The novel coronavirus (COVID-19) pandemic has severely impacted the global economy, as lockdowns, uncertainty, and demand drop put pressure on businesses.
To get a clearer picture on the post COVID-19 economy and how Egypt will perform, Daily News Egypt spoke with Sherine Shohdy, Coverage Director for Egypt at CDC Group, the impact investor and development finance institution owned by the UK government
How do you see the Egyptian market after the pandemic?
COVID-19 has had a major impact on the Egyptian economy, dampening growth, undermining external income sources and disrupting fiscal consolidation, all reinforcing long-standing challenges.
After several years of robust economic expansion, growth declined from 5.6% in 2019 to 3.5% in 2020 according to the World Bank. Some sectors, such as tourism, have been particularly badly hit, and there have been many job losses in retail and wholesale trade, manufacturing, and construction. Informal workers have borne the brunt of the economic uncertainty.
The year 2021 will be a challenging year, and growth is expected to drop even further to 2.3%, leading to pressure on businesses and households, pushing more people into poverty. At times like these, the private sector needs all the support it can get, and I’m proud that CDC remains a committed partner during this challenging period.
Egypt is a priority market for us, and we see tremendous opportunity to invest, driven by the government’s pro-business stance, large population and entrepreneurial culture.
The pandemic has tested medical staff and healthcare facilities worldwide, highlighting the importance of resilient health systems. In February, CDC announced a $100m investment in Alfa Medical Group to expand its diagnostics business and medical facilities, which are available to all income levels. This is our largest direct equity investment in Egypt and we remain committed to investing in the country to accelerate its economic recovery.
What are the most prominent economic sectors on which CDC Group depends and promotes investments?
CDC invests in several sectors, including manufacturing, education, healthcare, infrastructure, food and agriculture, construction and real estate and financial services. Now more than ever, through our investments and convening power, we are driving a transition towards greener, cleaner, job-creating sectors as we focus on climate-consciousness, adaptation, and resilience.
Our investments accelerate economic and human development, creating jobs and opportunity, bringing us closer to achieving the United Nations (UN) Sustainable Development Goals (SDGs). We prioritise the sectors where our flexible, long-term capital and technical expertise can make the most substantial impact in the countries we invest in across Africa and South Asia.
Does CDC Group have the desire to have stakes in governmental IPOs in general?
CDC primarily focuses on investments in privately owned businesses. We are actively looking to provide debt and/or equity to private Egyptian companies and projects which meet our ticket size, typically $20m to $150m), in sectors that accelerate economic and human development.
We provide flexible capital in all its forms, such as direct and intermediated equity, debt, mezzanine and guarantees. We also seek to partner with Egyptian entrepreneurs who have long-term visions that aligns with our patient capital approach, and who are committed to improving social, environmental and governance performance, as well as creating jobs.
In Egypt, we are particularly focused on investing in healthcare and pharmaceuticals, manufacturing, consumables and infrastructure, including renewable energy, industrial parks, ports, desalination and wastewater treatment.
When did CDC Group enter the Egyptian market?
CDC has been investing in Egypt since 2003, and we established a permanent presence in the country last year. In the 2000s, CDC’s strategy was to invest in private equity (PE) and venture capital (VC) funds with local exposure.
Since 2011, we have focused heavily on investing directly in companies in our target markets. Today, approximately 80% of our annual commitments are invested directly in companies, with the remainder being allocated to PE and VC funds who invest on our behalf. By investing directly, we’re able to work more closely with our investees to help them grow and create jobs, giving them the right tools and guidance to improve on areas like sustainability and gender equality.
The two-pronged approach where we invest directly and indirectly allows us to reach a wide spectrum of companies, ranging from small- and medium-sized enterprises (SMEs), who many of our partner funds invest in, to large companies who are seeking investments up to $150m.
What is the value of CDC Group investments targets for the Egyptian market in 2021, and the total investment portfolio for Egypt?
Our portfolio of investments in Egypt stands at $266m and spans 35 Egyptian companies across the country, collectively supporting close to 29,000 jobs. Our portfolio covers a wide range of sectors: infrastructure; manufacturing; trade; microfinance; healthcare; business services; and financial services. We are also invested in PE and VC funds with exposure to Egypt and North Africa that are aligned with our development mandate, such as Ezdehar and Sawari Ventures.
Our recent investment in Alfa Medical Group, one of the largest healthcare providers in Egypt, will help finance its medical diagnostics business’ growth and innovation and establish the Alfa Academy.
The academy will serve as a training centre for Alfa Medical Group staff and third-party healthcare staff, providing valuable training to professionals and developing high-quality talents across the healthcare sector.
I am looking forward to the positive impact that this investment will make as it broadens healthcare access to underserved communities. It builds on AMG’s 140+ labs and six radiology labs, 170-bed hospital and two additional hospitals, and the Alfa Medical City under construction.
CDC is a key partner in the 800 MW Solar Park Project located in Benban, Aswan. Our $97m debt investment covers nine projects for a total capacity of close to 400 MW. This project provides clean, cost-effective power to over 350,000 people, and generates up to 6,000 jobs during construction.
We do not set specific targets for each country; instead, our investments are guided by wherever we can deliver the greatest economic and human development gains at scale. However, CDC sees a great opportunity for investment in Egypt and I am looking forward to signing deals with some of the country’s most promising businesses.
