Egypt country risk assessment

02 May 2019

Egypt country risk assessment President Abdel Fatah al-Sisi amended the constitution on 22 April, 2019 to consolidate control over the judiciary, raising immediate contract alteration and expropriation risks for investors. Terrorism risks remain elevated in tourist hotspots and the military is engaged in fighting with Islamist insurgents in North Sinai.

Nevertheless, structural economic reforms will stimulate significant private investment in hydrocarbons, allowing Egypt to be a regional outperformer in 2019-2020.

Security Environment

Constitutional changes approved by the Egyptian parliament in April 2019 will grant al-Sisi control over the judiciary and extend presidential term limits to six years. Despite giving al-Sisi a potential mandate to govern until 2030, opposition to the decision has been minimal.

The Muslim Brotherhood, which has traditionally been the focal point of political opposition in Egypt, has largely lost the ability to organise large anti-government demonstrations due to the imprisonment of a number of high-ranking members of the leadership.

Egypt country risk assessment Nonetheless, domestic unrest is likely to continue sporadically and in small numbers throughout 2019, driven by public reaction to rising inflation and austerity measures. Protests and sit-ins at company headquarters and outside the labour and finance ministries in Cairo are likely in the one-year outlook.

Terrorism risks remain elevated in the major urban centres of Cairo and Alexandria.

Attacks are most frequent in North Sinai and Giza, where terrorism targeting tourists and religious minorities is likely.

Egypt faces a two-pronged terrorism threat, from both a localised Islamic State presence west of the Suez Canal and a grassroots nationalist-oriented Islamist movement active in Giza, Damietta, Fayoum and Beheira Governorates.

In December 2018, an improvised explosive device detonated in downtown Giza, killing three Vietnamese tourists and injuring ten bystanders, highlighting the threat to foreign nationals.

Trading Environment

Egypt’s GDP growth is projected to increase to 5.5% in fiscal year 2019, as the economy stabilises from structural reforms. Increased natural gas production from the Zohr oil field discovery will also help the country to become self-sufficient in the coming years.

However, economic headwinds exist. Debt, currently at 89.4% of GDP, remains high though sustainable.

Servicing government debt accounts for approximately 30% of fiscal spending, almost 10% of GDP. Increased foreign currency denominated debt, the opening of the capital account, and rising foreign investment in the local currency sovereign debt market increase Egypt’s sensitivity to international capital market volatility.

Nevertheless, a flexible exchange rate and rising international reserves of US$44.5 billion (currently 8.5 months of import cover) provide buffers.

Egypt’s capital accounts will remain susceptible to external shocks and would be adversely affected by any sharp increase in oil prices or security risks.

Egypt is a significant importer of soft commodities and is the world’s single largest importer of wheat, importing 12.5 million tonnes for the 2018/19 marketing year. The dependence on agricultural imports creates economic vulnerabilities and may contribute to unrest in 2019.

External shocks such as oil price spikes can drive up the cost of importing goods, periodically forcing the government to cut subsidises.

This can drive social unrest in response. Oil prices have risen nearly 40%in 2019 as OPEC has cut production and sanctions on Iran and Venezuela have tightened global supply.

Investment Environment

Pricing outlook EgyptIn line with Sisi’s stated objective of attracting greater foreign investment, Egypt has introduced a number of pro-business reforms. In 2019, Egypt simplified the process for starting a business by removing the requirement to obtain a bank certificate and establishing a one-stop shop for business registration.

The 2017 New Investment Law streamlines the licensing process for foreign businesses, allowing industrial entities to get approval from one authority instead of 11 agencies, which was previously a 600 day process.

Contract enforcement risks have increased given the decision to grant Sisi greater control over the judiciary in April 2019. Sisi will now have the mandate to appoint the heads of the four main judicial courts, including the Supreme Constitutional Court, and expand the jurisdiction for military courts to try civilians guilty of attacking military installations.

Under the 2014 Investment Law third parties are banned from challenging government contracts.

The Law limits the scope for outside parties to bring corruption cases regarding government decisions such as privatisation of public assets at below-market prices.

Currently, most government contracts for infrastructure projects are being carried out by military-owned firms, hence the outcome of any domestic dispute is likely to be heavily influenced by investors’ prior relationship with the Egyptian military and networks associated with politically connected individuals.

The monthly Risk Outlook is supported by our proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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5 Key Takeaways

  • Contract enforcement risks have increased given the decision to grant President Sisi greater control over the Judiciary in the April 2019 referendum
  • Protests and sit-ins at company headquarters in Cairo are likely in the one-year outlook
  • Terrorism risks remain elevated in the major urban centres of Cairo and Alexandria
  • Dependence on agricultural imports creates economic vulnerabilities and may contribute to unrest in 2019
  • GDP growth is projected to increase to 5.5% in 2019

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Mexico, Ghana and South Africa, all of which have been the subject of recent enquiries from our client base.

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  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects. Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on
    +44 (0)20 8108 9544.