When the Going Gets Tough Adaptation in times of crisis

What makes some economies more robust than others in challenging times? What is the private sector role in tough times? And why do some institutions withstand difficult situations more than others? Ramy Youssef sheds light on this interesting subject.

With two revolutions in less than twenty four months, dwindling foreign currency reserves, a delicate security situation, and a relatively high unemployment rate, there is no consensus on whether or not Egypt is a ‘fragile’ country. Although the OECD’s ‘States of Fragility 2016’ report classifies Egypt, the most populous middle-eastern and North-African state, as moderately fragile, the World Bank did not announce a similar view.


The Egyptian economy

At a glance the past six years have proven the Egyptian economy more robust than the market expected as it persevered through its difficulties amidst world economic slowdown significantly impacting expatriate transfers, Suez Canal revenues, and tourism income – the Country’s top three sources of foreign currency.


It is rather baffling to observers as to how the Egyptian economy is still growing when official numbers would suggest a complete halt. There are a few reasons, some less obvious than others. The key factor is the diversity of the Egyptian economy that lessens the impact of any particular sector on the overall economy.

Another key reason is the bustling shadow economy. Studies have placed the shadow economy in Egypt at 20% to 30% of GDP. This includes most self-employed blue-collars (cleaners, builders, delivery staff etc.) serving people employed in the official economy and the majority of the cash economy.


A final reason has to do with the nature of Egyptians. Since the dawn of time, Egyptians are accustomed to dealing with crises, from the Nile floods to various occupations since the pharaonic pre-dynasty times to the modern-day revolutions. This, combined with a civilization built around agriculture, has created qualities of acceptance to difficulties as part of life and a high level of belief in, and determination to, positive change.


Egypt post 2011The past couple of years have witnessed a paradigm shift in fundamental economic reform with a keen focus on building a sustainable model while balancing the immediate needs of lower income brackets of society. With the decision to float the Egyptian pound on November 3rd 2016, cut subsidies, and invest in much-needed infrastructure, Egypt is definitely on track to regain international trust as one of the key potential regional markets.


With significant foreign currency shortages in 2015 and 2016, the $12bn IMF Extended Fund Facility (EFF) came as a vote of confidence in the country’s efforts to bridge the balance of payment gap. In itself, the EFF doesn’t mean much, however it is the accompanying structural reforms that the private sector is keenly awaiting.


The private sector has embraced the newly introduced VAT, higher utility costs, and overall inflation as the price of doing business in one of the most promising markets in the near future. This was driven by the belief in a long-awaited overhauled investment law and better transparency and stability in legislations.

The journey remains long with all eyes on the labour law that most investors believe is a key hurdle to FDI growth. However, it is recognized that an overhaul of this law has to be preceded by introduction of a social welfare system that offers unemployment benefits that sustain families above the international poverty line; a target that is ambitious for the current state of affairs.


The private sector is the main engine of economic growth in Egypt with an estimated 80% of GDP growth (2015) and employing more than half of the 28.4 million workforce in 2015. The private sector is also the highest exporter, with 52% of all exports in 2015, significantly above the public sector at 36% .


PPP synergy is keyLooking back at our three decades in Egypt, we believe the private sector has a vast role to play in developing emerging economies. Yet, this cannot be done in isolation as neither the government nor the private sector can singlehandedly achieve development. Working through an alternate PPP (Private-public partnership) model could result in significant synergies.


The private sector role can be more effective as part of a centrally orchestrated master plan. Having identified the key growth sectors of the economy, the private sector is best placed to help define the right investment incentives to be offered. The wealth of experience in the private sector, through years of knowing what doesn’t work, is a critical success factor in shaping a fit-for-purpose incentive structure per economic sector. A performance-driven mind-set in the private sector would align well with a KPI-driven investment plan where investor rewards are linked to achievement of the master plan milestones per sector.


Finally, being the biggest employer, the private sector has a better chance of high-grading the skillset of the workforce. Incentives such as tax-deductibility of training cost could help the private sector help the country more.


We believe in the fundamentals of the Egyptian economy, our industry, and the country’s ability to drive significant economic growth in the coming years. We expect an economic boom post the Egyptian pound flotation, fiscal reforms, and investor-friendly legislations. We continue to back this belief with investments. We hope other investors follow suit.


Case Study From the mountains to the valleyIt was a cold morning in October 1958 when a young egg delivery boy pedalling through the narrow streets of Zahlé, Lebanon, started to plan for his first business venture, a small poultry farm. 59 years later, Musa Freiji is Chairman to one of the largest integrated Poultry and Agribusiness groups in Egypt.


Founded with a vision to provide ‘affordable protein to the Middle-East’, Wadi Group was established in 1984 in Egypt after Musa joined forces with the late Philip Nasrallah, a prominent poultry producer in Lebanon. The Group has an estimated 17% market share of the Egyptian poultry industry , 15% of poultry feed production, ten thousand acres of olive trees and grape groves, six factories and a workforce of around three thousand five hundred. With a turnover of EGP4.8 billion (USD 300 million) per annum, it is companies like Wadi that drive the Egyptian economy forward.


Through the past thirty-three years of operations, Wadi has endured various difficult situations, the most significant being the avian flu pandemic in 2006, which altered the face of the poultry industry in Egypt. The Group, as part of Egypt as a whole, endured through revolutions, currency devaluations, and evolving fiscal policies.


Adaptation in times of crisisThe past six years have been a real test of Wadi’s management ability to cope and respond to an ever-changing macroeconomic and fiscal environment. Being the second largest grain importer, after China, Egypt’s food sector is significantly impacted by foreign currency availability and hence pricing. The poultry sector demand in Egypt witnessed significant fluctuations, as roughly 70% of the cost of poultry meat is feed – usually imported yellow corn and soybean.


Our strategy has been to focus on the basics. People need to eat and being a responsible citizen meant that we have an obligation to continue to supply the market with an affordable source of protein even if it meant compromising on our profitability. Our employees need to be looked after in times of crisis and we have decided not to take decisions on workforce reduction aiming at cost cutting. Rather, we focussed on enhancing operating efficiency, buying smarter, and reducing waste in our factories.


“We believe in the fundamentals of the Egyptian economy, our industry, and the country’s ability to drive significant economic growth”

Our flexible financial strategy through access to foreign currency, export markets, and preferential interest rates, also helped us to continue to compete in difficult times. At times when investors were uncertain, Wadi has taken final investment decision on a project aiming to double its poultry production by 2020 and our poultry school is fully operational. This school aims at increasing the technical level of our industry through vocational training.

Ramy Youssef is wadi Group's Chief Financial Officer. Ramy has over 20 years of experience in the areas of financial management, economics evaluations and restructuring & transformation across various industries and regions, including Angola, UK and the middle East. He has worked for global firms including Henkel, Shell and BP. Ramy holds two degrees in Business Administration and is passionate about change management and transformations in developing economies.

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