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July 10, 2014

BRICs and beyond: Eyeing Egypt: Why firms are queueing up to invest

A new president and a revised investor law for Egypt appears to be restoring business confidence. Last month three food and beverage giants announced plans to invest in expanding operations in the country. But with a growing population and high levels of unemployment, plus a cut in fuel subsidies that could put pressure on the average citizen's pocket, is now really the right time to be eyeing Egypt? Hannah Abdulla explores.

A new president and a revised investor law for Egypt appears to be restoring business confidence. Last month three food and beverage giants announced plans to invest in expanding operations in the country. But with a growing population and high levels of unemployment, plus a cut in fuel subsidies that could put pressure on the average citizen’s pocket, is now really the right time to be eyeing Egypt? Hannah Abdulla explores.

Since the uprising of 2011, Egypt has proved a particularly complex market for foreign investors. Net foreign direct investment fell from US$23.3bn in 2009 to an estimated $13.4bn in 2013, according to World Bank figures. But as the political situation in the country stabilises – following the ousting of Muslim Brotherhood Leader Mohamed Morsi a year ago and the subsequent appointment of former military chief Abdel Fattah Al-Sisi last month – there has been a noticeable improvement in investor confidence.

In June, Nestle and PepsiCo – the latter as part of its joint venture with Saudi Arabian food group Almarai – announced plans for fresh investment in Egypt. News of their projects follow an announcement from Coca-Cola Co. earlier this year to spend US$500m in the country, all supporting forecasts of an increase in foreign direct investment into Egypt to $15.3bn by 2015.

The announcements support the view that the new Egyptian government coming into power is gradually restoring faith among foreign investors. In a report forecasting the possible development of Egypt’s packaged food market from 2013 to 2018, Euromonitor predicts volumes will increase “at the same levels as the pre-revolution years”.

The turmoil did not cause investors in the food industry to flee altogether. Though sporadic, investments – particularly in the snack sector – were taking place in 2013. Last June, Mars announced it was spending US$83m on the production of Twix in Egypt.

And there was interest in local food companies, too. UK private-equity firm Actis spent US$102m on a 30% stake in Egypt-based snack food group Edita Food Industries.

The political upheaval in Egypt actually provided an opportunity for domestic players. The turmoil meant tourism fell, prompting the supply of foreign currency to decline. With dollars in short supply, and Egypt prioritising items like medical supplies and industrial equipment, food importers had to “stand in line and wait [their] turn”, Kamel Saleh, Deloitte’s Egypt analyst, says.

Egyptian companies began to flourish, investing in brand development and SKU expansion. Euromonitor says domestic companies could then “swamp the market with Egyptian options and suffocate new entrants out of modern retailing shelf space”.

Euromonitor says the multinationals that maintained and looked to expand their presence in Egypt have been able to better compete with domestic companies than those exporting into the country. And now some of the international food makers are looking to kick on with their expansion.

Deloitte’s Egypt analyst, Kamel Saleh, explains the uprising may have played a part in delaying some investment but it did not put investors off.

“The reasons are quite obvious; the fundamentals of the Egyptian economy have not changed. We are still a country with 90m consumers that will eat, drink, wear clothes, consume products and that population continues to increase at 2-3% a year.”

But the burst of activity in 2014 has prompted business watchers to ask what sudden change has prompted an investment domino effect.

David Faulkner, global market analyst at Mintel, believes the Egyptian government is keen to encourage investment.

Ashraf Salman, Egypt’s investment minister, has outlined a plan to deliver US$10bn in foreign direct investment in the next year and US$14bn in three years time. To try to achieve this target, the country has passed a law that stops third parties challenging contracts made with the government – something which had in the past harmed business confidence in the country.

“It will be hoped that the recent commitment from Almarai, PepsiCo, Coca-Cola and Nestlé will encourage a further influx of business agreements,” Faulkner says.

But what sectors are predicted to boom as the political horizon in Egypt somewhat stabilises, and which are the firms that should be investing?

According to Euromonitor, the market has “been predominantly driven by sales in artisanal bread and rice”. Other staples – dairy, for example, are key. Mintel has identified a “steady growth” in the number of liquid dairy products launched in Egypt in recent years, increasing 20% between 2010 and 2013. Earlier this year, European dairy group Arla Foods told just-food it would be increasing its focus on Egypt and Libya, predicting a growth rate in trade in Africa – inclusive of Egypt – of 20-25% in the next four years.

In addition, there has been an increase in demand in the snacking and confectionery sectors, which Faulkner attributes to a growing, “internet savvy”, youth population and burgeoning middle class incomes.

Cue Nestle. The firm has invested close to EGP1bn (US$139m) since 2011 and doubled its local workforce in a bid to seize a portion of the snack market estimated to be worth about US$1.6bn. 

“Egypt has massive consumer and labour potential, making it an attractive place for investment in the region. Despite the political uncertainty over the last few years, the facts still remain that Egypt is and will be an important centre for trade and production,” a spokesperson for Nestle told just-food.

Its latest investment into its confectionery plant will see the addition of a line which will produce Nestle’s Crunch brand. And the demand for such products is there, argues Faulkner, with 60% of the population being under 30 years of age. 

Euromonitor adds that, with “import restrictions and bureaucracies” being somewhat “relaxed” following the revolution, it is likely this sector will continue to grow. “The flow of premium and luxury products will return and with it, bring some market value growth,” Euromonitor says.

However while Carpe Diem seems to be the approach of Nestle and PepsiCo when it comes to investing in Egypt, others wonder whether now truly is the right time to be growing their operations there.

The new investor law has raised concern among critics who believe it may promote corruption. Further, the level of unemployment in Egypt, combined with a growing population, is another factor that could lead to social unrest if not addressed. And to add to the challenges, at the end of last week, Egypt announced it would be cutting fuel subsidies in a bid to reduce the budget deficit by EGP51bn, prompting fears over the potential impact on consumer spending.

But Saleh believes the move is “not likely” to have a negative impact. “It’s redressing a disequilibrium in the market – correcting something that was wrong as the food prices and transport prices are officially below what they cost. It should have a positive impact.”

Though a fuel price increase may influence people’s spending habits, investors seem unlikely to be scared off. Saleh insists the current president is making “all the right signals toward investors”. While in the short term, international investors may be presented with some obstacles until the political environment settles – possibly after the upcoming parliamentary elections – the future, Saleh believes, looks bright. He adds that there are already a number of companies in Egypt seeking IPOs.

“It suggests there is potential for raising capital and expanding. The way the market is moving – it’s likely to be quite lucrative for international investors”.

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