Abstract

As time elapsed and globalization advanced, more and more countries worldwide have started a development that seems limitless. The latter, called “Emerging Economies” have already overwhelmed in terms of GDP many of the most industrialized nations, and are preparing to become the stage of the future. Within this framework investing has become harder; as it is true that market opportunities are crawling, it is also real that risks are numerous and cannot be undervalued. The work here presented has the main aim of illustrating the latter, hopefully serving as a guide for future investors in Egypt, individuated as one of the next favored emerging market by the Goldman Sachs Asset Management president Jim O’Neill but that the analysis confirmed as currently not being the best place where to make business. 

INTRODUCTION

Since the end of the second World War, the phenomenon of globalization has strongly impacted the world, radically changing habits and at the same time creating a melting pot of cultures. Trading, travelling and working across different nations has become more accessible and economic data analysis demonstrates that countries benefit from globalized markets in different proportions.

Despite the interconnectedness of the world, investing in the right way and in the right place is challenging. Risks are present in every corner of the globe and valuing them has become crucial in each working field.

The objective of the following report is to evaluate risk and contribute suggestions on investing in the emerging market of Egypt. The research paper has been structured in 7 different sections; each focuses on specific risks and indicators, evaluated against some specific benchmarks set by the International Monetary Fund (IMF). Specifically, the first section is dedicated to the market potential of the North-African republic. Followed by an analysis of the country’s risk assessment indicators, sovereign, non-transfer, banking, political and the natural risks will be assessed.

LITERATURE REVIEW

As more tools have become available, also the amount of researches and country risk analyses have augmented. During the last years many economists have focused their studies on emerging countries, trying to literally work on guides or research papers that would have facilitated making business to investors. Between them it is noteworthy to recommend the International Country Risk Guide by the PRS Group that furnishes a general methodology on how to assess the various financial, economic, and political risks through the use of 22 variables; 5 for financial, 5 for economic and 12 for political risk; and the AMB Country Risk Report which strictly relates to the analysis of Egypt and as the International Country Risk Guide highlights the weaknesses of the economic, financial and political systems of the North-African region, classifying the country as risky.

Other than that, useful reports can also be found on the IMF, World Bank or World Economic Forum Databases.

SECTION I: MARKET CONDITIONS

The following section presents an analysis of Egypt and its market potential based on economic indicators such as the GDP, the PPP, the Global Competitiveness Index, the Market Potential Index and the Business Potential Index. The objective has been to contextualize the country in the overall framework of emerging economies.

COUNTRY OVERVIEW

The Egyptian economy demonstrates signs of development. Some strong economic factors include a large domestic market of 85 million people and a strategic location between the Middle East and Africa. Egypt has a relatively diversified economy and multiple foreign exports such as oil and gas, tourism, Suez Canal revenues and a manufacturing base (Hermes, 2016). This country has showed considerable debt repayments indicating progression.

The political climate in Egypt is one of post political transition; despite the changes in governance, problems of poverty and lack of jobs have not been specifically targeted. Egypt also faces political uncertainties caused by “contagion risk from Syria and Iran’s nuclear program” as well as regional uncertainties due to its relationship with Israel (Hermes, 2016).

In the recent years, government spending has been consolidated; although the public deficit is high due to current spending, investment spending is expected to boost economic activity.

GROSS DOMESTIC PRODUCT (GDP)

The Gross Domestic Product calculates the total value of production of a country, taking into consideration only the final goods. In the case of Egypt, it has been equal to 330.78 billion US dollars in 2015 (3.8% growth – World Bank, 2016), and showed a growth of 0.8% with respect to 2014, year in which it attested at 301.5 billion $ (3% growth – World Bank, 2016). This trend confirms Egypt as an emerging economy when compared to more developed economies whose growth rate is usually less than 2%.

PURCHASING POWER PARITY (PPP)

Another risk assessment indicator is the Purchasing Power Parity concept, which refers to “the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries” (OECD, 2016). By analyzing the PPP of Egypt, it is possible to say that its currency (Egyptian Pound, EGP) is getting stronger, trying to reach the parity against the dollar and euro. Having said that, it is possible to conclude that in the future Egyptians would be able to afford more dollar/euros, for the same amount of Egyptian Pounds. Between 2014-2015 the GDP Annual Growth Rate per capita adjusted for PPP has grown up by more or less 2% from 10048.57 to 10249.96 US$ (World Bank, 2016).

