Tunisia, February 2011. The curfew in place since President Zine al-Abidine Ben Ali fled the country on January 14 has just been lifted, but protests continue, and the interim government is about to fall. In Egypt the curfew is still ongoing, and euphoria reigns. It is two weeks since President Hosni Mubarak was forced out of power, the military has taken control, and in virtually every workplace there are protests for higher wages and management changes. In Benghazi, in eastern Libya, an insurrection has started. The regime of Colonel Muammar Gaddafi is deploying tanks and heavy artillery to retake the city, and a bloodbath is expected.
From their vast apartment in central Cairo, Paul and George Bahna are putting out fires in these three countries. Their family firm, Bahna Engineering, operates across the region as a subcontractor to heavy industry and construction projects. In Egypt their chief client is Ezz Steel, the country's largest steel producer. They work on multiple facilities, and have projects in the pipeline for the next few years, as Ezz Steel is in expansion mode. Or at least it was. CEO Ahmed Ezz, a close political ally of Gamal Mubarak, the former president's son, has been arrested and some of the company's accounts frozen.
Meanwhile in Libya, the Bahna brothers' main contact in a railroad project has mysteriously vanished. "In Libya, you needed a regime connection to do business," explains Paul Bahna. "The man we worked with was a longtime companion of Gaddafi's. As the uprising began in the East, we heard our man went to see Gaddafi and urge him to negotiate with protestors... It devolved into an argument, and reports got back to us that in the middle of the discussion, Khamis Gaddafi, one of the Libyan leader's sons, pulled out a gun and just shot him dead."
The Bahna brothers' Egyptian operations also suffered in the lawlessness that followed the uprising and the collapse of the police state. A Bahna Engineering facility for metal processing near Suez had trouble with Bedouin tribes from nearby Sinai. "One day the youth of the local tribe would come and claim the land our facility is on is theirs," remembers George Bahna. "They demanded money, and when they didn't get it, they just began taking our equipment. they even stole our main gate to sell as scrap metal."
The experiences of the Bahna brothers may be extreme, but they are typical for many investors caught up in the Arab Spring. Revolutions are not good for business, at least at first. They are messy, disrupt established orders, generate violence and legal uncertainty. The assets of former rulers and their cronies, often key players in the economy, get frozen or nationalized. The transition periods that follow the initial uprising, even if order is slowly being restored, are often just as chaotic.
It took six months and several cabinet shuffles for Tunisia's interim government to stabilize under the premiership of Beji Caid el Sebsi. Libya's precarious government still has only hazy control over much of the country. Egypt has gone through several prime ministers and ministers of finance since the fall of Mubarak, and now has, in Mohammed Mursi, the unknown quantity of a new, Islamist president. In all three countries, protests initially directed at dictators have metamorphosed into a million revolts, with even private sector workers seizing the opportunity to demand a better deal.
Taher Gargour lived through it all at his factory near Alexandria, in northern Egypt. As deputy CEO of Lecico, a manufacturer of toilets and sinks, he employs several thousand workers. During the revolution, many of them joined the call for a general strike, and afterwards went on strike for higher wages.
One of the protest movement's initial demands was to increase the minimum wage, especially in the public sector, which employs some seven million Egyptians. Whereas an average monthly salary for an unskilled worker might be EGP600 (about US$100), there are now calls for increases to more than double that. For investors like Gargour, the issue was not so much increasing salaries as knowing where the demands would stop.
"The strikes were chaotic, without leadership. I had dozens of people tugging at my shirt, trying to get my attention," he remembers. "And when I thought we negotiated a compromise, it would start up again, with new unrealistic demands."
This experience will be familiar to many businessmen operating in Egypt, where expectations raised by revolution provoked an explosion of demands - some more reasonable than others. Although following the election of Mohammed Mursi, the government implemented a 15 percent increase in public sector wages, much remains unresolved, and companies have often simply had to deal with their workers directly. As unemployment surged on account of the drop in tourism and disruptions in business, private sector workers afraid of losing their jobs negotiated with their employers.
Gargour also says that capital controls that were put in place by the Central Bank of Egypt made moving money, even between the company's international offices, much more difficult - another common complaint.
