As attendance levels from around the world to Egypt’s Economic Development Conference signal an interest in the country’s investment opportunities, they also put the onus on the government to sustain such interest with continuing reform.
Egypt will be welcoming some 2,000 delegates from 112 nations, including 30 heads of state and executives of multinational companies, to a massive economic event in Sharm El-Sheikh this weekend, which is meant as a coming out party for the country after four years of political turmoil following its 2011 uprising.
The primary aim of the conference, officials have reiterated in the run-up to the event, is to present the Egyptian government’s economic vision and put Egypt back on the map as an attractive investment destination.
The government of President Abdel Fattah El-Sisi has taken a series of measures since his election to power last summer to redress Egypt’s macroeconomic imbalances and attract private investment to the country.
The confirmed international and local attendance has been hailed by Minister of Planning Ashraf Al-Araby as a success in itself.
Indeed, there is evidence that “investors can see the seriousness and commitment with which Egypt’s government is undertaking reform,” says Sherif El-Diwany, executive director of the Egyptian Center for Economic Studies (ECES).
But the success of the conference, and Egypt’s attractiveness to investors, will depend on how far the government takes the reform agenda in the months and years to come, analysts agree.
Investments more than aid
Egypt needs $60 billion in foreign direct investment to achieve its growth target of seven percent over the next four years, Al-Araby said earlier this week.
Towards that goal, the government is presenting 60 projects to investors at the conference, thirty of which in partnership with investment banks and consulting firms.
Egypt is in need of foreign investment because domestic savings are relatively low relative to GDP, approximately 15-16 percent, whereas Egypt needs to save and invest no less than 25 percent of GDP to grow at say 6 percent, explains former finance minister and World Bank economist Ahmed Galal.
In the 18 months following the ouster of Islamist president Mohamed Morsi, Saudi Arabia, the UAE and Kuwait showered Egypt with $23 billion in aid to plug its financing gap at a time of political transition.
This week's conference was initially conceived by Saudi Arabia’s late King Abdullah last June, who publically called for a donor’s conference upon the election of president Abdel Fattah El-Sisi, before national and regional considerations shifted the focus from aid to investment.
But although some new grants and loans are expected to be announced at the conference according to the latest statements by officials, there is a unanimous recognition that Egypt cannot rely on continued aid to finance its budget.
“Egypt will not, in normal conditions I mean, get massive amounts of budget support as was the case in 2013-2014 fiscal year,” says Amr Adly, Political Economist at the Carnegie Middle East Center.
“The form of help from the Gulf as well as other international sponsors who are interested in saying a stable Egypt will take the form of investment that would hopefully improve the position of the balance of payments, foreign reserves and regenerate growth and create jobs,” says Adly.
“The reforms that have been taken by the government, including those on subsidy, taxes and the exchange rate are moves in the right direction,” says Galal.
Last year, the government started implementing a gradual plan to phase out energy subsidies which in recent years have consumed a fifth of public expenditure by cutting fuel subsidies by LE44 billion in the budget.
On the revenue side, it has also enacted a long-suspended property tax, a 10 percent capital gains tax on the stock exchange, hiked taxes on consumer goods such as tobacco products and alcohol to rein-in a swelling budget deficit that reached 12.8 percent of GDP in the 2013/14 fiscal year.
Also in the pipeline are a Value-Added-Tax and a recently-announced unified income tax ceiling encompassing special economic zones.
The Central Bank has also moved to mitigate exchange-rate risk by devaluing the pound and taking other measures to curb the currency black market, with positive results so far.
“However, it will take more than that to make real progress or a takeoff,” says Galal, citing the need for clarity on monetary targets and the exchange rate regime.
“We are yet to tackle many of the structural problems facing economic growth,” says Galal, citing Egypt’s rambling and inefficient public sector companies, its broken pension system, employment and wage policies, energy shortages and red tape.
The government has passed an “investment law” which it claims will facilitate investment procedures, including the establishment of a “one-stop-shop” for investors to obtain licenses and permits, which are currently issued by a baffling 78 different state bodies.
The president also signed a new civil service law to streamline bureaucratic processes on Thursday.
But other institutional constraints on investment, such as weak rule of law, weak contract enforcement, and slow adjudication are not likely to be treated in the short-term through policy or legal reform, says Adly.
Egypt ranked 112th out of 189 economies in the World Bank’s 2015 Ease of Doing Business Report, and 152nd in contract enforcement.
“What is legal reform going to do about weak contract enforcement, which has to do with the judiciary”, Adly cites as an example.
But legislative reforms can address institutional impediments to investment, says Diwany, if implemented properly.
“It is feasible, but the new laws must be translated into executive regulations, which in turn must be translated into detailed administrative instructions to the concerned administrations,” says Diwany.
“The real test will be after the conference, once the investment commitments have been made,” says Diwany, “will the legislative reforms really facilitate investment and will the government apparatus be equipped to handle the projects?”
The government is hoping for the conference to generate up to $15 billion in investments over the next two years, according to the latest statements by Minister of Investment Ashraf Salman.
“I think the government is really betting on getting politically-motivated investments from the Gulf (primarily the UAE) that would encourage other international investors and secure an inflow of capital,” says Adly.
Egypt saw a record $13.2 billion of net FDI inflows in the fiscal year 2007/08, a number which had dwindled to $2.2 billion in FY2010/11, following the global financial crisis and Egypt’s January 2011 uprising.
The government aims to double FDI to this fiscal year to $8 billion, Salman said last week.
“I don't think it would be possible to get back to these heydays given the current global financial crises and given that locally and regionally things are far less stable politically and security-wise compared to the years prior to the 2011 revolts,” says Adly.
Others are more optimistic. “$15 billion over two years is feasible, they will come from current investors and Gulf allies,” says Omar El-Shenety, Managing Director of Multiples Group, a regional investment bank.
Already seven deals await final ratification at the conference, said Salman last week, indicating that one of the deals is worth $3 billion alone.
Egypt’s flagship mega-project to be featured at the conference, the establishment of an international industrial and logistics hub around the Suez Canal, requires $220 billion in private investments over 15 years, according to the latest figures stated by Salman.
Egypt’s leading cigarette producer Eastern Company has already requested 250 feddans (105 hectares) in the area designated for the project, with the financial details of the deal yet to be disclosed.
Projects in the renewable and conventional power generation sector, which according to the investor’s brief include thirteen projects with total CapEx of $19.5 billion, are widely expected to be met with great interest at the conference.
In the past year, Egypt has set feed-in-tariffs for renewable energy, a move which was met with 175 bids for projects from international companies.
The government also recently approved a law opening the production and distribution of electricity to the private sector.
Other sectors that rely on Egypt’s large consumer base are also expected to whet investor appetites.
"The size of the Egyptian market, with its 90 million-strong population, makes it attractive for investment in sustainable sectors such as energy, food and beverages, health, and education,” says El-Shenety.