The author is head of macro-strategy at FIM Partners and author of The Time-Travelling Economist.

It’s not often that a single foreign investment bails out a country, but Abu Dhabi’s ADQ has done just that.

The sovereign wealth fund’s leading role in a $35bn investment in Egyptian real estate — equal to some 10% of the country’s gross domestic product (GDP) — had a euphoric effect on financial markets. Egypt’s default risk dropped from 50% to 30% within two weeks of ADQ’s February announcement. 

The underlying reason why Egypt has avoided default and become investable again is the central bank having devalued the local Egyptian pound four times since 2022 — most recently after the ADQ news, as had been expected for months. 

It’s a theme we’ve seen across Nigeria, Pakistan and Kenya, too. These countries’ currencies were, at their peak, 20–50% overvalued on FIM’s Real Effective Exchange Rate Model. The Covid-19 pandemic and rising US interest rates saw dollar supply in these countries dry up. Foreign investors could not withdraw profits, which is among the biggest deterrents to foreign direct investment (FDI) imaginable.

Today, using the Real Effective Exchange Rate Model, these four countries’ currencies range from around fair value to 30% undervalued in Egypt and Nigeria. Not only are their wages very competitive, at less than half that of China, but their assets are cheap too. 

So are cheap currencies all that frontier markets need to see FDI return?

Unfortunately not. Attracting FDI is a long-term project which thrives best in countries where adult literacy is at least 70% and energy supply is sufficient to power foreign-owned businesses. Egypt has now crossed both these thresholds; the other three countries have not. With a realistic currency level and strong IMF and regional support, Egypt can now capitalise on its 109 million-strong population, develop its tourism sector and accelerate plans to build a manufacturing hub in the Suez Canal area. 

However, devaluation is the reason we may see FDI start coming back to Kenya, Nigeria and Pakistan. Thanks to their cheaper currencies, a small amount of US dollar investments mean FDI equal to 2% of GDP may be plausible from 2025. It’s not a game-changer as in Egypt, but it will be a welcome relief.

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.