However, Chinese economic influence in Egypt could grow steadily over the medium term
Multinationals should continue to prepare for heavy exchange rate volatility and FX scarcity through 2024. Expect continued pressure from businesses and government entities to reduce prices and defer payments over the medium term.
Firms operating in the B2B and B2G spaces, particularly in areas involving high investment costs, should double down on emphasizing their added value and long-term cost efficiency to mitigate potentially strong competition from Chinese state-owned enterprises and private firms over the medium to long term. Furthermore, such firms are advised to engage with policymakers to understand the government’s shifting fiscal and strategic priorities over the coming months and years. Projects that enhance Egypt’s export potential or allow for import substitution are likely to be given priority in licensing and state support.
In the B2C space, in addition to increased (and potentially cheaper) Chinese alternatives being more widely available in the market, expect increased competition for talent and skilled labor from BRICS multinationals, particularly Chinese firms. Anticipate increased competition in brownfield investments and acquisition of local assets from Chinese companies, particularly in consumer goods.
Overview
- Egypt will officially enter the BRICS grouping beginning in January 2024.
- Egypt is now in preliminary talks with China, Russia, and India to carry out bilateral trade in local currencies. The country floated its maiden CNY-denominated panda bond in October, raising debt at a lower interest rate than for dollar-denominated issuances.
- Officials have stated that the Asian Infrastructure Investment Bank (AIIB) has prepared a pipeline of US$ 1.3 billion in affordable financing for sustainable infrastructure projects in Egypt, and we have seen a flurry of announcements regarding investments by Chinese companies.
- Several projects have been initiated or announced by Chinese firms in the Suez Canal Zone (SCZone) and beyond. Investments include a power plant and factories for the production of textiles, home appliances, iron, and bromide, as well as a green hydrogen plant.
- Beyond the SCZone, Chinese multinationals have made investments of more than US$ 100 million, and their interest in brownfield investments is growing. China has also recently expanded its presence on the infrastructure investment front, most recently by financing the third phase of Egypt’s electric light rail train.
- Activity has been more mixed when it comes to BRICS members outside of China. Russia, Egypt’s largest supplier of wheat, has canceled a massive industrial zone project in the SCZone that had been announced in 2018. On the other hand, new Russian investments have been announced in the metallurgical sector and in oil & gas.
- Meanwhile, India’s Ocior Energy has reached a preliminary agreement to construct a green hydrogen plant in the SCZone.
Our View
FrontierView does not expect Egypt’s accession to the BRICS grouping to have material implications for the country’s economic challenges over the short to medium term. We do not see BRICS membership bringing in large inflows of affordable funding that can help plug Egypt’s funding gap over the coming years, meaning that movement to a flexible exchange rate regime for the pound will remain a prerequisite for the revival of significant portfolio inflows and a significant uptick in foreign direct investment (FDI).
BRICS membership may expand Egypt’s access to financing packages for infrastructure and sustainable development projects. However, although Egypt has been a member of the China-led AIIB since 2016, outstanding project financing to Egypt from this entity stands at just US$ 1.3 billion. By contrast, Egypt’s total external debt was estimated at US$ 165 billion in June 2023.
While, in theory, BRICS membership is seen as a means of helping Egypt reduce its reliance on dollar liquidity to facilitate imports, this is unlikely to occur in the medium term due to the relatively low volume and highly concentrated nature of trade between Egypt and the BRICS countries, particularly outside of China.
Excluding China, the BRICS nations account for just 11% of Egypt’s imports (China alone accounts for about one-fifth of imports). BRICS economies also account for a mere 9% of Egypt’s exports—with most of these going to India. Meanwhile, Egypt’s export sector remains structurally uncompetitive, capping the benefits it can glean from BRICS membership through a more diversified trade portfolio.
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