THE GLOBAL COMPETITIVENESS INDEX: Economical Stages of Development

The Global Competitiveness Index is a measurement of the productive potential of different nations. Competitiveness is defined by the WEF as the “set of institutions, policies, and factors that determine the level of productivity of a country”.

From the Global Competitiveness Report 2015 of the World Economic Forum, Egypt can be classified as an Efficiency-Driven economy, Stage 2. FIG.1 in the appendix, contains the GCI data. Egypt ranks 116 out of 140 with an overall score of 3.7 out of 7. Within sub index A, basic requirements, Egypt ranks highest in health and primary education with a score of 5.3. This is a positive sign of an employable working class and strong young populations. In sub index B, efficiency enhancers Egypt reached the highest in market size with a score of 5.1 demonstrating the complexity and diversity of markets available within the population of 85 million Egyptians. However, the country received a low score on innovation, 2.7. This demonstrates that the country is still in the process of progressing in the business sophistication factor.

A COMPARISON WITH THE PAST

Although it was already classified as an Efficiency-Driven Economy in 2014, in 2015 Egypt gained some positions in the overall ranking with respect to the previous year (FIG. 1 & FIG.2). This is the result of major improvements in the country’s institutions particularly in physical security, judicial system, and a protection of property rights. Some improvements have also been achieved on the financial market development side due to contemporary reforms, such as the contraction of energy subsidies and taxes, together with a greater political stability after years of riots.

THE MARKET POTENTIAL INDEX

The Market Potential Index describes the commercial possibilities available in a country, it focuses on 8 different dimensions: market size, market growth rate, market intensity, market consumption capacity, commercial infrastructure, economic freedom, market receptivity and country risk.

Data calculated by the International Business Center of the Michigan State University for 87 countries excluding the U.S. on a scale from 1-100, are weighted in the following way: Market Size* (25/100); Market Intensity* (15/100); Market Growth Rate* (12.5/100); Market Consumption Capacity* (12.5/100); Commercial Infrastructure* (10/100); Market Receptivity* (10/100); Economic Freedom* (7.5/100); Country Risk* (7.5/100).

*For a better understanding of how these measures are estimated, please refer to the tables at the bottom of the page of this link: http://globaledge.msu.edu/mpi/2015

Upon review of the 2015 statistics for Egypt (FIG. 3), it can be concluded that the country’s market size is quite small. The country is on average well positioned for what concerns the Market Growth rate although the latter has decreased with respect to the past (71/100 in 2014; FIG. 4). The Market Intensity measures the richness of one market with respect to another in terms of purchasing. This indicator is among the highest values in the table and furthermore has increased within a year (it was 69/100 in 2014. The same trend has been followed by Market Consumption Capacity that nevertheless in general scores low.

For what concerns the Commercial Infrastructure, Egypt has still some improvements to make. The strange statistics here regards the fact that the country has lost marks with respect to 2014 (-15 deterioration). When considering the Economic Freedom Index a score of 30/100 makes the country one of the most restricted in terms of financial freedom and property rights with a quite high index of corruption (36/100 for Transparency International with a score of 0 corresponding to very clean and 100 to highly corrupted). Corruption influences the government at all levels. The investigation mechanisms in place are weak which does not enable a stable rule of law. Although the new constitution grants the judicial system autonomy, it is not fully institutionalized. In terms of property rights, many investors and Egyptian citizens find their rights are not protected effectively and things have more or less not changed during the last year. The stable Market Receptivity score of 6/100 suggests that Egypt’s economy is less import-oriented. In the end, the Country Risk assessment places Egypt as one of the countries with the highest risks.

THE MIDDLE CLASS

It is simply possible to classify as middle class member households with a disposable income of over 10000 $ or with earnings between 10 to 100$ per day.

During the last years the importance of the Egyptian middle class has increased a lot. In 2015 in fact, data showed that the latter represented the 39% of the total country population of 85 million (Nielsen, 2015), accounting for the 45% of the total country disposable income. These numbers with respect to the past (2000-2010 decade) have increased mainly thanks to the end of the restrictive Mubarak’s regime. The latter is good news because a growing middle class means only one thing: good market opportunities.

