“When you see a good chess move, look for a better one”- Emmanuel Lasker

In my humble opinion, pitching for foreign investors is not an easy task. It entails answering the difficult questions prior addressing the easy ones. Commenting on one of my articles, an investment professional asked me one of those difficult questions. What is the impact of the current geopolitical tensions facing Egypt on its ability to attract investors or Foreign Direct Investment (FDI)? The gentleman question made me realize an important investment fact. Conducting roadshows is not only about crunching numbers or investment analysis for the designated projects that you are marketing for. Obviously, it also entails visualizing and anticipating the full macro picture. Addressing frankly and honestly the potential problems, presenting possible scenarios along with correlating the scenarios impact on the country’s investment climate. Again, it is all about the big forest pictures and not only the individual trees.

The gentleman question is not difficult or awkward in investment analysis. Rather, it is a normal practice to factor in geopolitical tensions and implications in the equities discount rate formula. The difficulty of the question is stemmed from the ambiguity surrounding the tensions timing or in other words: why now? That is one thing that truly I can’t understand. So, part of this article will be an attempt to understand the reason behind the timing of such geopolitical tensions. The remaining of the article will attempt to mimic the analysis of any rational investor. This includes breaking down such geopolitical tensions into possible numerous scenarios and correlating the impact of each scenario on Egypt’s investment climate.

According to military and national security literature, each country defines its national security by three circles based on geographic location. First degree circle, what is known by the country’s backyard, includes the direct neighboring countries to Egypt’s frontiers or borders. Stemmed from their geographic location, Libya and Sudan are considered first degree circle to Egypt. Second degree circle includes the neighboring countries to the first circle such as Ethiopia. Since its location is quite far from Egypt, Turkey is considered a third degree circle. Recently and till present, Egypt is facing two geopolitical tensions. First is in Libya stemmed from Turkish military involvement whether directly or indirectly. It is well known that Egypt and Turkey are not on good political terms since June 30, 2013. Second tension is with Ethiopia stemmed from the construction of the renaissance dam and its impact on Egypt’s quota from the Nile River. Based on such impact, some strategists classify the second tension as a first degree circle to Egypt’s national security. As a result, Egypt’s parliament recently granted a proxy to the Egyptian president to conduct military intervention in Libya. Also, Egypt presented a request to the UN Security council regarding the renaissance dam / Nile river tri-party negotiations.

During geopolitical tensions, an investment decision resembles a Texas poker game. This means that rational investors will analyze the tension outcomes and its impact on their investment in the context of military game theory simulation. Then, investors will place their bets on one of the scenarios to be the most likely outcome. Nevertheless, an informative investment decision should also understand and analyze the reasons behind the tensions timing along with acknowledging the tensions ultimate purpose or strategy. Understanding the purpose is necessary in evaluating the outcome probability. So why now and what could be the game theory possible scenarios? What is the associated investment impact to each scenario?

Regarding the tension in the Libyan territories and its latest escalation, there could be different justifications. First, The Turkish economy is expected to contract by almost 5% in 2020 due to COVID impact and requires new resources to stimulate its economic growth whereas the Egyptian economy will grow by 1% at the worst case scenario. Hence, Turkey directed its attention to the east and south of the Mediterranean Sea seeking business opportunities especially in Libya which is undergoing its rebuilding process. Secondly, may be some Egyptian and Turkish businessmen/ economic players rejected to cooperate in mutual projects in Libya based on political differences. This could be analyzed in the context of the Egyptian President latest statements that Libya’s resources are owned by its people and they are the only ones entitled to reap its fruits after suffering for years. Another explanation is the United States presidential election that is due in next November. The uncertainty surrounding Mr. Trump re-election might be a valid explanation. The latter justification could also be applicable to the tension spot with Ethiopia especially that POTUS was personally involved in last January negotiations that ended with no progress. Also, it is well known that Turkish and Ethiopian foreign policies are more aligned with the US Democratic Party more than with the Republicans. So is this an attempt to direct Egypt in favoring one political party over the other in the next US elections?Not actually sure. Nevertheless, it is quite astonishing that some Egyptian media especially political talk show and sports coverage is pouring more fuel to the tensions. This is evidenced by some of the local sports reports raising negative propaganda against the African football framework. Generally speaking, such media coverage could insinuate that some people inside Egypt are taking advantage of the tensions to settle political scores with the Egyptian military and current government for some reason or another.  

That being said, what could be the possible scenarios for game theory simulations? Starting by the tension in Libya, there could be four potential scenarios. Scenario (1) assumes a status quo situation with no further escalation till conducting the US presidential election by next November. By that time and based on the election results, it is assumed that each country will conduct a reassessment situation for its strategy and counter strategy. Scenario (2) assumes Turkish direct escalation by deploying its military unmanned drones in Libya in a manner threatening Egypt’s backyard and provoking its military. This could be countered by the Egyptian army through signal jamming equipment beside other tactics. Scenario (3) assumes Turkish indirect escalation through a proxy war by deploying mercenaries and illegal fighters in Libya.  Scenario (4) assumes a direct full scale war between the Egyptian and Turkish armies. Regarding the tension in Ethiopia, there could be another three scenarios. Scenario (A) is similar to Scenario (1) assuming a status quo situation with no further escalation till conducting the US presidential election and awaiting the UN security council reply to the Egyptian request. Scenario (B) assumes conducting successful negotiations with Ethiopia based on a win-win situation to all parties. Scenario (C) assumes a full scale war that could lead to the closure of the Suez Canal corridor as a consequence of military operations occurring in the Red Sea.

In conclusion, scenario (1) and scenario (A) are most likely to prevail in Libya and Ethiopia geopolitical tension respectively. This is stemmed from a simple fact and recent examples such as the Cuban missile crisis and Aramco IPO. A status quo scenario may or may not increase the risk premium for the Egyptian equities discount rate. Hence, even if the required equity discount rate increased, this will slightly decrease the equity valuation. Prior to Aramco IPO, Saudi Arabia and Iran escalated their geopolitical tension into a direct escalation for a short period. No one expected Aramco IPO will be successful or subscribed. Nevertheless, Aramco IPO successfully closed with an oversubscription especially from local retail investors, thus, increasing the valuation later making it lucrative for FDI. In addition, FDI increased in the US during 1962 and 1963 despite of the Cuban Missile Crisis. Hence, by favoring a status quo scenario with no further escalation, it is appropriate to assume that investors could still successfully bet on investing in Egypt.Furthermore, it is unlikely the occurrence of Scenario (2&3&4) or a full scale war with Ethiopia that are considered negative to the Egyptian Investment climate. This is stemmed from several events. First, the recent downgrade of the Turkish outlook by S&P naming it unfavorable for investors adding more unnecessary salt to its economic status. Secondly, European Union intervention especially Germany to prevent a direct military confrontation between Turkey and Greece. The latter signed a tri-party defense agreement with Egypt and Cyprus few years ago. In addition, the whole world is suffering from the pandemic impact and it is not willing to add any other impact either through direct wars or trading limitations through a potential Suez Canal closure.

Finally, I think most of foreign investors are rational by properly analyzing the situation and placing their bets wisely.I personally don’t favor wars and hope all geopolitical tensions whether current or potential to end in a win-win manner. But sometimes to win geopolitical tensions without going to war, a country has to show off its deterrence capability beside its military capacity. So it is prudent to assume that when Egypt plays a Texas poker game, it does not bluff.