How does CDC see Egypt’s banking sector, and is it possible to take part in Banque du Caire shares when the bank starts offering these?
Egypt has the largest, and one of the most stable, banking sectors in the North African region. Prudent regulation in recent years has meant the sector was in a good position when the COVID-19 pandemic hit.
Well-capitalised and with sound liquidity, it has dealt with the impact of the pandemic effectively so far. It is set to play an important part in accelerating Egypt’s recovery, in tandem with the support provided by the government and the response measures enacted by the Central Bank of Egypt (CBE). All of these have boosted domestic activity during this challenging period.
In the short-term, the sector will have to contend with pressures on profits. The impact of the pandemic on hard-hit sectors, such as tourism, and its effect on loan portfolios and quality is one area that will require careful monitoring.
Loans to the tourism sector are well provisioned and the banking system has increased its reserves since the onset of the pandemic in order to deal with potential losses. Despite these challenges, I expect the sector to remain stable and profitable.
Oversight from the CBE continues to be critical. The new Banking Law ratified in September 2020 improves the CBE’s governance of the sector and its potential for intervention.
Additionally, the new regulatory regime outlined in the law should help support ongoing economic reform, growth and innovation. Egyptian banks will now have to hold a minimum of EGP 5bn ($320m) in capital, up from EGP 500m ($32m), which could further boost M&A activity in the sector.
A key aspect of the law is that it supports the CBE’s drive for financial inclusion, by allowing it to provide payments and related services, which should drive increased access to formal financial services, especially for low-income consumers. Currently, only a third of Egypt’s adult population has a formal bank account.
In July 2020, CDC closed a deal to provide $100m in Tier 2 capital to the Commercial International Bank (CIB). The funding serves two critical objectives: firstly, to strengthen the bank’s capital base so that it can underpin growth and expansion in lending; and secondly, to support its lending to key exporting sectors of the economy, in line with the Government’s agenda to promote alternative sources of hard currency outside of the tourism sector.
Tier 2 capital continues to be scarce across the continent, with development finance institutions (DFIs) like CDC being the main providers. As such, the funding has helped CIB provide support to Egyptian businesses during these unprecedented times, as companies focus on protecting their workforces, sustaining operations and recovery from the economic impact of the COVID-19 pandemic.
What noteworthy partnerships has CDC entered into at a continental level?
Our track record of successfully investing in African businesses for over 70 years results from strong alliances developed over time. We believe that partnerships are essential to creating long-lasting companies that thrive.
As such, we have over 700 partnerships with businesses in Africa across various sectors and geographies; a significant part of our COVID-19 response has focussed on injecting systemic liquidity into Africa’s financial system through partner intermediaries including Absa, TDB and Standard Chartered. These commitments amount to $475m and are expected to rise beyond $500m. Another recent example includes our $82m joint commitment with fellow DFIs to Phatisa Food Fund 2. Through its investment in companies in the food value chain, the Sub-Saharan African fund increases food security, local food and agricultural production, targeting over 90,000 small-holder farmers and micro-entrepreneurs, and aims to create over 2,000 permanent jobs.
In November 2020, we partnered with Development Partners International (DPI) and the European Bank for Reconstruction and Development (EBRD) to acquire and combine Adwia Pharmaceuticals, an Egyptian generic drugs manufacturer and Celon Laboratories, an Indian cancer and critical care specialist.
This partnership creates the first of its kind pan-African pharmaceutical platform that will generate significant cost savings for healthcare providers across the continent. The platform will also widen the range of therapeutics available in underserved markets.
I’m also extremely proud of Gridworks, a development and investment platform principally targeting equity investments in transmission, distribution and off-grid electricity in Africa. CDC launched Gridworks as a wholly owned subsidiary in 2019, and the company aims to invest over $300m in the above areas, becoming a long-term investor and partner to governments, utilities and companies in the power sector.
With our biopharmaceutical platform, Gridworks, the solar park project in Benban and our partnership with Alfa Medical Group, among others, we’ve been able to create long-standing, solid partnerships. These can be scaled to benefit even more people and rapidly accelerate economic and human development across the continent.
What will CDC’s priorities be in 2021?
We recently announced plans to invest $1bn in African businesses this year. As ever, our focus will be on job creation and sustainable economic transformation.
Climate change is a key priority for us and we are now investing 30% of our annual commitments to tackling climate change as we strive to make our portfolio net-zero by 2050, in line with the Paris Agreement.
Since 2017, we have invested over $1bn in climate finance and have a strong focus on climate resilience and adaptation, as well as ensuring a just transition for workers and communities as we transition to greener economies.
We are also heavily focused on driving inclusion and ensuring SMEs can get access to capital to expand their operations. To this end, we continue to build on our strong partnerships with Africa’s leading banks, including CIB, to which we committed $100m in Tier 2 capital last year. In parallel, we invest in microfinance and consumer banks to drive financial inclusion.
Lastly, we are committed to boosting productivity across the continent, with a particular focus on Services, Manufacturing, Agriculture, Real Estate, Technology and Telecoms. Our Catalyst Strategies team is using innovative financing mechanisms to solve major, structural challenges such as resource efficiency and access to electricity that continue to hinder development.