EVEN UNDER DE FACTO DICTATORSHIP, EGYPT IS BECOMING AN INVESTOR FAVORITE

For Ahmed Issa, CEO of Retail Banking at Egypt’s largest private-sector financial institution, Commercial International Bank (CIB), the past two years have been good.

After close to 20 years of service with the bank, the Cairo-based executive is seeing the retail banking sector take off as more families move into the middle class and mobile technology allows new entrants to the banking sphere. As the country’s economy has improved, more customers are coming for services like mortgages, business loans and online banking at CIB.

Egypt’s current leadership has dramatically reformed the country, cutting subsidies, boosting its financial reserves and allowing its currency to be freely traded. These reforms have attracted a swarm of international investors as part of a partnership with the International Monetary Fund.

“We’re seeing it, definitely, but not only the level of financial investment — we’re also seeing it … in the real economy as well,” Issa told Yahoo Finance in a phone interview.

Since the reforms have been put in place, Issa said he has seen “almost a 180-degree shift in the sentiment and in the narrative of the questions” he’s gotten from multi-national investors in capital markets as well as in enterprises like real estate and manufacturing.

Investors are pouncing on Egyptian assets

The IMF has lauded Egypt’s recent turnaround by rewarding the country with access to loans of up to $12 billion and recent praise from Managing Director Christine Lagarde.

“Egypt has gone through massive changes in the last couple of years and has done so with support, assistance and advice from the IMF, but it was very much a program that was determined by the Egyptian authorities and it’s one of the reasons why it is making serious progress,” Lagarde told reporters last week at the organization’s spring meeting in Washington.

The World Bank reports that Egypt grew 4.3% in 2015 and 2016, more than doubling the pace from 2010 to 2014 and has grown at over 5% so far in fiscal year 2018. The country’s debt balance is shrinking and its unemployment rate is at the lowest level since 2010.

Those numbers have emerging markets investors jumping at the opportunity to buy the country’s stocks and bonds.

“They have rebuilt their credibility with the investor community and overall flows into Egypt are positive … so momentum effects seem to be strong in Egypt as well,” Asha Mehta, a senior emerging markets portfolio manager at Acadian Asset Management, told Yahoo Finance. “This is translating directly into the corporate sector.”

Egypt’s military operations against an affiliate of the Islamic State group in North Sinai is threatening to spark a humanitarian crisis, Human Rights Watch has said. Credit: REUTERS/Mohamed Abd El Ghany

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Mehta said she does have some apprehension about her investments in Egypt, but it’s because the stock market has performed so well this year, with its trailing price to earnings ratio running up to nearly 20, compared to a bit over 15 for emerging market equities more broadly.

Even ESG investors — fund managers who dedicate money to destinations that meet a rubric of environmental, social and governance standards — are moving money into Egypt.

Jamie Odell, portfolio manager of Greentech Capital Advisors’ Emerging Markets Sustainable Growth Fund, said that Egyptian President Abdel Fattah el-Sisi has “clearly consolidated power pretty aggressively and he is probably not the most democratic of leaders,” but Egypt is one of the highest overweight positions in his portfolio.

“The way we’ve approached this is we do not exclude countries based on regimes that are in power or perceptions of corruption,” he said, noting that ESG dynamics come into play when looking at companies rather than the country in which a company is located. “What we do try to do is think about what the risks are that such a regime might pose to our investment.”

In 2017, investment in Egypt’s government bonds reached the highest level on record, according to the Institute of International Finance, with the country issuing $4 billion of sovereign debt on international credit markets. Investors snapped it up, chasing the debt offerings with $13.5 billion of offers despite warnings from S&P Global that its B- credit rating reflected “wide fiscal deficits, high public debt, low income levels, and institutional and social fragility.”

In 2018, IIF projects investors will match last year’s investment total. Egypt issued another $4 billion in debt in February, which was again more than three times oversubscribed.

The build-up in Egyptian assets in investor portfolios has been sharp and sudden, with data firm eVestment finding that investors bought nearly $12 billion worth of Egyptian stocks and bonds in 2017, up from just over $2.5 billion in 2016 and slightly under $2.5 billion in 2015.

