Tuesday,12 December, 2017
Current issue | Issue 1238, (19 - 25 March 2015)
Tuesday,12 December, 2017
Issue 1238, (19 - 25 March 2015)

Ahram Weekly

Achieving Egypt’s goals

Better than expected outcomes at last week’s Egypt Economic Development Conference should benefit all Egyptians, writes Sherine Abdel-Razek

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Al-Ahram Weekly

The large grin on President Abdel-Fattah Al-Sisi’s face, as well as the joyful tears of his prime minister, during the closing speeches at last week’s conference in Sharm El-Sheikh conveyed one message: the long-awaited conference had achieved its goals.

Deals worth tens of billions of dollars were signed with major multinationals at the conference, another aid package of $12.5 billion was offered by the Gulf countries, and there was a clear tone of political support for the government in the speeches delivered by international officials. What more could the two men have wanted?

The overall sentiment at the Sharm El-Sheikh Convention Centre, attended by almost 3,000 participants, including heads of state, multinational CEOs, representatives of leading financing institutions and Egyptian businessmen, was positive.

The value of the investments finalised during the conference is $36 billion. This figure increases to $60 billion when financed projects and loans by international financing organisations are added, the latter alone accounting for $5.2 billion.

“This is far more than our wildest dreams. We were hoping for another Gulf aid package and maybe $10 billion worth of investment,” said Ossama Mourad, chairman of Acumen Securities, a local investment bank.

Most of the deals were in the energy sector, in electricity or oil and gas, both down- and upstream operations. Top officials from the Italian company ENI, the American GE, UAE’s IIPC and the UK’s British Petroleum (BP) signed agreements with Egyptian ministries on the fringes of the conference.

Meanwhile, projects valued at billions of dollars were also negotiated over the conference’s three days but were not included in the final figures. These mostly relate to memoranda of understanding that may take some time to materialise as solid contracts.

They include one signed with the German industrial giant Siemens in which the latter will invest 10 billion euros ($10.5 billion) to increase Egypt’s energy production capacity by up to a third by 2020.

Al-Sisi boasted of his bargaining skills in clinching the deal at a low cost and at very favourable terms. Some say Egypt received finance terms of only 1.2 per cent over 12 years to pay back the cost of the project.

The new administrative city to be built to the east of Cairo was the big surprise of the conference. The Capital City Partners fund, founded and headed by Mohamed Al-Abbar, head of the UAE-based construction conglomerate Emaar, signed an agreement with the government worth $45 billion to develop a new capital that will have about 350,000 housing units and 10,000 hotel rooms. The Egyptian government is said to have a 24 per cent stake in the project.

The new capital, together with a series of projects in housing and tourism and $12.5 billion in aid, including $500 million from Oman, puts the Gulf at the top of the list of Egypt’s main supporters, as has been the case since the ouster of former president Mohamed Morsi in 2013.

The UAE, Saudi Arabia and Kuwait have extended $23 billion in aid and investments since June 2013.

Beyond the conference’s financial objectives, Ayman Ismail, an assistant professor at the AUC’s School of Business, said the event had created a strong positive momentum in support for Al-Sisi, both internationally and domestically.

Internationally, his new high profile signals that the post-July 3 period, characterised by a lack of international recognition, is now over, and Egypt and its president are now internationally accepted.

“On the domestic side, the public euphoria is substantial. People watched the conference sessions on TV as if it were a football game,” Ismail noted.

The conference is Al-Sisi’s end-of-year score card, he said. The president has stabilised the country, restored security and launched an economic recovery plan with the investments to fund it. He is also perceived as a strong world leader who is comfortable among his peers.

“This conference cemented Al-Sisi’s image as a regional leader you can do business with,” Ismail concluded.

Delayed gains: But the $60 billion in investments won’t show up immediately as foreign direct investment (FDI), which would help reduce the balance of payments deficit. “This won’t happen before we receive the actual money,” said Eman Negm, an economist at Prime Holdings.

Negm does not expect the investment to show up in the current fiscal year, which ends on 30 June. Egypt attracted net FDI of $4 billion in 2013-2014, compared to $3.8 billion the previous year.

As for the reserves, Hisham Ramez, governor of the Central Bank of Egypt (CBE), said on Monday that the $6 billion in promised Gulf deposits, almost half of the aid package, are expected to be delivered within days. This will boost the reserves significantly and reduce the burden on the Egyptian pound, Ramez told the MENA news agency.

Egypt’s international reserves stood at $15.4 billion in February, covering almost three months of imports. This is compared to $36 billion before the 25 January Revolution. The depletion has come on the back of a decline in FDI and tourism revenues.