THE BUSINESS POTENTIAL INDEX (BPI) – THE DOING BUSINESS INDEX

The Business Potential Index measures the commercial prospective of a country by focusing on indicators including: starting a business, getting credit, enforcing contracts, dealing with construction permits, paying taxes, registering property, protecting minority investors, getting electricity and resolving insolvency. It does that by calculating a Distance to Frontier which represents a line indicating the best possible performance.

In 2016 ranking, Egypt has gained some positions in dealing with construction permits (+1), in getting electricity (+1), in protecting minority investors (+11) and in resolving insolvency (+2). For the rest of the indicators, how it is possible to see from FIG. 5, no changes or even a deterioration has been portrayed. These data show how the country has still to progress in many fields.

This index will be analysed in more details within the section regarding political risks’assessment.

SECTION II: COUNTRY RISKS’ ASSESSMENT

In this second section the Arab Republic of Egypt has been analyzed by taking into consideration the following tools: the FDI and net capital flows, the current account and the balance sheet, the exchange rate, the debt to GDP ratio, the CDS spread, and the ratings.

THE FOREIGN DIRECT INVESTMENTS (FDI)

The 2016 United Nation World Investment Report indicates that Egypt’s FDI flows increased by 49% a numerical increase of $6.9 billion. This growth has been possible thanks to the expansion of foreign investments in the financial industry and pharmaceuticals. After developing an amendment to its investment law, Egypt enabled out of court forums settling Investor-State disputes. This proved to be an incentive for financial investments. Egypt’s FDI inflows rose from 4,612 million in 2014 to 6,885 million in 2015. This trend follows in parallel world’s one that showed an increase in FDI inflows levels from 1.438.115 million $ on 2014 to 1.891.777 million $ in 2015.

Currently, the government strives to boost foreign capital flows by developing a foreign direct investment council. The New Investment Laws approved in 2015 and its executives’ regulations will attempt to make it easier to invest in the country. The main components of the reform refer to the possibility of working directly with the General Authority of Investments and Free Zones together with a substantial decrease in the customs rate from 5% to 2% for imported tools, equipment and machinery. Egypt’s reform efforts have encouraged an international momentum.

THE CURRENT ACCOUNT AND THE BALANCE SHEET

The Current Account (CA) balance is formed by balance of trade (exports – imports), the net primary income (earnings on foreign investments minus payments made to foreign investors) and net cash transfers.

Statistics of Egypt show that the country is characterized by a CA deficit which within 3 months has enlarged (from -4940.2 million of dollars in January 2016 to -5549 in April of the same year – Central Bank of Egypt, 2016). Forecasts for the future continue to follow the same pattern.

Regarding the analysis of the balance sheet it is noteworthy to highlight an increase in total assets between 2013 and 2016. The latter was mainly due to an increase in the cash account and in the account short-term investments. These increments anyway are offset by an increase in equity, principally in the retained earnings account, which refers essentially to the accumulated deficit. Moreover, both total assets and total liabilities have decreased between March and June of 2016.

THE EXCHANGE RATE

Exchange rates measure the price of a nation’s currency in terms of another. Until 2003 the Egyptian Pound has been pegged to the US dollar, but after that year, the country’s central bank (CBE) decided to adopt a managed float which allows the exchange rate to fluctuate within a certain range.

THE DEBT TO GDP AND DEBT TO EXPORTS RATIOS

The Debt to GDP ratio is a measure that relates a country government debt with its GDP. Debt to exports quota instead, relates the public debt to the amount of exports.

Concerning Egypt, the public debt accounted for 90.5% of GDP (301.5 billion of dollars in 2014 –  Central Bank of Egypt 2015) in the long term. This measure shows an increasing trend starting from 2010, year in which it accounted for 73.7% of GDP that at the time amounted at 218.89 billion of dollars. The same thing can be said for the debt to exports ratio that jumped from the 7.5% of 2013 to the 12.7% of 2014.

THE CDS SPREAD

It is possible to define the CDS spread as the risk premium which the lender pays to an insurance company in order to buy a Credit Default Swap that allows the latter to be protected by any loss due to a credit event.

By glancing at the data for the Arab Republic of Egypt it is possible to realize that the CDS spread (Deutsche Bank Data, 2016) in September 2016 totals up to 477 basis points (which translates in 4.77% risk premium) while the Annual Probability of Default amounts to 6.6% which is quite high. The pattern has raised during the last years.

THE RATINGS

Ratings are marks that are assigned by Rating agencies to bond issuers on the basis of their creditworthiness.

