Egypt: Hope springs eternal

Instability has dogged the economy for the past few years but a new constitution brings prospect of a brighter future

For a while last year it seemed as though Egypt had got through its ‘Arab Spring’ turmoil. In mid-2012, in the country’s first-ever democratic elections, Mohammed Morsi was elected president and slowly business began to return to normality.

Egypt

But on 30 June last year a fresh round of violent protests saw thousands take to Cairo’s streets and Morsi was unseated from power. He is now being tried on charges of fraud and over the death of protestors in December 2012, when he was in power.

The fresh disturbances, say lawyers in Egypt, called a halt to the wave of work that had begun to come through in the first months of 2013. However, now there is renewed hope of stability.

Egyptians voted earlier this month on a new constitution, drawn up after the military coup that ousted Morsi. Although opponents claim their vote was suppressed, others say the secular focus of the document is a good thing. Presidential and parliamentary elections are set for later this year. 

Crisis upon crisis

But Egypt’s economy – like that of most developed markets – was suffering before the political situation became unstable.

“The financial crisis did affect the outlook in Egypt,” says Shalakany Law Office partner Aly El Shalakany. “The size and the frequency of deals has dropped.”

Shalakany and Sharkawy & Sarhan partner Karim Sarhan both acknowledge that the instability that kicked off with the Arab Spring in 2011 has had a material impact on investment into Egypt, and that many foreign investors are putting their plans for Egypt on hold until the future seems more secure.

“In our view everyone is in a status of ‘let’s wait and see’,” says Sarhan. “If we have in place a constitution, a president and a parliament we expect it to bring some stability.”

The hardest-hit sectors are infrastructure and tourism. As Shalakany points out, these projects tend to be long-term and also usually have government involvement in some way. Both factors make foreign investment more risky.

“They’re cautious about massive projects with a political risk because they’ll have to pay for it for the next 15 to 25 years,” he adds. 

Energy oasis

But there are still growth areas, including retail and oil and gas work.

“In the oil and gas sector, business largely continues as usual,” says Sarhan. “There are a number of bids coming out from the government for potential projects in these fields – mainly power plants.”

“People still need to buy things, so retail has been fairly strong,” Shalakany adds.

M&A activity has focused on foreign companies adjusting their exposure to Egypt, such as European banking giant Société Générale (SocGen). SocGen sold its Egyptian subsidiary, National Société Générale Bank, to Qatar National Bank in a $2bn (£1.2bn) deal that closed in March last year. Other companies have made similar sales, often to Gulf investors.

“These sales have nothing to do with the political situation – it’s got more to do with the situation in Europe,” Sarhan points out.

On the other hand, there has been a slowdown in finance work, particularly in capital markets.

“I don’t think there’s been a major IPO since 2011,” Shalakany says. “On the debt securities side, the Egyptian government was a decent user of the international bond markets and this has also gone.”

He says there is some secondary debt capital markets activity, and Sarhan adds that Egyptian banks still have a lot of liquidity, opening the way to finance work when stability returns.

But Shalakany hastens to add that there has been other work flowing in to keep Egyptian lawyers active.

“We’ve not been sitting idly by for the past three years,” he says. “The main cyclical markets are decreased, but counter-cyclical markets are on the up.”

Litigation and restructuring are the main areas of counter-cyclical work. Shalakany offers restructuring to increase foreign investor protection as a prime example of an area that has kept Egypt’s local firms busy. 

Dune roamin’

The Egyptian legal market has also had a bit of a shake-up recently. Although Norton Rose and Shearman & Sterling both expressed an interest in launching in Cairo last year, neither has yet done so; and Trowers & Hamlins has closed its Egyptian office, with the team moving to local firm Ibrachy & Partners.

Meanwhile, DLA Piper’s local associated firm Matouk Bassiouny & Co dropped the DLA branding, although the relationship remains. 

There is certainly a lack of enthusiasm among international firms to open in Cairo, but potential for growth remains and this could entice foreign lawyers back in the future.

“If the economy comes back on track, interest will be renewed because the fundamentals haven’t changed,” Shalakany concludes.

Key figures: Egypt

GDP: $263bn

Inflation: -1.4%

Population: 81m

Life expectancy at birth: 71

Unemployment: 13%

Source: World Bank, State Information Service, Central Agency for Public Mobilisation and Statistics