As a result, Lecico had a tough 2011. Its year-on-year profits dropped by 72 percent, not just because of disruptions to production but also because one of its main export markets, Libya, was engulfed in civil war. Yet Lecico has crawled back. In early May, when the company unveiled its results for the first quarter of 2012, profits were inching back up, with a 33 percent increase in sales due to the return of the Libyan market and the revival of Egypt's construction sector, and a 2 percent increase in year-on-year profit. "We are beginning to see what we hope will be a strong recovery from the difficulties of last year," says Lecico CEO Gilbert Gargour.
As the chaos following the uprisings subsides, a similar cautious optimism prevails even in some of the sectors most affected by the political unrest. In Egypt, no part of the economy was more upturned by the change in regime than real estate, because of the widespread perception (and, in part, the reality) of massive corruption in the sector.
Companies like Palm Hills Developments - majority-owned by the families of Mubarak's housing and transport ministers, who have fled the country - have had to face countless lawsuits and investigations into their acquisition of government land at extremely cheap prices. Several transactions in the sector have been reversed already, particularly when they involved companies that were amassing a vast land bank but intended to resell the land rather than develop it.
Simon Kitchen, head of research at Egypt's biggest investment bank, EFG Hermes - itself a recent target by Qatar Invest, the first major acquisition in the financial sector since the revolution - says the plethora of lawsuits filed in the name of fighting corruption has the air of a witch hunt. "Apart from the effect these investigations are having on individual companies, they are making investors domestic and foreign very nervous," he says. "They don't know the rules of the game."
Before the military disbanded Egypt's elected parliament in June, it was hoped the outlook and economic policies of the first permanent government would be known by summer. The late June election of Muslim Brotherhood candidate Mohammed Mursi as president, with the military retaining some significant powers, made things only a little clearer. Investors, meanwhile, are eager not to miss the right moment to come back to the market.
Looking at Egypt's balance of payments sheet, the hemorrhage is clear. According to EFG Hermes, in 2010 FDI reached US$6.3 billion; in 2011 it was actually negative at minus US$483 million. Portfolio investment went from a US$10.8 billion surplus to a US$10.4 billion loss.
Most investors are waiting to see how the political situation unfolds, and whether the Egyptian pound - stoutly defended by Egypt's central bank at a cost of some US$20 billion, or 57 percent of reserves - will be devalued. Another signpost is whether Egypt comes to an agreement with the IMF on a US$3.5 billion loan. The IMF deal will be a signal to other lenders, from Arab Gulf states to the G8.
David Butter, a Middle East economic analyst, says many are watching Egypt closely. "The finance ministry says that Egypt's record in letting the outflows happen in 2011 and in 2008-09 means that the relationships with foreign financial investors remain healthy," he says. "A lot of the Egypt carry-trade and treasury-bill investors have been back to have a look in the past few months, and they will probably come back in sooner or later because Egyptian treasury bills are giving attractive yields; but they have reservations about the political mess, the clouds over the IMF deal, and about exchange-rate risk."
An American fund manager who regularly visits the country says he is interested to come back but is still waiting. "There has to be a devaluation," he says, "and the problem is that we still don't know whether we'll have a government and central bank willing to make that unpopular decision." Overall, portfolio investors say that most Western financial institutions are staying clear of the government debt market for now, and only cautiously investing in equity. Most of the foreigners putting their money in the Egyptian market are from the Gulf Cooperation Council states, and it's expected that political support from liquidity-rich countries such as Saudi Arabia and Qatar will be translated into FDI, stock market investments, and increased buying of government debt.
There was one shining exception. The Swedish company Electrolux had been preparing, in late 2010, to acquire white-goods manufacturer Olympic Group, which has a 30 percent market share in Egypt. The deal was frozen as the uprising began in January 2011, but the company decided to go ahead with the US$480 million acquisition in July 2011 - a rare showcase of FDI during a tumultuous year.
"At the moment the situation might be difficult in Egypt, and there will probably be a bumpy road ahead for some time," says Erik Zsiga, Electrolux's media relations director. "But Electrolux believes Egypt and the region is an increasingly important market over time. It has a young population that will soon create new households in need of refrigerators, ovens, washing machines, and other appliances."
Ultimately it is this simple long-term calculation that is bringing back investors. The Arab world is overwhelmingly young - in a country like Egypt or Libya, some 60 percent of the population is under 30. The same young men and women who led the uprisings will soon be getting jobs, settling down, forming homes, and hopefully getting the prosperity and democracy they felt the old regimes had denied them.
