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As Investors Wait for Egypt to Settle, Africa Holds Up

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The volatile situation in Egypt is headline news and is changing rapidly with very little clarity on what the final outcome will be, and when it will be. And yet despite all that’s going on, the Egyptian stock market has remained almost eerily stable. While there has been some weakness, of course, “the damage hasn’t been that great,” said Larry Seruma, chief investment officer and managing principal of Nile Capital Management in New York, a firm that invests throughout the Middle East North Africa (MENA) region, Egypt included, “and the weakness has been far less than one would have expected.”

Seruma, like many investors, isn’t giving up on Egypt, where, he said, there are a number of very well run and well capitalized companies that have continued to perform despite the country’s many macroeconomic woes. He  views the present crisis in Egypt as a step in the right direction in the country’s evolution since former president Hosni Mubarak was deposed. Rumors have been circulating that Mubarak may be released from captivity, “but I believe that the military will continue to hold onto power and that ultimately, we’ll see a better democracy in Egypt and a far better country than other Mubarak,” Seruma said.

Seruma also said he believes that the Muslim Brotherhood’s days are numbered. “Once the dust settles, I believe that they will go underground, or at any rate, not exist in the same way as before, and in the long run, that’s a good thing,” he said. Of course, the Muslim Brotherhood is the most dominant political group in Egypt and has been operating for around 80 years. And in the Egyptian election that took place a year ago, the Brotherhood did win 51% of the popular vote.

However, “the Brotherhood is clearly not the best party to rule Egypt. They don’t have strong economic ties, and although they were aggressive in pursuing their agenda, they clearly couldn’t govern, and they will always face resistance in Egypt,” said Seruma.

The Brotherhood was also not a favorite of countries like Saudi Arabia, Kuwait and the United Arab Emirates, which pledged a collective $12 billion to the military-backed government. This cash infusion has helped Egypt stabilize its finances, to a certain extent, Seruma said, and staved off its pressing need for a loan from the International Monetary Fund (IMF), negotiations for which were tense, to say the least, in the months before the onset of the hostilities.

Nevertheless, Egypt has many issues that need sorting out, not least buffering up its foreign exchange reserves, which have dwindled to next to nothing.    “Egypt has no major resource, and its economy relies on tourism and a stable economic environment,” Seruma said. “The government has not been functioning, tourism has not been functioning, and sooner or later, the pressures of this will come to bear, with banks facing the threat of a liquidity crunch.” In addition,  Seruma is also confident that the current tension isn’t going to turn into a protracted civil war, and that Egypt will come out of this stronger and with greater prospects for investment.

And despite the strife, investors have looked at Egypt as a case apart and haven’t cut back on their exposure to the Middle East and to Africa, “where a number of markets have decoupled from whatever is happening in Egypt and have done well,” Seruma said, adding that he elieves the best opportunities lie in Frontier Africa, in countries like Kenya and Uganda, Ivory Coast and Nigeria.

The recent developments in the oil and gas industries in East Africa are particularly interesting, he said, with the discovery of oil reserves in Kenya and Uganda resulting in strong capital inflows into the country that are expected to reach several billion dollars in the next four years. In Tanzania and Mozambique, natural gas reserves are also attracting heavy cash inflows and investments.

“Our clients are very interested in these developments and they take a very long-term view of the growth story in Africa, which will be driven by demographic changes and the changes in consumption going forward,” Seruma said. “The world is going to have an additional two billion people by 2050 and the demand for food and basic consumer goods and services will be simply enormous, so that is a long-term story. In Africa, there’s going to be a great demand for housing and more infrastructure, among others, and my clients seem to understand that we’re talking about a long-term story here and they are committed to this in Africa.”


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