How are companies navigating through Egypt’s currency devaluation nightmare?
More than 12 months on from the Central Bank of Egypt’s (CBE) decision to fully float the Egyptian pound (EGP), the scale of action taken by many multinational employers in Egypt in the face of ensuing inflationary and currency pressures is now clear to see.
By assessing the effects of the devaluation to date and monitoring market trends, we can piece together a picture to help businesses operating in Egypt to plan their strategy for 2018.
Background to the currency crisis
The decision to float the EGP followed a one-off devaluation of approximately 12% in mid-March 2016, amounting to what many saw as an overly cautious move, which, although briefly closing the gap with the black market, provided only temporary relief.
By October 2016, against an official exchange rate of EGP 8.88 to the USD, currency rationing and increasing scarcity saw the dollar selling in the parallel market at an unsustainable premium of almost 100%.
Foreign currency outflows were vastly outweighing inflows and the CBE was hemorrhaging foreign exchange reserves.
With government reserves at close to half their pre-2011 levels of around $36bn, and under pressure from the International Monetary Fund (IMF) to devalue as a condition of a $12bn loan, some saw devaluation as inevitable.
Having all but lost two important sources of foreign currency – foreign investment and tourism – as a result of the 2011 revolution, government and businesses found themselves desperately in need of hard currency.
Some firms had no option but to shut down production in the face of foreign exchange losses, while others were unable or unwilling to pay for crucial raw material imports at crippling black market prices.
Birth of a black market
Prior to the devaluation of November 3, 2016, the EGP had been depreciating for some time on the black market, thus already partially reflecting the higher rate of exchange which we have seen post-devaluation. The domino effect of worsening economic troubles following the 2011 revolution with over 12% unemployment meant the creation of a parallel market in foreign currency.
As a result, the black market flourished and, at its peak, we saw record discrepancies between the official and parallel markets, where dollars changed hands for between EGP 16 and EGP 18. More than one year on, $1 now trades at EGP 17.78, representing a 50% devaluation against its official peg of EGP 8.88.
Pre-devaluation, salary increases hovered around 15%, broadly in line with annual inflation, and were paid annually.
How 2017 events compared with predictions
In November 2016 Willis Towers Watson predicted an 18%-23% salary increase for 2017, based on inflation of 20%-25%.
Our research has shown that the period between November 2016 and December 2017 saw actual reported salary increases of 23.5%.
As 2017 drew to a close, an analysis of our findings shows that half of all companies surveyed implemented off-cycle salary increases for 2017 either bi-annually (42%) or quarterly (6%).
A significant minority also introduced temporary lump sum payments to offset lost purchasing power. Of the 32% of companies that did provide such cost-of-living allowances, 42% offered a quarterly payment of 15%-20% of basic salary, 27% chose to deliver lump sums of 4%-8% monthly, with only 12% providing payments of between 33%-50% of basic salary annually.
What’s in store for 2018?
We expect inflationary pressures in 2018 to ease and follow the downward trend established since August 2017. This is due, in part, to the CBE’s efforts to curb inflation with a 7% hike in interest rates since November 2016: as of December 2017, Egypt’s overnight lending rate stood at 19.75%.
The CBE is targeting a decline in inflation to around 13% for Q4 2018 and to single-digit inflation from 2019 onwards. Therefore, we expect salary increases in 2018 to revert to pre-devaluation levels of 15%-20%, assuming inflation levels of 18%-24%.
Although we predict that some companies will continue the trend of mid-year salary increases, we estimate that the vast majority will see fledgling macroeconomic stability, coupled with the prospect of lower inflation, as reason enough to return to a policy of annual increases.
Current market conditions are also likely to lead to further challenges in key staff retention in 2018, with 66% of organisations reporting that retention in core roles has been a major challenge.
With employees benefitting from higher pay reviews, we predict that a growing number of companies will face increased competition in key staff retention during the course of the year as employees search the market for enhanced C&B features, such as more frequent salary increases.
Best practices for key talent retention in 2018?
We recommend instigating the following principles to enhance your talent retention potency in the face of increased competition in 2018.
Frequent salary increases and regular monitoring: In a relatively volatile economic situation, the faster your business responds to economic realities and the potential loss of purchasing power these entail, the greater your staff retention levels will be.
Identify, discriminate and communicate: In order to negotiate the challenges of 2018 successfully, we recommend that companies identify key staff critical to their organisation and positively discriminate in their favour by focusing retention efforts on them.
Keep informed: In preparation for a quick response to market fluctuations and to help businesses make timely and informed decisions, we expect that companies will stay tuned to market salary movements over the course of 2018.
Preparing for the landscape of 2018
With the help of up-to-date, regular and reliable market research, companies with operations in Egypt are advised to plan long-term employee value proposition reviews to address engagement and retention.
By Roman Weidlich, Director, Rewards line of business leader – CEEMEA