Egypt has been in and out of crises since 2008. It started with fallout from the global financial crisis, which slashed the country’s GDP growth rates from 7.2% in 2007 to 4.7% the following year. Since then, the government has suffered a myriad of significant domestic and regional disruptions that noticeably raised the country’s macroeconomic risk profile.
Egypt’s macroeconomic risks started with two revolutions two years apart (2011 and 2013). A raging currency black market in 2015 led to a devaluation in late 2016 when the pound lost half its value within weeks. In February 2020, COVID-19 lockdowns halted the global economy for months.
In 2022, war broke out between the country’s two biggest grain suppliers (Ukraine and Russia), resulting in blockage of the Black Sea route ships usually take to deliver food to Egypt. In 2023, the conflict in Gaza led Houthi rebels to disrupt shipping at the southern entrance to the Red Sea. That meant revenue from cargo passing through the Suez Canal, one of Egypt’s top three sources of foreign currency, in January was half what it had been a year earlier, the IMF said.
Those two situations contributed to significant devaluations in 2023 and 2024 in response to a resurgent dollar black market. The exchange rate went from EGP 15.6 to the dollar in March 2022 to almost EGP 50 in 2024.
Such risks require executives to make measured decisions to protect their businesses. “Shocks and crises pose a real threat, but so does overreaction to them,” said the Harvard Business Review in July. “For every true crisis, there are many false alarms. Leaders can lose the trust of their organizations if they overreact to false alarms with abrupt reversals in strategy, operations and communications. Clearly, getting the macro call right really matters.”
Bad news?
Investopedia defines macroeconomic risks as “political, social or economic turmoil that harms businesses operating within a country. Common examples … include changes in monetary policy, shifts in the regulatory or tax regime, and civil unrest.”
However, macroeconomic risks don’t always spell doom and gloom. “The presence of a ‘risk’ does not automatically mean that the worst case will happen or that resulting events will even be negative at all,” said Geopolitical Futures, a specialized publication. “[Macroeconomic] risk can potentially lead to economic and political instability, [creating] violence and conflict. They can also spur innovation and creativity as countries attempt to mitigate the risks.”
Having concrete plans to deal with macroeconomic risks is fruitless, as what happens next is “often difficult to predict … because it depends completely on how people respond to risk,” Geopolitical Futures said. “[Yet,] there are a number of ways that can help analysts and decision-makers stay ahead.”
Exercising judgment
Philipp Carlsson-Szlezak, Boston Consulting Group chief economist, told Harvard Business Review in the July-August issue, “Understanding risk is not about building the right model, [as] perfect foresight is impossible … The discipline of macroeconomics offers no precise instruments for business leaders to rely on.”
That means executives have to “cultivate their judgment [to] see beyond the headlines, to identify key … narratives, and ultimately make better [decisions],” said Carlsson-Szlezak.
Some economic models can yield solid predictions, but they mostly occur during times of economic stability. “Forecasts are least reliable when they are most needed: in times of crisis,” Carlsson-Szlezak said. “Crises generate extreme data points – so in situations where predictions would be most valuable, the models are asked to extrapolate beyond the data on which they are built.”
A case in point was when governments ordered months-long lockdowns to curb the spread of the COVID-19 virus. Those decisions led even the healthiest economies into unexpected and sudden recessions and top-performing businesses to close, which made using algorithms to predict what would come next difficult to forecast.
The second challenge facing executives is that the media and journalists often exacerbate macroeconomic risks. “Doom sells,” said Carlsson-Szlezak. “Crises and economic collapse [will] attract eyeballs and generate clicks.”
The big risk is that “false alarms [are] amplified as the microphone is often passed to the loudest pessimists in the room, who grab airtime by confidently portraying long-shot … risks.”
Such a volatile environment requires executives to have “a situationally aware mindset,” Carlsson-Szlezak said. “Judgment should come not only from economics, but also [other] disciplines and methods. The key is an approach that values contextual flexibility over theoretical rigidity, rational optimism over doom-mongering and judgment over prediction.”
Cyclical risks
The Harvard Business Review paper said one of the biggest issues executives face “concerns ups and downs in the production and consumption of goods and services. It often dominates perceptions of the macroeconomic risk landscape.”
That is because “forecasting macro cycles remains fiendishly hard.” A case in point is the discrepancy between how the global economy recovered after 2008 and 2020.
Brookings Institution, an education institution, said, “[Global] GDP returned to pre-pandemic levels … in the second quarter of 2021.” That was less than 15 months after COVID-19 started. On the other hand, Forbes reported that economies needed until 2016 to fully recover from the 2008 global financial crisis.
