Renaissance Capital, the leading emerging market investment bank, expected in its report issued on 29 June that the Middle East and North Africa (MENA) region to become more attractive to foreign direct investments (FDI) in the coming years, supported by cheaper rates and better human capital.
The report noted that North Africa, Turkey, and Ukraine may replace the Central and Eastern European three (CE3) countries of Poland, the Czech Republic, and Hungary as favoured industrial FDI destinations.
The report pointed out that cheap wages and better human capital mean the MENA region should become more attractive to FDIs.
Renaissance Capital said that following the late 2016 devaluation, Egypt has become one of the most plausible long-term beneficiaries of Central European wage inflation. It believed that labour costs are half that of Romania. The workforce is still growing, and with an employment rate of 41% in 2014, there is scope for a 3% increase in coming decades, which should keep a lid on labour pressures. This will require more women to enter the workforce, which is plausible, given the improved educational access seen in the 1990s. Egypt looks ripe to pick up manufacturing and export orientated FDI in coming years.
The report stressed that the government may need to engage more with ease of doing business reforms and provide reassurance regarding political risk.
In late January, the report expected Egypt’s growth to be 3% this fiscal year (FY) (the government and IMF forecast 4%) but to double to 6% in the next three FYs, starting in 2017/2018 (above IMF expectations).
Furthermore, Egypt has the cheapest currency in emerging markets based on a 22-year real effective exchange rate model, which suggests fair value for the currency is EGP12.9 against the dollar, but local sentiment has become more cautious of the currency since November.
International investors appear to be on hold in increasing their exposure to Egypt, awaiting evidence that the authorities can lift remaining capital controls without significant further Egyptian pound devaluation, according to the report.
The report believed that rising Central European costs can benefit Morocco, Tunisia, Egypt, Turkey, and potentially Ukraine or Iran.
The report explained that wages seem to be far lower and should not face the same upward pressure. Even though demographic trends are not that different than CE3 (only Egypt and Turkey have rising numbers of 15-24 year-olds over 2015-2020). The total employment rate in the MENA countries is around 40-50% compared with 60-80% in Europe. There is much more potential supply of labour on the EU’s doorstep, and this untapped resource is largely female. Educational access, particularly for females aged 11-17, has expanded dramatically in the past 20 years.
The report said that many frontier and African countries should see GDP rise by 3-4% a year purely due to demographics.
“European bulls may have noticed that 13 EU member states have reached ‘peak’ employment rates. Central Europe is leading the charge, and this is now driving wage growth. Hungarian wages rose 15% y-o-y in April. Unemployment rates have roughly halved from Estonia to Poland over the past five years. This is partly due to Germany, which is also at a ‘peak’ employment of 79%. Its industrial health tends to lift its Central European supply chain,” the report read.
The report mentioned that 13 of 27 EU countries at the end of 2016 had reached the highest employment rate in any year since 2006. Germany has seen the largest increase of any major economy. Both Germany and the UK are at record highs.
Furthermore, Spain and Greece are having a difficult time in decreasing unemployment ratios, helped by a working age population decline of 0.4% annually. Curiously, it is often overlooked countries such as Belgium and Finland that have seen the lowest increase in the employment rate over the past 10 years.
Nearly half of the EU countries have not seen the employment ratio this high since at least 2006 among 20-64-year-olds.
