Egypt: A Ray Of Light

For the Egyptian economy, good news has been tough to come by in recent years. Three years after the January 25 revolution, the continued fallout from broader socio-political instability has brought wave after wave of grim developments, whether it be worker strikes, rising deficits or shrinking reserves. 

So it came as something of a relief when, speaking on the sidelines of a conference in Cairo this September, Investment Minister Ashraf Salman broke some welcome news to the attending press pack. Amidst what was a particularly turbulent past 12 months, foreign direct investment (FDI) levels continued to improve, reaching $6bn for the 2013/14 financial year. The Minister also announced that the government is hoping to nudge this figure upwards towards the $10bn mark for 2014/2015.

This is an ambitious target given the largely downward trajectory of capital inflows over recent years.  By the time of the nation’s 2011 revolution the onset of the global economic crisis had already brought levels of FDI to Egypt from a high of $13.2bn in 2007/08 to just $6.8bn in 2009/10. Then, just as the economy began to stabilise, the political unrest which followed the departure of President Mubarak further eroded the confidence of foreign investors: in in 2010/11 and 2011/12 FDI suffered a more precipitous drop, registering $2.2bn and $2.1bn, respectively.  Reversing this decline has become a priority for the government, but until recently the fractious political environment hindered attempts to provide a more welcoming environment for foreign capital.

However, following the May elections, Egypt appears to have a window of opportunity to not only capitalise on the rising volumes of the past year, but also lay the regulatory and policy groundwork for a more sustained growth in FDI inflows.

Certainly, in the short time since President Sisi assumed office a number of significant policy milestones – many of which had been attempted and subsequently tabled in prior years – have been passed. The government has taken some key steps in reducing the costly energy subsidies bill, for example, which in turn has helped to reduce market distortions and address a widening fiscal gap. It is also working on improving the nation’s taxation system by broadening the tax base, and is preparing to introduce a fully-fledged VAT system to replace an inefficient sales tax. A long awaited property levy has finally been implemented, and changes in the customs law have sought to simplify cross-border transactions. 2014 also saw the introduction of a new investment law which sought to ban legal challenges to investor-state contracts by third parties, which could help improve investor protection after a period of high-profile court cases involving past transactions – although it has raised concerns over the ability to ensure accountability.

One of Egypt’s strongest attributes in terms of its investment attractiveness remains a well-developed public-private partnership (PPP) model, which has for a number of years now served as a useful investment conduit. Egypt had achieved some success with the PPP model before the January 25 revolution, establishing a PPP unit in 2006 which oversaw a number of projects in which domestic firms joined forces with consortia of some of the world’s largest companies to bid for large public sector infrastructural contracts. The passing of a PPP law in 2010 aimed to encourage yet more external input by providing a more comprehensive framework for such ventures, although to date its implementation has largely been confined to the utilities sector.

Outside of domestic reforms, Egypt has also taken a particularly bullish stance in recent months to strengthening investor confidence, including re-starting IMF consultations. In September 2014 the Ministry revealed that it had asked the International Monetary Fund to undertake the first Article IV Consultation in the country since 2010, for example. The long-delayed economic assessment will be formulated from the results of discussions with government ministers and departments, the Central Bank, and representatives from the private sector, academia, labour organisations and parliament. The Article IV Consultation process is a standard reference for investors seeking an overview of a nation’s financial and economic state of affairs, and the Ministry of Finance has expressed a desire to see the results of Egypt’s assessment before a planned investment summit to be held in Sharm el Sheikh in March 2015.

The summit itself will serve as something of a watershed moment for Egypt as well, giving the country a chance to set out its stall for interested investors. Originally scheduled for next February, it has been pushed out to March in order to allow for the completion of the master plan for the Suez Canal Development, the multi-billion dollar mega project launched in August of this year. As well as the contracts that this massive undertaking will generate, regional and international investors attending the event will be presented with details regarding the Golden Triangle mineral project in Upper Egypt, tourism projects planned for the northern coast, a 16,000 sq km land reclamation project and a 3,000km road building initiative – as well as a range of other large development projects for which details have yet to be released.

There is also a push to diversify both the sources of and the ultimate destinations for inbound investment. Over the past decade, FDI has been driven in large part by the country’s hydrocarbons sector. The sizeable flows of capital into the oil and gas sector, largely unaffected by the recent unrest, have continued to pour in, with a spate of new production sharing agreement’s (PSAs) signed by international oil companies and the Ministry of Energy and Electricity. In terms of the origin of FDI, thanks largely to its input to the hydrocarbon sector, the United Kingdom was the largest source of investment in 2012/13, accounting for 34.7% of total inflows, followed by the US (22.7%), according to data from the Central Bank of Egypt. However, in recent years, regional neighbours, such as the UAE and Saudi Arabia – which have also extended grants and aid to Egypt – have bolstered the share of FDI stock in the country. The UAE accounted for roughly 5% of FDI during the 2012/13 fiscal year, and a number of Emirati firms have taken part in high-level transactions, such as the $500m acquisition of BNP Paribas’ Egyptian assets by Dubai’s Emirates NBD.

The next year should be an illuminating one in terms of Egypt’s overall FDI performance, and will prove whether the past year’s increase in activity was a one-off event or part of a more sustained recovery. The country will certainly face increasing competition from emerging markets elsewhere in the region, with Mediterranean neighbours like Turkey and Morocco strengthening their appeal in manufacturing and tourism. However, the completion of the IMF’s Article IV consultation will certainly help improve confidence in the country’s potential and ultimately, the sense of stability following the recent elections – combined with the domestic reforms to reduce subsidies, improve taxation policies and strengthen investor protection – are encouraging, which bodes well for the country’s planned March conference.

---This original article from OBG originally appeared in Business Today Egypt.