Regarding the pound, Egypt loosened its grip on the local currency earlier this year in a move aimed at combating the black market. The pound lost six per cent of its value in early February. On Monday the pound traded at LE7.53 against the dollar in the official market and 7.65 on the black market.

The devaluation was one of many reforms the government embarked on to attract investment in the countdown to the conference. The most recent of these was the decision to unify income taxes at 22.5 per cent rather than 30 per cent.

“The revenue loss caused by this decision, to be enforced retroactively from January 2015, will strip government coffers of LE12 billion this fiscal year and LE30 billion next year,” explained Negm, adding that the expected investment will mitigate the short-term effect of these losses.

Negm and Mourad agreed that real gains to the economy will not be felt before a year or a year and a half in the future, when the investments are actually pumped in and give economic growth and employment needed pushes. The huge funds promised for the energy sector should also make blackouts and queues for butane gas canisters and diesel things of the past.

Waiting for the trickledown effect: The fact that most of the deals at the conference were in the energy and real estate sectors raised concern among some observers, who fear that the new projects, which are not labour intensive, will not create new jobs and that the benefits will be reaped by only a lucky few.

“The oil and gas sector is unlikely to be the source of productivity gains and the job creation that Egypt desperately needs. The most successful emerging markets have developed on the back of strong manufacturing sectors,” noted Jason Tuvey, senior economist at Economic Capital, a London-based macro-economy research group.

Tuvey believes that with relatively low wages, a young and growing workforce, and proximity to developed markets in western Europe, Egypt has all the ingredients to become a manufacturing hub. But investment in manufacturing in Egypt is less than two per cent of GDP, well below the levels of around five per cent of GDP or more that the central European economies have experienced in the past decade.

This is reminiscent of Mubarak-era economic policies when foreign investment and growth rates rose but so did poverty and income inequality. The trickledown effect of the growth never happened, and only the business and ruling elites got richer.

“From the economic policy angle, the main difference [from Mubarak-era policies] is the increased consciousness of and focus on the social inclusion dimension; otherwise, it is moving in the same policy direction,” Ismail said.

However, according to Ismail, the current government has more determination, urgency and political will than those that ran the country under Mubarak’s status-quo approach. Speeches by Mohamed Al-Erian, head of Allianz, Christine Lagarde, managing director of the IMF, and Sri Mulyani Indrawati, managing director of the World Bank, all stressed the importance of inclusive growth.

The fact that Egypt lacks skilled labour is also something that makes Egypt more attractive to capital-intensive industries, according to Acumen’s Mourad. “We need time to train our labourers and to provide them with the know-how to deal with state-of-the-art knowledge-based manufacturing technologies. So maybe in a year or two we will be able to attract investment that accommodates skilled labour,” he added.Al -Sisi said in the closing remarkes that the conference will be held annually.

The country also needs investment in infrastructure and energy to solve the energy crisis as soon as yesterday. “No investor will come to a country where he can’t get energy,” he noted.

Following the 25 January Revolution, political uncertainty led local investors to suspend their investments and foreigners fled the country, resulting in a steady decline in the investment rate. The low investment resulted in poor infrastructure, hampering the mobility of goods and people around the country and electricity shortages, explained Tuvey.

“At around 13 per cent of GDP at present, the country has one of the lowest investment rates in the emerging world,” Tuvey said.

Singapore, Korea and the Czech Republic are three of the richest emerging economies, and one thing they have in common is that they raised investment to at least 25 per cent of GDP as they developed.

“Let us consider the economy as a new building,” suggested Mourad. “Now is the phase when we are building the foundations. The results are not yet being seen, but these are the right foundations for the building.”

Negm adds that even if the agreed projects do not offer long-term job opportunities, the multiplier effect of such projects will lead to more investment and thus increase the benefits.

Banking on the conference: The influx of such huge investments could be a blessing for the banking sector, which can find in it a lucrative opportunity to use its high deposit-to-loan ratio.

The last four years have seen the government borrowing heavily from local banks through treasury issues to fund the large budget shortfall. With the banks’ claims on the government rising at a quicker pace than the government has been able to secure new funding, this has reduced lending to the private sector, which could have financed more investment, according to Tuvey.

Orascom Construction (OC), the local construction conglomerate owned by businessman Nassif Sawiris, said on Monday that the banks have offered up to $1.95 billion (LE14.9 billion) in syndicated loans to finance the coal-fired power plant it agreed to build during the conference.

According to Reuters, the cost of the first phase of the two phases of the privately owned power plant is forecast to be $3 billion (LE22.9 billion). The company added that the financing would come from Egyptian as well as international banks.

With growth rates picking up on the back of these investments and the dollar exchange rate stabilising, Negm believes that the CBE will lower interest rates further to promote credit to the private sector, especially small- and medium-sized enterprises.

