One of the key markers of a thriving economy is whether investors are committed.
For Egypt, attracting investors has remained a point of contention in the last three years – are they or are they not putting money in Egypt?
Marshall Stocker, an American venture capitalist, was among a band of businessmen drawn to Egypt’s transformation from a sleepy Arab socialist country to one that embraced the market.
The 2004 cabinet had cut the top rate of tax, launched a series of special economic zones and encouraged a rush of construction activity. This robust economic expansion plan, led by Hosni Mubarak’s son, Gamal, hit its stride in 2008, when foreign investment reached dizzying heights of $13 billion. Economic growth clocked in at a consistently high 7%.
The global business community applauded Mubarak’s rule as “bold”, “impressive” and “prudent”. On the surface, the country was a haven for investors like Stocker.
But once he had arrived in Cairo to launch his urban redevelopment real estate company, Stocker’s optimism was short-lived and he was forced to shut down his business just a year after it had hit its peak. He subsequently documented his experiences in a memoir published this year, “Don’t Stand Under A Tree When It Rains”.
Rebel Economy spoke to him about his experience as a foreign investor during the height of the revolution and why he won’t be investing Egypt again, at least for now.
- What was your business about?
A populist government panders to voters by preventing rents from rising. After several years tenants are paying much less rent than they otherwise should and this makes for lost income to the landlord and significantly lessens the value of an apartment building.
We intended to buy 12 large buildings in Cairo, and instead of buying building by building we could buy them all in a week and redevelop them.
Our team started raising money in 2009 for properties that were a particularly illiquid investment with a lock-up of 8 years. But the aftermath of the financial crisis prompted everyone to demand very, very liquid investments.
That meant that even though we solicited lawyers, doctors, colleges – all types of wealthy people, in the end the people we found to invest were all people we knew and they were all professional investors; people who managed mutual funds, hedge funds, they apparently have a better appreciation of the market liberalisation thesis in Egypt.
We were able to raise money to do that – $50 million of equity – and we started formally in 2010.
- Why was Egypt a good investment?
I had already advised the President of Yemen and his son on market liberalisation and the positive consequences of liberalising their economy. I always felt that direct investment in this type of liberal environment is where the real excitement is.
Egypt had both boxes checked – a nice liberalisation environment and it had rich opportunities in urban development. Egypt had the single greatest increase in economic freedom in the years leading up to 2008 and 2009, inflation had been brought under control, corporate taxes were halved to 20% and foreigners could own 100% of a business.
What you saw was direct investment increase collectively. And it was relatively easy to set up a business. The General Authority For Investment (GAFI) is a one-stop shop so the whole process of getting a company going was quite easy.
We had another dilemma: whether it is ethical to do business under an autocratic regime and what business are ethical in such environments. Ours was completely voluntary, as in sellers and tenants were free to refuse our offers. That, I thought, was the ultimate measure of ethics.
The peak came after the revolution had begun. Post-revolution there were genuine economic stresses and market prices were falling on buildings.
I negotiated inside a building on Mohammed Mahmoud Street that had its windows duct-taped shut.
The cost of the asset was dropping under tenants were under increased economic stress. So paying tenants to leave was easier to do, and redevelopment, another major component of our business, got easier to manage even though imported goods cost were going up as well as labour. The business made sense post-revolution.
- What was the turning point, when you knew it was time to leave?
There has been no economic policy post-revolution except to peg the currency. The volatility of the Egyptian foreign currency rate hit an all-time low post-revolution, and that’s absolutely not what should be happening.
In my opinion, economic policy took a backseat. Islamist president Mohammed Morsi had free-market ambitions at the micro level but didn’t show that he understood this at a macro level. So once he was in power, we had started hearing anecdotal evidence that people couldn’t move money out of the country.
GAFI told us this was not the case but we endeavoured to move a modest amount offshore. It took 7 months.
Luckily, we never had much money onshore but come August 2012, we made the decision that informal capital controls and lack of reliable economic policy meant that we would not be able to continue our business.
The business was still excellent. Profits were higher because asset prices dropped and those are the operational risks we were willing to take, but at the end of the project, if you can’t move your money out of the country, woe is the investor who makes the investment.
- Would you invest in Egypt again?
I have no money left in Egypt. Would I pursue a direct investment strategy that has a decreasing level of economic freedom? No, absolutely not. I wouldn’t go back.
- What do you forecast for Egypt’s economy?
The government has a blank cheque from a number of Gulf states but there is a credit limit and the risk is that this credit limit is reached before sound economic policy is enunciated and deployed.
And in the absence of policy, I have to believe that the money is going to run out first.
The Egyptian government visiting Gamal Abdel Nasser’s tomb also signals a certain level of respect toward his thinking but also of his socialist economic policies, which I don’t agree with. Those type of activities should not be ignored.
Stocker has published a memoir of his experience in Cairo. “Don’t Stand Under A Tree When It Rains” exposes the dilemmas of investing during the Egyptian uprising and provides advice on working in a foreign country.