The policies of future governments will be crucial in determining how fast these investors come back. Future elections, to the extent they take place, will bring new parties or coalitions into power, and while everyone is promising growth and social justice, delivering in a fiscally responsible way is another matter.
In Libya, which can rely on petroleum exports, there is already a boom as rebuilding takes place, which presents opportunities for its eastern and western neighbors, traditional providers of services and labor. "Egypt has an opportunity to cash in on Libya's economic renaissance," says Butter, the economic analyst. Hundreds of thousands of Egyptian economic migrants have already returned to Libya to look for jobs not available at home.
But domestically, for Egypt, the government serving until the controversial election of June served with caution, postponing major new spending programs. As for Libya, Butter says, "there are plenty of opportunities in just about any sector, but very little solid legal or financial infrastructure to build on."
For Egypt, Libya, and Tunisia, much now depends on how quickly political divides can be bridged so that governments are formed that can tackle urgently needed reforms with legitimacy. Libya's election for a Public National Conference will act as a constituent assembly and build a basic constitutional framework from scratch after over 42 years of one-man rule.
The challenge for Libya is to ensure that the vast resources from oil revenue are spent wisely and accountably, and that the contradictions between Libya's geographical political divisions and the reality that the central government controls much of the oil income are resolved.
Tunisia is already ahead in all this, with a new constitution expected to be presented to a popular referendum early next year. New general elections will follow that could deliver a different result than the current coalition government of Islamists and secularists. And in Egypt, where Islamists did well in initial parliamentary elections, the ultimate outcome of this summer's messy and at first inconclusive elections and the future role of the military will be crucial to both the constitution-writing process and the government in Cairo's ability to deal with a pressing economic crisis.
One interesting outcome of the political upheaval is that, in Tunisia and Egypt, pro-business Islamist movements have emerged as the strongest. Both Tunisia's Ennahda and Egypt's Muslim Brotherhood have elaborated programs based on encouraging free trade and boosting entrepreneurship. In Egypt, for instance, the Muslim Brotherhood said that prior to elections it was preparing to improve the legislative environment for Islamic banking and other religiously sanctioned forms of investment, and that it would revive Mubarak-era programs such as public-private partnerships (PPP) to attract foreign investors to infrastructure projects.
"We want to have a new PPP law, and favor investments that are done through vehicles that are Islamically correct, like sukuk [Islamic bonds]," says Amr Abou-Zeid, a management consultant who advises the Muslim Brothers' economic policy team. Such vehicles are likely to attract investment from the Gulf first, but Western companies are also interested. "I'm ready to lend money now," says the managing director of the local subsidiary of a major European bank. "But I need a government that gives me clarity. There are too many projects frozen since the revolution, and for no good reason."
Reform of subsidies has also been high on the agenda. In 2011, the Egyptian government spent US$12 billion subsidizing energy. "We need to target subsidies better," Abou-Zeid says. "We can't keep on subsidizing fuel for people like me who can afford to fill their tanks, or energy-intensive industries that have been getting their natural gas at cost." Now a series of reforming measures are in place, including an EGP25 billion cut in subsidy relating to petroleum products.
Such reforms might be crucial to fix the delays in payment that the Ministry of Petroleum has accumulated to upstream companies operating in the country, for long the major part of Egypt's FDI. Progress on projects such as BP's US$10 billion, ten-year investment plan on Egypt's north coast will be key signs of improvement in the investment climate.
In the meantime, there are some institutional investors lining up to invest in the region. The European Bank for Reconstruction and Development is planning to spend €7.5 billion annually within a few years in North Africa and Jordan. It already announced in April a US$1 billion fund to boost the recovery of the region's economies, and will begin disbursing funds in September.
That is a rare commitment from Western nations, which at an May 2011 G8 meeting in Deauville, France, promised over US$80 billion but failed to pay out. Concern about homegrown problems, such as the eurozone crisis, may have dampened enthusiasm for a Middle Eastern Marshall Plan. Likewise, Gulf states promised investment funds and aid worth some US$16 billion, but have delivered only a few billion dollars thus far. And most of that was for buying treasury bills to support government borrowing. Revolutions may be bad for business, but investors remain cautious during transitions too.