Egyptian economic woes to prolong startup funding slump

February 26, 2024, 12:03 PM

The value of the Egyptian pound has halved since 2022, leading to reduced investment — Egypt devalued its currency to under EGP50 to the dollar as part of the March 6 IMF agreement

Funding down for Egyptian startups
‘Mass exodus of money’
Startups relocating to Gulf

Egyptian startups face another tough year finding funding, as the prospect of further currency devaluations and stubbornly high inflation deter investors, despite the attractive demographics of the Arab world’s most populous nation.

The number of venture capital deals in Egypt in the first nine months of 2023 was 47, down by nearly two thirds on 2022’s annual total of 129, according to Pitchbook.

Similarly, the value of VC deals fell to less than $200 million, from around $475 million over the same period.

Using slightly different metrics, Wamda, a VC company, estimates Egyptian startups raised a combined $334 million last year, down from $547 million in 2022.

“Egypt is going to struggle,” said Issa Aghabi, founder and managing director at Access Bridge Ventures, a Dubai-based VC company that has invested $35 million in regional startups.

“Historically, Egypt has been a very important market. The ecosystem has been challenged significantly over the past two years. In Egypt, every dollar you invested three years ago is worth 30 cents now.”

The Egyptian pound is linked to a basket of currencies in which the dollar is dominant. Policymakers have slashed the official exchange rate several times. At the time of writing, the pound trades officially at 30.9 to the dollar. It was valued at 15.7 in early 2022 and 7.6 in 2015.

A prolonged foreign currency shortage benefits the black market, where the pound trades at about 63 to the dollar, more than double the official rate.

The pound’s slump has plunged import-dependent Egypt into a cost of living crisis, with annual inflation at 30 percent in January, although this was down from September’s peak of 38 percent, which was the highest this century.

GDP per capita fell to $3,521 in 2023 from $4,123 in 2022 and will be almost unchanged in 2024, according to S&P Global.

“The macro situation sucks,” Aghabi said. “I can't sugarcoat it. You have inflation beyond belief, devaluation. You have a mass exodus of money. Regional investors are not touching it. The local ecosystem is challenged. There's not many VC funds locally with liquidity right now.

“You still have amazing [demographics], a great market, strong human capital, but for the past few years, anyone who touched Egypt has been firefighting there.”

Egypt is widely expected to devalue its currency for a fourth time since 2022 after the re-election of Abdel Fattah el-Sisi, a former army general, as president in December.

In a report in February, BofA Securities forecast the pound would fall to 58 to the dollar on the official exchange rate by the end of 2025, while S&P Global has forecast it will hit 55 to the dollar by December.

“Every time I think there's an end in sight, I’m proven wrong,” Aghabi said of Egypt’s economic and financial difficulties

Many Egyptian startups are relocating to the Gulf to diversify their operations away from their home market, Aghabi said. For example, two years ago a startup in his portfolio generated 70 percent of its revenue from Egypt and 30 percent from Saudi Arabia. Now it is 90-10 Saudi-Egypt, he said.

Egypt’s real GDP will grow 2.8 percent in 2024, its smallest rise since 2013, S&P has estimated. The ratings agency forecasts that real GDP will increase by 5.7 percent in 2025.

Tamer Azer, a partner at Shorooq Partners in Cairo, one of the region's major VC firms, with about $350 million of assets under management, said: “Once Egypt stabilises from a macroeconomic and currency perspective, more investment should flow into the country.

“With such uncertainty over the pound you can’t price assets. We’re first and foremost deal-makers, and if we can't price, we can't deal,” Azer said.