Egyptian environment is getting more stable and the economic situation is improving, for this reason we can expect a reduction in budget deficit due to a stronger growth of the country and a reduction of prices. These have been the main explanations by Fitch for the improvement in the country’s rating with respect to last years (B in 2015 instead of B- of 2014).

SECTION III: SOVEREIGN RISKS’ ASSESSMENT

In this third chapter the Arab Republic of Egypt has been analyzed by taking into consideration the following tools: the inflation, the real GDP and its volatility, the budget balance, the country’s foreign exchange reserves, the ease of doing business, the gross national income (GNI), the government effectiveness and the taxation system.

THE INFLATION

The concept of inflation refers to a surge in the general level of prices within a country.

In Egypt’s case the inflation level reached a peak of 15.5% in August 2016, increasing by 5.4% points with respect to the January 2016 (Central Bank of Egypt, 2016). This percentage crosses the 6% threshold established by the IMF, which enables to say that the country has a default probability of 50% within 10 years from now.

REAL GDP AND VOLATILITY

The Real GDP Growth rate is an indicator that measures economic growth in relation to the GDP of a country, adjusted for inflation.

This measure related to Egypt showed a volatility of 1.97%, increasing from 2,23% of 2014 to 4,2% of 2015 (World Bank, 2016). Forecasts for this year (2016) confirm that the growth trend will slow down to 3.3% and rise up again to 4.2% in 2017. Due to that it is possible to say that this indicator for the Egyptian country is quite volatile.

THE BUDGET BALANCE

The Budget Balance refers to a financial statement presenting the government’s revenues and spending of a financial year for a given country.

By looking at Egypt that balance amounted to -12% for 2014 and -11.5% for 2015 (% of GDP – Ministry of Finance Egypt – 2016). That means that although the numbers have decreased between the two years, the country is still experiencing a government budget deficit.

Within that framework it is also useful to give a look to the External debt on GDP and External debt on total government debt ratios.

THE EXTERNAL DEBT / GDP RATIO

The relationship between external debt and GDP indicates the amount of total debt that has been borrowed from foreign lenders.

Data for 2015 registered a 14.5% ratio for Egypt, decreasing by 0.8% with respect to the previous year (15.3% in 2014 – Central Bank of Egypt, 2016). That means no alarms since the threshold after which someone should have started to worry is set at 60%.

THE EXTERNAL DEBT/TOTAL GOVERNMENT DEBT

The relation between external debt and total government debt measure the fraction of debt a country owes to foreign creditors with respect to the total government debt.

For what concerns the Egyptian situation the external debt amounted to $ 41.3 billion in 2014 while the total debt for the same year summed up to $272.8 billion (Central Bank of Egypt, 2016). By dividing these two numbers it comes out that the External Debt/Total Government Debt ratio for 2014 was equal to 15.1% which is not so high considering a threshold set at 50%. No problems are showed even when assessing the non-transfer risk (analyzed later in another section).

THE FOREIGN EXCHANGE RESERVES

The foreign exchange reserves refer to the amount of money held in foreign currencies by a central bank that uses them to back liabilities on their own issued currency or to influence the monetary policy.

In Egypt’s case the total reserves for 2014 sum up to 14,927.00 million of dollars and for 2015 to 15,858.89 million of dollars (Central Bank of Egypt, 2016). This increase logically follows the devaluation of the Egyptian Pound with respect to the Dollar.

THE EASE OF DOING BUSINESS INDEX

The Ease of Doing Business Index is an indicator calculated by the World Bank, which ranks countries by indicating how it is easy to establish a business in terms of regulations.

The ranking for Egypt deteriorated from the 126^th position out of 189 countries in 2014 to the 131^st in 2015. To the nation it has been assigned a score of 54.43% points as Distance to the Frontier, which is the optimal line representing the best possible performance. This measure although has passed the threshold of 50% representing the possibility of a default, is still far from being considered a good result.

THE GROSS NATIONAL INCOME (GNI)

The Gross National Income refers to the sum of a nation’s GDP plus the net income earned by foreign residents of that country.

The Egypt’s GNI per capita adjusted for PPP measured by the World Bank, amounted to $10,330 for 2014 and $10,710 for 2015.

In terms of percentage the measure can be respectively translated in 27.22% and 27.31% in 2015 as % of US level. The percentages are above 20% threshold, which represent the minimum threshold to be considered as safe, but not of much.

