An opportune deal

Sherine Abdel-Razek , Sunday 3 Mar 2024

The timing of the purchase of the development rights to Ras Al-Hekma on Egypt’s North Coast by the Abu Dhabi Sovereign Wealth Fund could not have been better for the economy.

Madbouli witnessing the signing of the deal
Madbouli witnessing the signing of the deal


Last week, observers, talk shows, investment banks, and laymen alike had negative views of the Egyptian economy.

The dollar crunch had intensified, seen in the widening gap between the official and parallel market rates, and some investment banks were talking about an imminent devaluation of the pound that some said would leave the official rate at LE55 to LE60.

News of the effects of the war on Gaza on Suez Canal receipts, one of Egypt’s main hard-currency sources, made the picture gloomier. Households were struggling to make ends meet amid increases in prices accompanied by unprecedented shortages in basic commodities.

Then came the announcement that Egypt had clinched a deal which would provide it with $24 billion in fresh foreign direct investment (FDI), the largest ever, according to Prime Minister Mustafa Madbouli. Things then changed by 180 degrees, and the general sentiment became positive.

The deal will see Abu-Dhabi Sovereign Wealth Fund ADQ purchasing the development rights of the Ras Al-Hekma area (more than 170 million sq m) on Egypt’s Mediterranean North Coast for $24 billion to be paid in around two months.

It will also entail the conversion of $11 billion of UAE deposits in the Central Bank of Egypt (CBE) into “investments in real estate and other prime projects across Egypt to support its economic growth and development,” according to an ADQ statement.

A few hours after the announcement, the dollar black market rate declined to around LE48 to LE50 and the feverish gold markets calmed down amid subdued demand. 24 carat gold was trading at LE3,050 per gram on Monday compared to LE3,380 on Friday before the deal was announced.

According to Hande Kucuk, Morgan Stanley’s Central and Eastern Europe, Middle East and Africa economist, the news paves the way for the long-awaited adjustment in Egypt’s foreign-exchange regime, which is the last key policy step to unlocking a bigger loan from the International Monetary Fund (IMF), “expected to be above $10 billion with additional multilateral funding.”

The deal leaves Egypt “very few steps” away from reaching a new deal with the IMF, Madbouli said after the deal was signed.

The announcement came one day after Julie Kozak, director of the Communications Department at the IMF, said that there was excellent progress on the discussions to reach a Staff Level Agreement (SLA) with Egypt, a statement that observers believe is based on the IMF’s awareness of the closed-door negotiations on the Ras Al-Hekma deal.

Alongside an expanded IMF assistance package, the deal will cover the country’s financing gap for the next four years, US investment bank Goldman Sachs economist Farouk Sousa said in a research note.

This leads to the question of the magnitude of the predicted devaluation of the pound. Sousa believes that it will be “relatively modest” compared to the parallel market rate, given the expected availability of foreign-exchange resources in the monetary system.

Other than providing the needed foreign-currency buffer to devalue the pound, the deal “implies massive momentum in the country’s privatisation programme, which has secured about $5.6 billion between April 2022 and December 2023 from selling stakes in 14 different state-owned companies,” Kucuk said.

The IMF was critical of the slow pace of the privatisation programme last year, with this being seen as an important source of much-needed finance for the economy as well as a means to widen the role of the private sector, a commitment made by the government to the fund.

Nevertheless, IMF Managing Director Kristalina Georgieva said last week that Egypt should not rush to sell state assets under the current circumstances, referring to the war on Gaza.

Most of the privatisation deals that have taken place since the government unveiled its State Ownership Document on the programme have gone to the UAE.

They comprise the ADQ purchase of shares in five listed companies, including 18 per cent of Egypt’s largest private bank, the Commercial International Bank. ADQ has also bought a 51 per cent stake in the holding company owning Egypt’s seven historic hotels. This is in addition to its spending $800 million on minority stakes in Egyptian Ethylene and Derivatives, oil firm the Egyptian Drilling Company, and Egyptian Linear Alkyl Benzene, a petrochemicals producer. A private Emirati company has also bought 30 per cent of Eastern Company, Egypt’s largest cigarette producer last year.

The prime minister said that the Ras Al-Hekma city, when completed, would attract an additional eight million tourists to Egypt per year. Around 14.9 million tourists visited Egypt in 2023.

If achieved, this means at least $7 billion in additional foreign-exchange revenue from tourism per year, as Egypt is targeting 30 million tourists by 2028, according to a report by Decode for Economic and Financial Consulting.

Speaking at an event organised by the AUC in Cairo, Omar Al-Shenety, managing partner at Zilla Capital, a leading investment services firm, said the deal offers a lifeline after a very dark period in the economy.

He expects the coming three to four months to see foreign currency starting to flow into Egypt, but prices will not immediately retreat as companies need to reprice their products, projects, and services, he said.

However, starting next summer, the economy will have a “honeymoon phase”, he added.

“In the light of the huge inflows of foreign currency, the renewed appetite of institutional investors to invest in the country and the stable geopolitical situation post the regional war, we should see very active financial markets, clarity on foreign-exchange policy with the parallel market getting contained, clarity on interest-rate policy with inflation getting contained, and fast growth in the economy across various sectors,” Al-Shenety said.

The local bourse reaction was mixed. The stock exchange main index EGX30 dropped by five per cent amid a selling spree on Sunday, the first working day for the bourse after the announcement. The Index later gained 3.9 per cent on Monday.

People were not selling in order to exit the market, but instead were re-allocating their money from companies benefiting from the increase in dollars to others that will be the ultimate beneficiaries of the deal, Ahmed Abou Al-Saad, head of Regional Asset Management at Azimut for the Middle East, North Africa, and Turkey, wrote on his LinkedIn account.

In fact, the Stock Exchange saw increased demand for construction materials and real-estate shares, like in the Talaat Mostafa Group and Orascom Construction recorded around 20 per cent gains on Sunday.

Abou Al-Saad said the deal solidifies the positive outlook for the market for the medium term. He called on the government to capitalise on the changing sentiments and momentum by preparing a pipeline of initial public offerings (IPOs) to attract investments.

The market has been witnessing a bullish performance since the second half of 2023 amid increased appetite among local investors to invest in stocks as a hedge against the deterioration in the value of the pound. It hit many records in 2023, with the EGX30 crossing the 30,000 point threshold for the first time in its history.

The deal, equivalent to 3.5 times Egypt’s FDI figure in 2023, will make much-needed liquidity available. How it will be spent is not yet clear.

Alaa Ezz, secretary-general of the Egyptian Federation of Commerce, told TV talk show Kelma Akheera that the government is allocating $1.3 billion to cover the backlog of imports, including food, animal fodder, dairy products, and medicines from the ports.

The gradual release of these commodities will help in rebuilding the stock of strategic commodities, including cooking oil and sugar, to cover Egypt’s needs for four to six months, he said.

The effect of this new supply will be felt on prices as soon as the commodities leave the ports and are distributed to traders, Ezz said.

* A version of this article appears in print in the 29 February, 2024 edition of Al-Ahram Weekly

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