CAIRO: With foreign direct investments (FDI) surging to $11.1 billion during the fiscal year 2006/07 – up 81.7 percent from the previous year – the country must be doing something right in terms of investment.
Investment has improved a great deal over the past five years due to a number of reasons, said Simon Kitchen, senior economist at EFG-Hermes.
According to Kitchen, the increase in FDI can be attributed to Egypt s freely convertible currency. In the earlier years of the 2000s, it was hard to get foreign currency. Starting 2004, the Egyptian pound has been convertible and floating in a managed place against the dollar. Simplifying the tax and tariff systems, he added, has also played a role in boosting foreign investment. You also have the fact that the minimum capital needed to register a company in Egypt was reduced from LE 50,000 to LE 1,000 and that encourages more companies to register and expand. According to the Ministry of Investment, the country managed to pull $20 billion worth of FDI over the past three years. The total size of private investment pouring into the country is on the rise – climbing to 67 percent this year, which constitutes two thirds of the country s total investments. These investments are spread across the board, but the hottest sectors are real estate, textiles, banking, telecoms, as well as oil and gas. Real estate is one of the hottest sectors today for both local and foreign investors, said Wafaa Baddour, senior research analyst at EFG-Hermes, adding that such a boom in real estate positively affects the entire construction and building materials sector. The banking sector is growing as well. We ve seen a lot of foreign banks interested in buying Egyptian ones because the Egyptian market is more profitable than the Gulf market and some of the European markets, Kitchen pointed out. Egypt is a large market with 70 million people, and this is where they [the banks] can make a lot of money. He indicated that four or five years ago, investments were mostly made in the oil and gas sector; but now, they have spread to include other sectors. That is a very significant development because with oil and gas, it requires almost less of a commitment to the Egyptian domestic market than when you start up a bank or a retail chain. Recent figures show that non-petroleum direct investments in the country in 2006/07 amounted to $8 billion, out of the $11.1 billion. Only 25 percent of this year s investments are in oil and gas, while 50 percent is in new projects, and 24 percent in privatization. In 2004/05, almost 70 percent of total investments were in oil and gas, so, there is a significant change, he added. Foreign direct investment comes from various countries. Europe and the US, Kitchen clarified, were the main source for investment in oil and gas in particular until two years ago. The Cooperation Council for the Arab States (GCC) countries are becoming more important, as well. We believe that will continue because they are wealthy and are looking into expanding regionally and globally.
The GCC investments are apparently geared towards real estate and retail sectors, while western investments are more towards banking as well as oil and gas. Asian countries are particularly interested in the textiles and ready-made garment sectors. It depends on the expertise of each country, Baddour said, adding that each country has its own reasons for investing in Egypt. If you look at the banking sector, for example, it is under-penetrated. Therefores, the fact that Egypt s banking sector has huge potential and room for development attracts many investors to the country. As for textiles, investors mainly come to benefit from Egypt s location and proximity to Europe – which allows them to use Egypt as an export hub – as well as benefit from its free trade agreements with some European countries and the Qualifying Industrial Zones (QIZ) with the US, he said. Still, more improvements can be made in Egypt s investment environment. The customs system has improved but still some shipments are not cleared quickly which adds to costs and disruption of businesses, Kitchen stated. While red tape and bureaucracy are improving, they apparently have not reached their optimum. The government – embodied in the General Authority for Investment and Free Zones (GAFI) – has embarked on establishing one-stop shops across the country to speed up processes needed to register an enterprise. The increase in the number of new projects launched after establishing the one-stop shops proves things are more efficient than they were four or five years ago, Baddour said. The Ministry of Investment recently announced that the period required to register a company was reduced from several months to a few days. Still, it takes a while to get things done in Egypt compared to the rest of the Gulf. In the Gulf, the ease of doing business is one factor, but Egypt has a large population. So it depends on what your business is, Kitchen said. For retail banking, for example, a large population of 70 million makes more sense than in Dubai; versus investment banking which Dubai can serve as a hub. As Egypt s private and foreign investments are on the rise, the country still needs to further boost its investments to promote growth. The range of FDIs is getting broader . still investment levels in Egypt have not been sufficient enough to meet employment growth, Kitchen stated. You could argue that a dollar in the retail sector generates more potential jobs and wealth than maybe a dollar in oil and gas. It has more employment impact. You need an investment of a quarter of GDP to meet current employment growth, he added. Egypt is well on its way to doing that. FDIs can also help a little on the fiscal side. The government is hoping to increase FDI in education, infrastructure, and healthcare. These are things the government is traditionally responsible for, but if we can get a foreign investor to build a highway, for example, it saves the government so much money.