THE GOVERNMENT EFFECTIVENESS

The Government Effectiveness is an index calculated by the World Bank capturing the perceptions about the quality of public services, civil services, policy formulation and implementation, and the credibility of the government’s commitment to such policies. The measure is set within a range going from -2.5 (weak) to +2.5 (strong).

Estimates about Egypt assign to the country a score of -0.9 for 2013 and -0.8 for 2014. These numbers with respect to the range suggest that Egypt cannot count on an effective government.

THE TAXATION SYSTEM

Egypt is characterized by a Corporate Income Tax Rate of 25%, a percentage quite high with respect to other African countries but not only, as we can see from FIG.6 in the appendix.

Another noteworthy thing to highlight regards the fact that local companies are taxed twice, either for their earnings at local level or for the profits generated while operated abroad. The same it is not valid for foreign companies operating in the country which are only taxed on what they earn on the Egyptian territory. A so high tax level is beneficial for the state’s treasury.

SECTION IV: NON-TRANSFER RISKS’ ASSESSMENT

This fourth section of the report is centralized on the assessment of non-transfer risk, defined as the risk associated with the exchange rate and capital movements or the impossibility of converting money into the currency in which debt is valued. It is feasible to look for this kind of risk’s propensity by paying attention to the following market measures and characteristics: the amount of exchange rate depreciation of a currency with respect to another; the ratio of foreign reserves over imports, the current account balance, the current investments, the total debt and the financial need over GDP; the EMBI spread; the external debt over total debt ratio and the annual change in short term debt at original maturity; the existence of an informal economy. The latter are analyzed in detail for Egypt in the following paragraphs.

THE DEPRECIATION OF THE EXCHANGE RATE

An exchange rate depreciation can be viewed as a decrease in the value of a country’s currency with respect to others.

It is crucial to mark exchange rate fluctuations especially for countries like Egypt, since as already portrayed in Section II, in 2003 the country adopted a system of flexible exchange rate. In 2016 in particular, the latter’s currency depreciation against the U.S. dollar amounted to a 13% change with respect to 2015 (Bloomberg, 2016). By taking this value and comparing it to the standard established threshold (15-30% or 10% depreciation with respect to the previous year) we realize that the country could be exposed to a possible non-transfer risk.

THE FOREIGN RESERVES OVER IMPORTS RATIO

Measuring the amount of foreign reserves with respect to imports allows to calculate the number of months of imports of goods and services a nation could pay for with its reserves.

2015 data for Egypt showed an amount of total yearly reserves equal to 15.858.890.000 U.S. dollar (World Bank, 2016) and a 5.420.000.000$ monthly value of imports (Central Agency for Public Trade and Statistics, 2016). By dividing these numbers, we get a result of 2.9 months of imports that can be sustained through foreign reserves. This outcome it is close but does not exceed the covenanted threshold of 3 months and enables to say that there is a quite high possibility of non-transfer crisis.

THE CURRENT ACCOUNT BALANCE TO GDP RATIO

The CA/GDP indicator relates the Current Account to the total production value of a country expressed in terms of GDP.

In 2014, according to World Bank this ratio for Egypt equaled to -2% (an increasing trend with respect to 2015 were it attested at -5% but still confirming that the country imports more than it exports) which considering an alert threshold greater than 4% which does not cause concerns.

THE CURRENT INVESTMENTS TO GDP RATIO (GROSS CAPITAL FORMATION)

The Gross Capital Formation measure, highlights the percentage amount of domestic investments that a country pursues with respect to its GDP.

The World Bank data on Egypt for what concerns this indicator furnish a result of 14% stable between 2014 and 2015, which is clearly lower than the 35% chosen as limit. Thus, no worries.

THE TOTAL DEBT TO GDP RATIO

As already pointed out in Section II the Debt to GDP ratio compares a country government debt as a percentage of its GDP. In 2014, the Egyptian public debt accounted for 90.5% of GDP (Central Bank of Egypt, 2016). This percentage contrasted to a no-danger range going from 0 to 50% indicates possible troubles due to non-transfer risk.

