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Attracting direct foreign investment to Egypt: Correcting misperceptions

What is the best way to attract foreign direct investment to Egypt? Niveen Wahish sounds out the experts

Niveen Wahish , Friday 21 Jun 2019
Offshore drilling platform
Sixty per cent of FDIs go into the oil and gas sector
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However, Sherif Fahmy, a director at NGage Consulting in Cairo, believes that although the FDI was lower than expected in 2018, it is still the highest in the region. The UN report showed that Egypt figured as the largest recipient of FDI in Africa that year. Fahmy said that global FDI flows had seen a 13 per cent decline in 2018, falling to $1.3 trillion. This had been attributed to US tax reforms in 2017, which provided tax incentives to US multinationals to repatriate foreign-held capital and invest it in the US economy, he said.
 
FDI into Egypt had reached around $8 billion in 2016, almost double the figure of 2014, prompting the government to target $10 billion in FDI. However, this did not happen despite multiple efforts.
 
Allen Sandeep, director of research at Naeem Holding, a consultancy, believes the government has done a decent job in laying the foundations for Egypt to be viewed as an attractive investment hub in the future by enacting bold economic reforms such as the phasing out of petroleum subsidies, taming inflation, and maintaining a competitive exchange-rate policy.
 
He said that measures such as the new investment law with the one-stop-shop to facilitate set up and the various incentives it offers in free zones had been important to changes in the balance of payments, drops in yields on treasury bonds, and levels of interest shown by investors in international bond issuances.
 
Fahmy added that the government intended to take further measures to accelerate the automation of procedures. It was also committed to policies designed specifically for value-added and technology-oriented sectors that contribute to overall economic growth and decrease unemployment, he said.
 
The government’s investment act in particular is designed to promote investment in less-developed regions to enhance living standards.
 
While Fahmy was optimistic that Egypt could attract more FDI to reach around $8-8.5 billion in 2019-2020, Sandeep believed that for FDI to pick up as a result of the reforms being enacted a time frame of five to 10 years was needed.
 
In the meantime, he stressed that the government must engage more in investor roadshows and strong PR and marketing impetus to improve awareness externally. Risk perceptions about Egypt, whether on politics, the economy or security, were a lot different outside than within the country, he said.
 
This had meant that risk premiums were mispriced, resulting in sluggish investor interest both for foreign portfolio and foreign direct investment. He suggested that new venues for investment needed to be prioritised in areas such as the services sector.
 
Business-process and knowledge-process outsourcing and IT-enabled services were good options for Egypt, he said, because it had a strong edge in terms of human capital.
 
Alexandria University economics professor Mohamed Abed agreed on the need to coax investment towards areas with potential for Egypt. He lamented the fact that around 60 per cent of incoming FDI poured into the oil-and-gas sector, while more was needed in manufacturing because that was what created jobs.
 
Around 10 per cent of FDI goes to manufacturing at present. This was mostly directed towards domestic consumption, however, whereas what was needed were export-oriented industries that could generate hard currency, Abed said.
 
Fahmy explained that according to the UNCTAD report, foreign investment in Egypt was skewed towards oil and gas, as significant discoveries of offshore gas reserves had attracted investment and the country became a net exporter of gas in January 2019.
 
British Petroleum, he said, had increased its investment stock in the country to more than $30 billion. Egypt also signed at least 12 exploration and production agreements with international oil companies in 2018.
 
However, Fahmy said the UNCTAD report also showed some large foreign projects had been announced in other sectors, such as a $2 billion Ukranian project by Nibulon to upgrade Egypt’s grain-storage infrastructure and a $1 billion Saudi project by Artaba Integrated Holdings for the construction of a medical city.
 
In addition, the Chinese Shandong Ruyi Technology Group had signed an agreement to invest $830 million in the construction of a textile area in the Suez Canal Special Economic Zone (SEZ).
 
Fahmy said that companies opening up in Egypt were not there just for the domestic market, but “for the entirety of the two billion people that represent countries that are part of free-trade agreements and encourage the flow of goods into international and regional markets.”
 
However, FDI into Egypt could also be affected by global conditions. Sandeep said that the ongoing trade war with China instigated by the US could have long-lasting global impacts, both directly resulting in the flight of capital out of emerging markets and indirectly because of the spillover impacts due to contagion.
 
Geopolitical risks due to tensions between Iran and the Gulf countries and the US could also affect the price of commodities such as oil and could impact trade, tourism, and Suez Canal receipts, Sandeep said.
 
*A version of this article appears in print in the 20 June, 2019 edition of Al-Ahram Weekly under the headline: Correcting misperceptions
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