Nevertheless, she stressed that it has to be clear if these foreign investors will be getting bank credit in local or hard currencies. “It has to be in local currency, otherwise our foreign currency liquidity will be depleted,” she noted.


Ignoring the good news: Despite expectations of across-the-board bullish activity in the stock market on the back of the positive news from the conference, the market lost two per cent from its main index, the EGX30, on Monday after edging up by less than one per cent on Sunday.

Aggressive selling by institutional investors overpowered the positive sentiment as investors opted to lock in their profits following a week of strong performances, noted a commentary by Pharos Securities.

The decline came in line with the sell-off in regional markets, mainly Dubai, Qatar and Saudi Arabia, due to a decline in oil prices pushing them down. Another reason for the selling spree is investors cashing out to take part in the secondary public offer of food-maker Edita, which is seeking to raise LE2 billion from the offer.

But companies that negotiated or signed agreements during the conference have held tight. Orascom Construction bucked the trend and jumped 6.4 per cent on Monday on news that its consortium with the UAE-based IPIC had signed an agreement with the Egyptian government to construct a 3,000-MW coal-fired power plant.

Palm Hills Developments, the leading real-estate developer, showed a strong performance thanks to news of that it is part of a consortium to build the new city near Cairo at a total cost of LE150 billion.


Good bargains: In his speech at the end of the conference, Al-Sisi stressed the importance of acting as fast as possible and with the least possible cost to move on the economy.

“I’m in a hurry because I’m late, and anyone who’s late should either speed up or run,” he said.

He told the audience that he negotiated the value of the deals with investors to reduce their profit margins. Al-Sisi’s role at the conference was received warmly by local businessmen and officials in attendance.

He was reportedly involved in negotiating mega-deals with international CEOs. “It was obvious that he’s deeply involved in the Suez Canal Zone plans with Dar Al-Handasa. He also had personal discussions with the CEOs of Siemens and GE to conclude their energy deals. Al-Sisi is emerging as a hands-on president,” said Ismail.


Deals negotiated in Sharm El-Sheikh

Among the deals negotiated at last week’s Egypt Economic Development Conference were the following:

- German industrial giant Siemens signed a Memorandum of Understanding (MoU) to invest US$10.5 billion ($10 billion euros) in Egypt to build power plants that will boost the country’s electricity generation capacity by up to a third by 2020

- British Petroleum (BP) signed an agreement to invest US$12 billion in Egypt to produce the equivalent of three billion barrels of oil covering operations in the east and west Delta as well as the Gulf of Suez

- The United Arab Emirates company Dana Gas will invest US$350 million over 30 months in new development wells, workovers of existing wells and new pipelines

- PepsiCo will invest US$500 million in Egypt this year to expand production

- General Electric will invest US$200 million in a manufacturing and training facility in the Suez Canal Economic Zone

- Masdar, an Abu Dhabi-based company, and Saudi Arabia’s ACWA Power signed a MOU with the Egyptian government to build power stations valued at US$15 billion

- The Alsuwaidan Group, an Emirati company, signed two agreements valued at US$6 billion to develop a wheat logistics hub in Damietta and a logistics and shopping zone in Ain al-Sokhna on the Red Sea

- Beyti, a joint venture between Saudi Arabia’s Almarai and PepsiCo Inc., is considering the acquisition of Eg Qalaa Holdings’ two subsidiaries Rashidi al-Mizan and Dina Farms

- The ministry of housing sealed a deal worth US$4 billion with Saudi businessmen Abdel-Rahman Sharbatly and Fahd al-Shobokshi to develop a project called South Marina on the country’s north-west coast

- The ministry of housing signed a deal with Abu Dhabi government-owned Aabar Investments and the local Palm Hills Company for the development of the October Oasis Project, a huge new property project in Sixth October City worth US$20 billion.


Quotes:

“I know Egypt and its problems ... Egypt needs at least $200 billion to $300 billion so that there is real hope for its 90-million population.”
Abdel-Fattah Al-Sisi
President

“We don’t expect things to be perfect, but we think over the longer term our investments will pay off.”
Jeff Immelt
CEO of General Electric

“We’re lucky we have these good performing ministers right now, but some of them are stuck with old management from the past when we should have fired all the people under them and brought in new ones.”
Naguib Sawiris
Chairman of Orascom Telecom Media & Technology

“Demands are not reached by wishing.”
Christine Lagarde
Managing Director of the IMF, quoting singer Um Kalthoum

“Most of us agree that there’s a fundamental change in the design of the economic policy framework. There’s a clear emphasis on inclusive growth.”
Mohamed Al-Erian
Chief Investment Adviser, Allianz

“You don’t commit to a $12 billion investment unless you believe in what’s going on in the country.”
Bob Dudley
CEO of British Petroleum

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