THE FINANCIAL NEED OVER GDP RATIO

The financial need/GDP indicator helps to quantify a country’s needed portion of financial need with respect to how much it produces. Starting from 2016 and from the next 3 years Egypt has asked to IMF, World Bank and African Development Bank for 21 billion of dollars as a financial aid. That amount equals to an annual financial need of roughly 7 billion $ (21.000.000.000/3) which divided by 330.780.000.000 (latest available yearly country’s GDP in billions of dollars, 2015) represents a percentage of 2.12%. The latter, considering an alert value of more than 15% should not cause concerns.

THE EMBI SPREAD

The EMBI index measures the total return on government bonds for emerging countries. It does it by taking as benchmark the U.S. Treasury’s bonds yields and then calculating the spread.

The EMBI spread for Egypt equaled to 6.66% (666 base points) on April 2008 (J.P. Morgan, 2008), a sum clearly greater than the threshold set at 4% (400 base points). That means higher propensity to non-transfer risk.

However, more updated data (which are not anymore displayed for free) would have been necessary to come out with a more precise conclusion.

THE ANNUAL CHANGE IN SHORT TERM DEBT AT ORIGINAL MATURITY

The annual change in short term debt includes all modifications affecting debt having an original maturity of one year or less. The latter is expressed as a % of total external debt which represents the debt of foreign residents.

The Egyptian total annual variation in short term debt amounted to +2.1% between 2014 (22.2%) and 2015 (27.9%) – World Bank, 2016. Given a threshold allowing at maximum a change of 1%, we should be cautious.

THE EXISTENCE OF AN INFORMAL ECONOMY

The existence of an informal economy is a prevailing feature of private entrepreneurship in emerging economies. The informal economy is defined as “the economic unit which does not adhere partially or totally to the enforcement of official procedures such as license to exercise activities, trade or industrial registration, social insurance coverage, and payment of taxes on economic activities based on regular auditing” (Hussein Kamal Mehrem, 2014).

The amount of activities performed on the “black market” in Egypt is estimated to be around 40-60% according to an analysis conducted by the center for International Private Enterprise in 2014. This percentage has risen especially during Mubarak’s regime.

SECTION V: BANKING AND FINANCIAL RISKS’ ASSESSMENT

THE BANKING RISK

The sovereign risk in Egypt has important consequences on the banking system in this country. However, the Economist Intelligent Unit (EIU) states that the banking sector risk is still rated at B in 2015, since the exposure to sovereign risk can be compensated by a considerable amount of bank deposits (2015, Egypt: Banking Sector Risk, para.1).

The EIU reports that the ratio of non-performing loans decreased constantly from 10.5% in late 2011 to 7.6% in June 2015. However, the fact CBE decided in 2014 to “offer subsidized mortgages to low- and middle-income Egyptians risks […] could expose the central bank to future NPLs” (2015, Egypt: Banking Sector Risk, para.2).

In addition, Moody expect Egyptian banks to keep “robust cash provisions against troubled exposures, with loan loss reserves accounting for 98% of non-performing loans” (2015, Moody’s changes Egypt’s banking system outlook to stable, para.5).

BANKING REFORMS

Between 2004 and 2012 the Central Bank of Egypt has successfully carried on some reform programs including applying Basel II in the Egyptian banking sector in cooperation with the European Union. Currently, the CBE is in the process of implementing Basel III.

In conclusion, thanks to this actions it is possible to say that during the last years the banking system has become more sound but still exposed to many risks.

THE FINANCIAL RISK

Even though trade activity decreased in 2015 because of a challenging business environment and high operational risks, the Euromonitor reports that “The Egyptian economy will continue to perform well in 2016, backed by rising domestic demand and continued international financial assistance”. (2016, Business Dynamics: Egypt, para.2)

TradingEconomics highlights that Egypt EGX30  (Egypt Stock Market) Index increased “2.07% to 8368.52 on Wednesday October 5 from 8198.51”, which is not far from its “all time [record] of 11935.67 in May of 2008” (2016, Egypt Stock Market, para.1)

Overall, Egypt financial sector is sending “positive signals to financial markets”, which make support and external borrowing from Western countries and Gulf monarchies easier to obtain (Coface, 2016, para.3).

SECTION VI: POLITICAL RISKS’ ASSESSMENT

Inside this section the position of the Arab Republic of Egypt has been assessed in terms of political risks. The latter are crucial for deeply understanding the environmental situation in which someone is going to make business.

THE POLITICAL RISK

Political risk is “probability of occurrence of political events that will change the prospects for profitability of a given investment” (Haendel et al., 1975).

