Earlier this week, Major General Mohamed El-Assar, member of the Supreme Council of the Armed Forces, is reported to have expressed support for investors and investment to members of the American Chamber of Commerce in Cairo. His statements are not novel. Other members of the government had voiced similar intentions on earlier occasions. Yet, investors remain "cautiously optimistic" as put by Akrum Bastawi, a specialist in international economic regulation who regularly advises governments and the private sector on economic policy issues.
Nonetheless, Karim Helal, group CEO of CI Capital Holding, says it is good to hear the continuous reassurances but he says words are not enough as implementation and concrete steps are needed. He also says the identity of the economy is not clear. Some observers have lately voiced concern that the government is reverting to socialist tactics meant to please the masses and is breaking away from the principles of the free market economy. That lack of clarity, according to one industrial expert who preferred to remain anonymous, is bad for Egypt's attraction of domestic and foreign direct investment, which requires the business environment to be stable, transparent and predictable.
However, Bastawi said that to be practical, there is no such thing as a 100 per cent free market for economies as large as Egypt's.
He acknowledged that the government has undertaken interventions in the name of "social justice" which have had impacts that both increase and decrease relative market freedoms, but the net effect so far, in his opinion, has been a gain in market freedoms.
Bastawi explained that the application of economic rules and regulations before 25 January reflected a lower degree of market freedoms since certain elites had different rules applied to them than the majority of businesses. "This has changed for the better and ultimately shows a serious commitment to free markets," he concluded.
But while the expert on industrial policies agrees that current and future governments should significantly change the policies pursued before the revolution as far as prioritising the private sector is concerned, "this does not mean marginalising the private sector." He said, "it would help if the demonisation of the private sector was to stop unless Egypt intends to go against current international trends and re- embrace its socialist past." If this is not the case, he said, then the government needs to make clear to the people that a healthy private sector is essential to the wealth of all. It is the balance between meeting social demands and the needs of businesses, which need to be internationally competitive, that defines most developed economies, he said.
Helal agrees. "The air needs to be clear regarding the private sector. Those being tried for misconduct should be treated on a case-by-case basis, not as a national sport." He also believes that supporting the private sector is aligned with what the masses want. "Jobs cannot be created with a shrinking economy. And you cannot appease the masses and address their needs by half solutions such as promising money when you do not have it. The answer to a better future is job creation and a better distribution of wealth," he said.
In fact, as the anonymous industrial expert says, "the government's engagement with the private sector needs to be strengthened but the government must have a clear idea of what it expects from the private sector and what it will deliver to them." In the meantime, a responsible private sector must submit to government regulation in return for reforms which liberalise the market place and enhance its international competitiveness. Most importantly, the government must ensure, through regulation, that new entrants to business, especially amongst young people, are supported by worthwhile government institutions and a banking system decidedly able to meet the needs of micro, small and medium enterprises.
Helal is also worried about the loss of the state's credibility especially as party to contracts. "Investors willing to tap the Egyptian market are worried that future governments would consider any contracts they sign today as void," he argued.
But it is not only those newly interested in the Egyptian market who are worried. One investor who preferred to remain anonymous lamented the slow implementation of contracts which investors may have signed with members of the former government.
Helal acknowledges that the damage suffered by the economy is acceptable and it is the price of freedom, but it needs to be rectified by concrete action. "It will take time for the government to reinstate credibility," he said.
Investors are interested in Egypt but they cannot clearly see what is ahead. He gave the example of someone going to the beach, knowing very well how much they will enjoy themselves, yet they are stopped in their tracks by fog. "When the fog clears, they will move," he added.
In fact, Bastawi says that credibility is affected by "unpredictability". He maintains that "the greatest driver of scepticism about any government's intentions are when legitimate expectations are not met, or when a government says something but does something else entirely, or when a government does not properly communicate its intentions sufficiently in advance of its actions to allow the business community to prepare."
Some believe this was the case with the proposed application of a capital gains tax. Helal said that while the decision not to go through with it may be a show of support for investors, it also revealed a lack of decisive leadership. "Either it was not well studied before it was parachuted on the market or they do not believe in it strongly enough to support it," he argued.
Bastawi looks at it differently as he believes it was handled quite well. The government announced that such a tax was on the table, the business community reacted, a debate took place, persuasive arguments were made on both sides and it was eventually taken off the table. "For a government operating without a legislature where such a debate could also have occurred, this was very well-handled under the circumstances; ultimately, the government was responsive," he said.
Bastawi added that what is lacking in government policy-making are elements which can only be remedied when there is greater political clarity and long-term direction for the nation itself. Moreover, "the policy postures of some ministries with an economic mandate remain enigmatic and that will need to be addressed at some point.
The anonymous industrial expert also believes a proper near term economic strategy is missing; it is not enough for the government to approve medium- and long-term economic projects. Going forward, he said, the government must have the courage in these fluid times to continue some of the work already started at the Industrial Development Authority, the Industrial Modernisation Centre, the Internal Trade Development Authority, the Engineering Export Council, the Chamber of Engineering Industries, the Egyptian Auto Feeders Union, and the Egyptian Automotive Manufacturers Association. "Re-start the formulation of economic sector strategies in partnership with the private sector. Do not make decisions in isolation but make sure they relate to economic strategies that have been formulated with all stakeholders," he recommends.
A recent note on the economy prepared by CI Capital showed that a contraction of GDP during the third quarter of 2010/11 to 4.2 per cent a year on year (YoY) and 8.8 per cent quarter on quarter was mainly due to a 26 per cent YoY fall in investments triggered by the flight of existing FDIs which registered an outflow of $0.2 billion. The note said, given the current uncertainty and the upcoming elections in the first half of 2011/12, investment decisions are likely to be postponed until a clear political scene is set and an investment-supportive government takes power.
But Osama Saleh, head of the General Authority for Investment (GAFI), is nonetheless optimistic. He acknowledged the fears of to-be investors stressing that the revolution will have its positive impact on investment once there is stability. In the meantime, he is betting on local investors to lead growth. After all, he said, even when investment was booming, local investments represented 70 per cent of total investments. He pointed out that since the beginning of the year, and despite the changes that are taking place, around 2,600 companies have been established. Although that is significantly lower than the same period last year, he said, it is still a good indicator. The past months also saw expansions by Nestle, Intel and GlaxoSmithKline, which shows that they understand the potential of the Egyptian market. Moreover, he said that several more acquisitions are waiting to happen but he would not disclose them for the moment. "Those who are taking the investment decision at the moment know it will pay back," he affirmed.
Saleh pointed out that it is important to bear in mind that despite all the events, there has not been any damage to factories and the infrastructure is intact. "What is needed to take off are solutions to issues which caused problems before. This includes transparency on access to land, licensing and infrastructure utilities," he said.
In the meantime, Helal said promoters of investment in Egypt continue to believe and propagate that the country is open for business, its outlook is positive, and that existing turmoil is natural given the circumstances. CI Capital was a co- organiser of a conference which took place in London this Monday called "Hidden Riches 2011". It brought together large to mid-cap financial and industrial companies from Turkey, Greece and Egypt for one-on-one meetings with institutional investors. The conference had been planned before the revolution, nonetheless Helal said they decided to go through with it "to tell investors we are here."