Foreign capital becomes refugee from crisis-afflicted Egypt
January 8, 2013, 3:16 pm

Business editor Amira Salah-Ahmed examines Egypt’s dwindling prospects as a destination for foreign direct investment.

Most of Egypt’s economic indicators and revenue generators have been on a downward spiral for the past two years, putting an increasingly hollow dent in the state deficit and weighing heavily on the currency.

Two of the main replenishers of foreign reserves – tourism and foreign direct investment – were hardest hit after the January 25 2011 uprising and the subsequently mismanaged transition process.

Net FDI reached $2.1 billion in the fiscal year 2011-12, falling from $2.2 billion the previous year. Numbers for the first two quarters of the current fiscal year have not yet been released.

Tourism recovery has fluctuated along with vital FDI inflows, at a time when the state faces a worsening funding crisis and widening budget deficit. As the two main earners of foreign currency, the drop in FDI and tourism has rendered the state incapable of maintaining the level of foreign reserves.

The Central Bank’s strategy to prop the weakening Egyptian Pound against the US dollar in the past two years has burned through more than $20 billion of reserves, which are now at a critical level of $15 billion – barely enough to cover two months of imports.

Meanwhile, protracted negotiations with the International Monetary Fund for a $4.8 billion loan have only pushed investors further away, and kept other sources of funding pledged to post-uprising Egypt out of the state’s coffers.

Fluctuating FDI levels, like tourism numbers and even the stock market’s performance, have mirrored the bouts of political instability in Egypt’s transition process and thereafter.

“There is enormous interest to invest in Egypt, but not whilst the political class is more focused on politics than the economy,” says Angus Blair, founder of The Signet Institute, a Cairo-based think-tank on Middle East and North African economies.

From June to August 2011, FDI was at $440.1 million while the following quarter saw a dramatic plunge of negative $858.2 million, according to Central Bank data. This October-December 2011 period corresponded with some of the bloodiest clashes between protesters and security forces.

In the following two quarters, FDI jumped $635.8 million and then $1.9 billion, the highest level since the uprising. This final quarter had coincided with the election that brought President Mohamed Morsy into power, thus ending military rule and seemingly bringing the transition process to its long-awaited finale.

It was believed that civilian rule would usher in a period of political stability that could translate into economic recovery, which had been stunted for 18 months.

However, the political climate since Morsy became president seven months ago is proving to be equally tumultuous.

Focus: FDI

While Egypt’s greatest internal challenges currently appear to be political, the government that existed before the uprising was focused on increasing its strategic foreign reserves.

Former President Hosni Mubarak’s reform-minded Cabinet, which took office in 2008 and was led by former Prime Minister Ahmed Nazif, prioritized FDI by positioning and branding Egypt as an attractive investment destination.

In turn, flourishing growth rates of nearly 7 per cent were mainly built on capital inflows and the piqued interest of Gulf and foreign investors, mainly in the country’s booming real estate sector.

In 2007-2008 FDI reached $13.2 billion.

Despite the flowery numbers, the policies failed to benefit the masses or to significantly lower unemployment, and were shrouded in corrupt business dealings, ultimately fueling instead of staving off the popular uprising.

Economists had long argued against this dependence on foreign investment, preferring instead to boost local production and invest in the agriculture sector.

But at times when the cash-strapped government finds its pockets in a pinch, there are few alternatives to calling on local and foreign investors to fill in the gaps.

In 2008, the global economic crisis began to be felt in key markets. By 2009, FDI levels in Egypt fell to $8.1 billion.

The following year, FDI reached $6.8 billion, until the uprising erupted. The political upheaval following the 2011 uprising led to a heightened sense of uncertainty and wariness on part of investors, making FDI prospects even less clear.

“Local investors need to feel secure and fairly protected. They need to feel confident in the government’s credibility and ability to lead,” Karim Helal, the investment banking adviser and chairman of the Asean-Egypt Business Association, told The BRICS Post.

“Once local investors are confident enough to start investing again, then we can talk about foreign investors, who we know are keen to invest in Egypt and believe in the undeniable and in many way unique drivers for investing here,” Helal added.

But getting local or foreign investors as well as tourists to feel confident and safe in Egypt again is no easy task.

Political turmoil

The fragile stitch of an already rocky political environment began unraveling on November 22, 2012, when Morsy made a constitutional declaration granting his presidency sweeping powers and immunizing his rule from judicial review.

The declaration also protected the constituent assembly – the body tasked with drafting Egypt’s new constitution – from possible dissolution by the Supreme Court.

Opposition parties and other civil society organizations had previously said the constituent assembly was unrepresentative because Islamist factions dominated it.

Mass protests against the constitutional declarations galvanized the once fragmented opposition powers to form an untied front against Morsy. However, their attempts to force the president into rescinding his decisions failed as he dug in his heels and went on to announce a snap referendum on a rushed draft constitution.

The referendum was eventually ratified with 63.8 per cent voting in its favor amid a mere 30 per cent voter turnout.

The fallout from this period of uncertainty lingers; the rift between opposing powers will expand, as the articles of the divisive constitution are set into motion.

This in turn will continue to affect Egyptian markets and the strength of the Egyptian Pound, which has devalued by 7 per cent in the past three weeks.

Experts have long argued that Egypt’s economic crises will not be resolved without political stability stemming from general consensus on tough decisions and a clear, steadfast vision of what needs to be done.

“Local sentiment is best described as cautious and in some cases negative. Investors are awaiting stability to move in,” says Wael Ziada, the head of research at regional investment bank EFG-Hermes.

They may be waiting for a while.

Flip-flop government?

In previous weeks, Egyptians have watched as top-down government decisions were being made without sufficient transparency or broad agreement.

Some of these decisions were met with almost immediate backlash and, in several instances, were then revoked. One example was a quickly rescinded decision to close shops at 10 pm to save on electric power consumption.

Two weeks later, Morsy’s government introduced a package of new income and sales taxes, believed to be part of a final IMF deal.

The package was panned by economic experts and faced a mountain of criticism before being suspended less than a day after it was made public.

This took place just days before the scheduled December 19 final approval of the IMF loan, and amid a highly polarized political and social climate. Eventually, Egypt reportedly requested a month-long delay in the approval, and is now meeting with the IMF again to move forward with the process.

In the meantime, the taxes are supposed to be up for social dialogue to avoid another wave of criticism when they’re inevitably passed.

“It is the investment climate that matters: the predictability, market size…rule of law, access to finance, labor quality and cost, and the ease of doing business,” Alaa Ezz, secretary general of Egypt’s Federation of Industries.

“If the ruling power provides all that, then it is an investors’ haven. It is what they do, not who they are that matters.”