Doing Business Index is an indicator that is responsible for analyzing, regulations that directly affect the generation of new business. This indicator has 10 factors, among which are starting a business, paying taxes and enforcing Contracts, among others. Leaving out aspects such as the quality of infrastructure, inflation and crime. In the analysis of Egypt, bad grades are evident on issues such as trading across borders, paying taxes and enforcing Contracts, Protecting minority investors and getting electricity. Comparing Egypt with similar economies such as Mexico and Turkey (FIG.7 & FIG.8), is evidence that there is a significant gap. It is clear that indicators in which it competes with similar economies (Getting credit, Registering property, Dealing with Construction Permits, starting a business and resolving insolvency), is still far from developed countries like the United States.

In FIG. 9 the Egyptian economy situation in 2015 is analyzed, based on 12 pillars, where 1 is the lowest rating and 7 is the highest rating. A high competitiveness is evidenced by two main factors, education and training Health and Market size. At this rate, it will reach an average rating of 3.7/7 and a rank of 116 on 140. It is evident that Egypt is positioned below the world average (4,26/7). For this reason, is would be better to invest in more stable countries.

In the past four years, Egypt has led to slow growth, after the 2011 Arab Spring (series of demonstrations of popular and political nature that occurred mainly in the countries of North Africa since early 2011. As a consequence, some falls in dictatorships in countries like Tunisia and Egypt have happened). This event generated a political instability in state institutions, combined with the social instability that existed in that country, led presidencies of just one year, between 2011 and 2014, preventing political stability in Egypt.

SECTION VII: NATURAL RISKS’ EVALUATION

In this last part of the report some of the possible natural and geological risks to which the Egyptian land could be exposed to have been highlighted.

THE NATURAL RISK

A natural risk is an environmental risk that can affect a country’s economy and its industrial production.

During last years, one natural disaster Egypt experienced has been the desertification. The country has lost more than 11 hectares of land every year since 2009. Anyway this has not been the only issue the country had to face during 2000s. In fact, Egypt has also been deeply impacted by the rise of sea level and the intrusion of seawater in the lands which affected the country’s agricultural productivity.

Due to the geographical location between the river and the desert, Egypt is also exposed to possible earthquakes and floods. Moreover, due to the presence of oil, minerals and gas, the North-African Republic could possibly suffer from general environmental risks.

CONCLUSIONS

Egypt has been confirmed to be an emerging economy when compared to developed economies whose growth rate is usually less than 2%. Anyway given the data analyzed investing in Egypt remains risky, especially if we take into consideration a Foreign Direct Investment (FDI). The country as shown does not score very high in the Doing Business Indicators, has lately experienced large devaluations and has a high percentage of public debt and corruption. Moreover, the country is quite used to sovereign default last of whom is documented during 80s (it is possible to hypothesize a red IMF alert for Egypt).

Another area of concern regards the very unstable political situation of the country that since the end of Mubarak’s regime has not been able to ensure itself a guide or a figure that would have been able to manage the loans requested to the IMF and at the same time attract more foreign investments. Ratings seem to reflect all of the latter and although ultimately some rating agencies such as Fitch have revised upward the Egyptian rating (from B- to B), default probability rates remain high, especially within next 10 years (more than 50%). Also the EMBI spread of 666 basis points collocates Egypt into the red band (high risk).

In the end, as already said, the Global Competitiveness Report 2015 of the World Economic Forum, classifies Egypt as an Efficiency-Driven economy, Stage 2. This means that the country is still in the process of progressing in the business sophistication factor which will maybe enable it to generate more profitable opportunities and a safer environment where to operate.

APPENDIX

FIG.1

Source: World Economic Forum (2015)

FIG. 2

Source: World Economic Forum (2014)

FIG. 3

a)

FIG. 3

b)

Source: Michigan State University (2015)

FIG. 4 MARKET POT INDEX 2014

a)

b)

Source: Michigan State University (2014)

FIG. 5

Source: World Bank – Doing Business (2016)

FIG. 6

Source: Doing Business (2016)

FIG. 7

Source: Prepared by the author

FIG. 8

Source: World Economic Forum (2015)

FIG. 9

Source: World Economic Forum (2015)

REFERENCES

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Coface: Risk Assessment (2016). Retrieved October 06, 2016, from

http://www.coface.com/Economic-Studies-and-Country-Risks/Egypt

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