Carlsson-Szlezak explained that after 2008, high unemployment rates took “many years to come down” because large financial investors went bankrupt when their clients could no longer pay their mortgages. That spilled over to local and foreign financial institutions, manufacturing and other similarly “safe” sectors.
In the aftermath, “too little investment occurred and too many skills were lost, leaving a permanent scar on the economy’s supply side and lowering the economy’s future potential,” said Carlsson-Szlezak.
In 2020, unemployment spiked because governments ordered national lockdowns. When economies reopened, companies saw sudden massive demand. That fueled employment and revenues. “With the stabilizing of COVID-19 and lessening of isolation measures … consumers [tended] to compensate for the previous pent-up demand, triggering … revenge spending,” said ScienceDirect, a research platform.
Risky government
Another type of macroeconomic challenge is “financial risk [that] brings both cyclical jeopardy and systemic peril,” said Harvard Business Review. “This part [of the] landscape contains a wide range of potential threats: gyrations in inflation and interest rates, reliance on stimulus, a proclivity for bubbles and the prevalence of … public debt, [which is a] particularly thorny, persistent source of economic anxiety.”
The way to approach those risks is to “spend less time thinking about [public] debt levels and more time thinking about interest rates [as a ratio of GDP] growth rates,” said Carlsson-Szlezak. “When the growth rate is higher than the interest rates, all the interest can be paid for with new debt without raising the debt-to-GDP ratio. But when the interest rate rises above the growth rate, the economy must set aside income just to keep the ratio stable.”
Another source of macroeconomic risk is policy change. “This can impact individual businesses, entire industries or even the global economy,” said Geopolitical Futures. “An example of the last would be if a country moved toward more isolationist policies.”
Specific legislation that advantages one sector or technology over others also could become a source of macroeconomic risk. “Climate change is already [impacting] global politics as countries grapple with the debate on how to respond to possible threats or whether there might be potential opportunities in the future,” said Geopolitical Futures. That is most evident in oil-exporting GCC countries investing heavily to diversify their economies as more foreign governments focus on renewable energy.
Global risks
Another macroeconomic risk facing executives is rising geopolitical tensions. “Geopolitics appears to occupy an ever greater share of the risk landscape, which is particularly challenging because it was relatively calm for so long,” noted Carlsson-Szlezak.
He explained the world has been moving toward “global convergence of political, security, economic, and financial systems. [That] made geopolitics irrelevant in macroeconomics.”
The Harvard Business Review said current divergences are a massive macroeconomic risk as assessment systems “cannot model the impact of geopolitics on the global economy with any real confidence … Not even the simple direction of the relationship (positive or negative) can be assumed.”
Carlsson-Szlezak stressed, “The best way to navigate such uncertainty is by trying to predict not whether or when the gun will fire, but how the bullet will ricochet through a complex maze of real, financial and institutional channels.”
He added that during the conflict, a “policy response, rather than the geopolitical event itself, [may have] the greatest impact” on economic performance. “The big lift to the U.S. economy from World War II didn’t come until the country’s full mobilization after Pearl Harbor” caused the stock market to increase 13%.”
Another macro risk is increased cyber threats targeting nations transforming to digital economies. “The internet and digital communications have revolutionized [how] we interact with the world. This has been a boon that allows many people to live fuller lives,” said Geopolitical Futures. “However, it also has created new opportunities for criminals and other malicious entities to exploit.”
Optimism ahead?
A survey from McKinsey & Company in June found “executives … believed a recession is increasingly likely.”
The survey highlighted four scenarios. Two expect GDP growth. The first was “growth accelerates because of productivity improvements, inflation lowers slightly [and] interest rates remain high.” In the second scenario, “inflation remains high due to strong demand, [and] interest rates remain high [as] growth slows slightly.”
The survey also offered two recession scenarios. The first was “rising uncertainty due to geopolitical conflicts and economic turbulence. [That] causes consumer sentiment to drop.” The second was “inflation continues to grow and central banks raise interest rates.”
In the first quarter of 2024, “38% of respondents chose one of two recession scenarios as most likely to occur” through 2025.
Responses in the second quarter of 2024 were more pessimistic, as “more than half ranked a recession scenario as most likely. The largest share of all respondents, 45% — up from 29% in March — cited a demand-led recession, where rising uncertainty causes consumer sentiment to plummet.”
Respondents from “emerging markets,” excluding China and India, see the biggest risks coming from “geopolitical instability and conflicts, domestic political conflicts [and] inflation.” Their least worrisome concerns were “transitions of political leadership and weak demand.”
Navigating such uncertainty requires “being prepared and informed [to] make better decisions about where to allocate … resources and how to protect your interests,” Geopolitical Futures said. “With the proper forecasts and analytical work, you can see signs of shifting policies and attitudes as they develop and take the necessary steps to avoid the brunt of the damage.”
