| Egypt: Challenge or opportunity
by Economist Intelligence Unit
|A big, youthful population should promise growth, but political instability holds the Nile nation back
Where there are political upheaval, risk and uncertainty, there are opportunities worth grasping. This may well be the thinking that Egypt’s President Mohammed Morsi will be clinging to as he beats a trail east and west to drum up much needed foreign direct investment (FDI). Since 2008/9, FDI in Egypt has slumped from $8.1bn to $2.1bn in 2011/12 and the country’s near-term macroeconomic stability depends on securing IMF assistance.
“The situation in Egypt is pretty dramatic and political uncertainty is proving a distraction both internally and for foreign investors,” says New York-based Matthew Miller, a senior associate specializing in the Middle East and North Africa for Frontier Advisory, a research and strategy firm that advises companies entering emerging markets. “The government is really finding it difficult to create the right conditions necessary for macroeconomic stability.”
The government’s 10-year development plan carves out ambitious targets including growth of 3.5% this year, rising to 7.5% by 2016/17 and 9.8% by 2021/22. But with deep polarization in the country’s body politic, the socioeconomic time bomb of a 13% unemployment rate, a perception of corruption at the heart of government as well as regulatory uncertainty, there is a big question hanging over Egypt. Where is growth going to come from?
So far, much of the foreign investor interest is coming from Arab countries – like Qatar, Kuwait and Turkey – that are sympathetic to President Morsi’s conservative Islamist government. To help Egypt fight its currency crisis, Qatar recently granted a $2bn loan to Egypt, in addition to a $500m grant. Turkey delivered the first tranche of a $1bn loan in December, with the balance arriving in January this year. Not all countries in the region have been so forthcoming; Saudi Arabia and the United Arab Emirates — which has locked horns with the Muslim Brotherhood — are taking a more cautious approach.
Whether the investments from the Arab world are a show of political support or truly commercial in nature, Egypt is a long way from reaching earlier growth highs of more than 7% per year. Talks to secure the badly needed $4.8bn loan from the IMF, which have been subject to several delays, now appear to be back on track, and a successful conclusion will be essential to the country’s near-term macroeconomic stability and future growth trajectory.
Beyond the current turmoil: The long-term fundamentals
In the current politically unpredictable environment, many potential investors are staying on the sidelines. However, as Charles Hollis, managing director in FTI Consulting’s Global Risk and Investigations team notes, while short-term political uncertainty is putting a damper on things, “Egypt’s fundamentals are not entirely bleak.” With 85 million people, Egypt is the most populous country in the Arab world, 60% of the population is under 30, and they speak the same language as the countries across the Middle East and North Africa.
These are among the reasons that multinationals with entrenched interests in Egypt – like Marks & Spencer, Vodafone and Shell – seem willing to ride through short-term disruption. In the past few months, other firms have given Egypt a vote of confidence. In September 2012 the South Korean electronics firm Samsung said it would spend $280m on a new factory in Egypt; this will begin operations in the first half of 2013. A month later France Telecom acquired the mobile service contract from its Egyptian partner, Orascom Telecom Media and Technology, for $142.3m. Mobile penetration is 100% and the competition is fierce, but this shows commitment to the region from the French telco. And Egypt was one of three destinations earmarked for a new factory for the French cosmetics firm, L’Oreal.
Egypt has natural resources including oil and gas and a diversified and competitive manufacturing sector. With 9% of the world’s trade passing through the Suez Canal, it is strategically placed. In fact, talks are under way for an ambitious plan to develop a Suez Canal Axis, which could boost a range of industries from manufacturing to technology and tourism. (Aside from significant political will and investment, this will require a resolution to the state of emergency that has been declared in three cities in the region.)
Arabs buy into banking; North Americans into real estate
Banking is one sector that is attracting substantial interest from Arab players, even as cash-strapped European banks look to exit Egypt. Given that around 90% of the country’s population still relies on cash payments, there are opportunities to provide niche financial products and services. No new banking licenses have been issued in Egypt since 2004, when banking-sector reforms were introduced. There is growing speculation that this could change.
Mr. Hollis, however, warns that given lack of transparency and no clear arbitration and dispute resolution procedures, there is a great deal of uncertainty around whether the terms of new or existing contracts will be honored. For the time being, banks in the Arab world may be the prime takers, but their interest is an indication that the market is seen as profitable. Egypt’s central bank recently approved a request by Qatar National Bank to acquire a majority stake in Egypt’s National Societe Generale Bank and National Bank of Dubai will acquire French bank, BNP Paribas Egypt.
If foreign firms outside the Arab world are holding off investing in the financial sector, they are getting involved in areas that are feeling the benefits of its growth. Closely linked to a recovery in the banking sector is real estate. U.S. construction risk management firm, Hills International, recently won a $1.5m contract from the Saudi Egyptian Construction Company to oversee the construction of the Secon Nile Towers over a three-year period. The development will feature two 23-story buildings: one five-star hotel tower and one residential and retail tower. Hills’ Cairo-based marketing specialist Ahmed Thabet says that despite recent political turmoil, the company remains optimistic about future opportunities in Egypt. “Things are getting back to normal and the real estate sector will boom again because there is always going to be demand for both residential and commercial properties,” he says. Hills also won the contract to manage the renovation and redevelopment of the Nile Ritz Carlton Hotel in Cairo.
From the markets of Cairo to Nile cruises, the pyramids and the beaches of the Sinai Peninsula, tourism has always been an important earner for Egypt’s economy, but its potential has never been fully realized. The revolution did little to help, but the government has now set a target of doubling tourist arrivals to 30m by 2020. There are challenges like combating the threat of domestic terrorism from Al-Qaida and instability in the Sinai. Yet developments like Secon Nile Towers indicate that tourism is not dead. According to Robert Repsher, chief financial officer of U.S. tour operator Sunnyland Tours, “Egypt is a gold mine for investors with foresight.”
Positive rumblings, perhaps, but with a Fitch downgrading from B+ to B, Egypt is now on a par with Lebanon, Cameroon and Rwanda. To secure much-needed FDI, the country now needs a stable and business-friendly environment. Parliamentary elections scheduled for April this year may, or may not, provide some clarity. Until then, however, it won’t come as any surprise that most investors will be waiting and watching.
Reprinted from EIU article published February 27, 2013 posted at Business without Borders website. To view article, go to http://www.businesswithoutborders.com/topics/opportunities/egypt-challenge-or-opportunity/