certainly the case in Egypt: participants on the call all reported business levels which were difficult but not dire, and less difficulty repatriating funds. Inflation has been 36%, coming down to a reported 26% in September 2024 – but with a peak of 70% to 90% on some key food staples.

Sadly, geopolitics cannot be ignored. Turkey and Egypt live in a troubled neighbourhood: Egypt has a border with Gaza - a massive influx of refugees could destabilise the country. Its own recent history is one of constant conflict between more radical religious elements and governments which tend to be authoritarian, but relatively secular and pro business. Importantly, the United Arab Emirates and Saudi Arabia were cited by participants as a major source of foreign investment, which has considerably helped with the foreign exchange situation. In particular, the UAE has signed a multi billion dollar agreement for the development of a significant area on the Mediterranean Sea – the precise amount is not certain, but it appears to be at least USD 15bn, with total value potentially being above USD 100bn.

There is a problem on the southern border as well: Ethiopia is building a dam on the Nile. Egypt takes a very dim view of this – but it is not receiving much publicity.

What does this mean in practical terms?

• Pressure to use documentary credits (LCs) has eased: it is now relatively simple to be paid for shipments on open credit, even if these are intercompany sales. Where LCs are still being used, the requested payment terms have improved from 270 to 365 days to terms in the area of 120 to 180 days. Previously, to conserve hard currency, banks were only able to process payments against documents – and these needed to have been booked a long time in advance. One participant’s customers are now prepaying imports.
• Even if there is no LC, stringent import documentation requirements must still be met.
• Participants who sell locally or on open account for imports are reporting issues with late payments. This can complicate hedging.
• Foreign MNCs had been using a lot of local banks as well as their global relationship banks, as they needed to shop around to find FX and loans. This situation has improved: foreign banks are now able to source FX and lend money – though one participant noted that HSBC refuse to pay interest on deposits, while Citi pay it.
• The Egyptian Pound devalued by over 50% early in 2024, from about 31 to the dollar to around 48. This has caused inflation and difficult price rises for businesses which import for local sale, though the exchange rate is now more stable. Most participants hedge the currency, despite the cost – the central bank’s base interest rate is 27.75%. 
• Part of the economic action plan includes a loan from the IMF of $8bn. One of the conditions is a privatisation plan. The government has been slower than many would wish in selling off some of the companies it owns – but progress is being made. 
• The significant devaluation caused problems for companies who sell via local distributors: the distributors sell in local currency – after a devaluation, they are not able to purchase the dollars or euros at the higher rate. However, these are long term relationships and participants worked with their business partners to find a resolution.
• Some participants are taking a new look at their business model: some are considering local manufacturing, with others examining purely offshore sales, or increasing the number of local distributors to spread the risk. In all cases, it is an important market to which they are committed: one participant’s company was actually looking to develop a presence which they do not currently have.

Bottom line: Egypt is a challenging country. Over the past few years, there have been significant difficulties obtaining foreign currency and local funding. The difficult measures taken by the government seem to be going some way to addressing the issues – with important help from some of the Gulf countries.

Overall, the feeling amongst the participants, who were mostly from high priority industries such as medicines, was that the country goes through difficult periods, and is no stranger to turmoil. But it remains fundamentally business friendly and is an important market it is difficult to ignore. Even if it does live in a very dangerous neighbourhood.