Yahoo Finance spoke with 10 different fund managers from institutions including T Rowe Price, BNY Mellon and others for this story and all 10 said they had holdings in Egypt, with the vast majority saying they are bullish on the country and would like to add to their positions.

‘Facing an existential threat’

But investors may be helping to prop up a despotic and unstable regime. President Sisi has been accused by numerous human rights organizations of suppressing dissent, state-sponsored murder, crimes against humanity and undermining democracy in the country. His recent election was declared “farcical” by Human Rights Watch after a campaign in which they say opponents were either threatened or jailed and dissidents who spoke out against the military leader were silenced or disappeared.

“Egyptian civil society is facing an existential threat,” Ahmed Benchemsi, Human Rights Watch’s communications director for the Middle East, told Yahoo Finance. “The situation is definitely a dictatorship.”

Sisi’s regime has been denounced by Human Rights Watch, Amnesty International and a host of non-governmental organizations. The Washington Post, in an editorial by its board, declared that under Sisi, “political repression has been the worst in Egypt’s modern history.”

While investors can say that they’re after returns rather than world peace, what could be worrisome is how tied Sisi’s government is to businesses in the country and how his regime could be emboldening terrorist elements in the region. International peacekeepers describe the fighting in Sinai as beginning to resemble the conflict in Afghanistan, according to author and journalist Joshua Hammer.

“With its erratic security forces, proximity to other jihadist battlefields, large Christian minority, repression of Islamists, and large population of young Muslims unmoored and angered by the authoritarian rule of Sisi, Egypt may present a rich opportunity for jihad,” Hammer wrote in a New York Review of Books post titled “Egypt: The New dictatorship.”

While investors have said they like the stability that Sisi provides — putting a tight lid on the uncertainty that is anathema to investors — some argue that such stability is merely surface-level facade.

“Mr. Sisi’s ruling project, which justifies itself with an appeal to stability, is curiously unstable: It lurches from crisis to crisis, each revealing new cracks in the architecture of political authority, each accompanied by new levels of official violence,” Jack Shenker, author of “The Egyptians: A Radical History of Egypt’s Unfinished Revolution,” wrote in a New York Times editorial last year. “It looks like a rickety stage set that could collapse in an unexpected gust of wind.”

A stomach for weak institutions

Egypt is far from perfect, said Ed Al-Hussainy, senior interest rates and currency analyst at Columbia Threadneedle, but dealing with unstable, corrupt and/or repressive regimes has simply become the norm for investors in emerging markets of late. As capital markets have improved throughout much of the asset class, governments have almost uniformly become more autocratic and unscrupulous, he said.

“If you’re going to be an investor in emerging markets you need to have a stomach for weak institutions,” Al-Hussainy told Yahoo Finance during a meeting on the sidelines of the IMF meetings. “I cannot name a single major emerging market where institutional quality, particularly when it comes to democratic institutions, has improved in the last five years.”

Al-Hussainy, who has positions in Egypt’s sovereign local currency bonds, highlighted corruption scandals like the one involving Brazilian construction conglomerate Odebrecht that has so far brought down high-level politicians in 12 countries and been labeled by the U.S. State Department, “the largest foreign bribery case in history.” He also pointed to countries like Turkey, Russia and China that have seen leaders effectively become autocrats with no chance of opposition challenges.

With Egypt, Al-Hussainy said, at least there has been a significant increase in measurable financial data. And that’s where investors are looking.

“Definitely their reserves have improved dramatically, growth has improved, inflation’s coming down, standard of living is going up, so on those measures they’re doing a good job,” he said. “In terms of its distance from anything that resembles a democracy, yes that distance has increased.”

Richard Thies, an emerging and frontier market portfolio manager for Driehaus Capital Management, said that he remains confident on Egypt’s prospects as an investment destination, at least in the near term.

“You always have worries about governments like this lasting in the long term but over the short term that doesn’t bother us,” he said. “Egypt is a place where the economy does better when there’s a strong leader. Things tend to go better than when there’s democracy.”