While opportunities for investment and trade with Egypt are growing, there is still much work to be done to improve confidence in sectors outside of the oil and gas industry, writes Rebecca Spong.


Mars Wrigley Confectionery, the manufacturer of well-known chocolate snacks such as Snickers and M&M’s, announced in February it was ramping up its investment in Egypt, expanding its factory and making the North African country its regional exporting hub to Asia, the Middle East and Africa.

It is a move that points to a potential resurgence of confidence in Egypt’s economy, following years of political and economic instability.

“Making Egypt a regional manufacturing hub for our confectionery business is a reflection of our belief in the potential of the country,” a spokesperson for the company tells GTR. The firm has just opened a new production line for its flagship brand Galaxy chocolate at its factory in 6th of October City, just outside of Cairo, and has plans for a second phase of expansion later this year.

The manufacturer is looking to invest E£750mn (approximately US$40mn) over the next 18 months. “Our goal is to double our exports out of Egypt by the end of 2018, reaching US$100mn annually,” the spokesperson says.

It is not only sweet-makers that are seeing renewed potential in Egypt. Trading companies Cargill and Archer Daniels Midland signed a preliminary deal in February to establish a joint venture to provide oil and soybean meal to Egyptians from a factory in Borg El Arab. “Cargill wants to sustain and grow its strong presence in Egypt,” explains a spokesperson from the trading company.

The construction industry is attracting interest as well. The Chinese house-building company CFLD is reportedly in the final stages of negotiations with the Egyptian government over a contract to develop the new US$20bn “administrative capital” city project outside of Cairo, expected to open in 2019.

These are some indicators of the increasing level of foreign direct investment (FDI) flowing back into Egypt. Net FDI flows rose by 14% year-on-year to reach US$7.9bn in the last fiscal year 2016-17.

Renewed investment has given a much-needed boost to the country’s foreign reserves, which stood at US$37bn, as of December 2017. Back in 2013 they stood at US$14.9bn.

Despite these promising signs, the majority of foreign investment still gravitates towards the country’s oil and gas industry, rather than into manufacturing, agribusiness and housing.

“This is the new challenge: how to redirect FDI and target other sectors that will support a more sustainable growth path,” Sofia Tozy, an economist at the French credit insurer Coface, tells GTR.


Reforming Egypt

The increased foreign interest in Egypt is in part due to the reform programme spearheaded by President Abdel Fattah el-Sisi, who was sworn in as leader of the country in 2014 after being part of the military takeover that removed former Muslim Brotherhood-backed President Mohammed Morsi the previous year.

As this publication goes to press in April, Sisi, who was widely expected to be voted back into power, has just been re-elected for a second term.

When Sisi initially took power, the country’s ailing economy and diminished foreign reserves were propped up by large sums of funding from Saudi Arabia and other Gulf states. As oil prices fell, that lifeline started to fade, and Egypt needed to ramp up its reform effort to create an economy attractive to foreign investors.

In late 2016, Sisi struck a deal with the International Monetary Fund (IMF) to secure a US$12bn financing package in return for implementing various market reforms. In January, the multilateral completed its second review of Egypt’s reform efforts, noting “welcome signs of stabilisation” enabling the country to draw down another US$2bn under the agreed facility.

One of the biggest reforms implemented as part of the IMF deal was the decision to shift the Egyptian pound from a fixed to a floating rate. In late 2016, Egypt reduced the value of the currency against the dollar by 50%. Previously, the currency was considered highly overvalued and many currency exchanges were conducted on the black market.

The reform was widely welcomed by foreign investors and Egyptian exporters, helping to make Egypt’s assets more attractive, boosting foreign reserves and improving the country’s competitiveness.

The latest trade statistics suggest that exporters are starting to enjoy more success overseas, with non-oil exports rising to US$22.4bn in 2017, a 10% increase on the previous year.

The ministry of trade and industry noted “major” export growth in chemicals and fertilisers, ready-made garments and engineering products, in an official release.

In contrast, imports fell by 14% year-on-year in 2017, helping to narrow the trade deficit. The government put the reduction of the deficit down to its efforts “to eliminate random import of poor-quality products and enhance local manufacturing to boost Egyptian exports”.

To cut import costs, Egypt has tried to encourage the production of goods within the country. At the end of last year, local press announced the launch of the first Egyptian-manufactured smartphone, made by Sico Technology.

This was followed by the opening in March of a factory producing fibre optic cables for the Egyptian market. The project was the result of a joint investment by the Egyptian firm HitekNofal and a Chinese firm, Hengtong Group, with the aim to eventually export the cables to African markets by 2019.

Another significant reform widely welcomed by foreign investors was the reduction of fuel subsidies, with the first cuts made in 2014. Subsidising fuel had been a drain on the government’s balance sheet.

“The business environment was particularly bad before these reforms,” says Stéphane Colliac, senior economist at trade credit insurer Euler Hermes. “In order to keep the exchange rate fixed, the country had introduced so many exchange rate interventions and capital controls that the strategy was self-defeating,” he says.

He adds: “Foreign reserves were very low, and the capital controls had detrimental effects on the current transactions, with import bans in order to limit the trade balance deficit. After the subsidy cuts and the exchange rate reform, Egypt attracted so many capital inflows that the situation stabilised dramatically.”

Nevertheless, there has been some negative fallout from the reforms, the most stark being the soaring rate of inflation, which hit a 30-year high of 33% year-on-year in July last year. The introduction of a value added tax (VAT) in 2016, which was increased again last year, further fuelled consumer prices.

Some press reports have said that importers have struggled to pay bills and bank loans due to the change in the currency rate. However, inflation has started to edge down, with annual core inflation falling to 14.35% in January this year.

The long-awaited Investment Law – passed in 2017 – has further improved sentiment among foreign investors. The legislation aims to encourage overseas money by cutting bureaucracy and providing incentives, such as guaranteeing investors residence in Egypt during the project length and allowing profits to be transferred abroad.

“The law is a real improvement,” says Coface’s Tozy, though she emphasises that the impact of the ruling won’t be fully evident until the 2017-18 fiscal year figures.


Oil bias remains

While the ongoing reform process has helped pave the way for increased foreign investment, to date most of that money is still going into the oil and gas sector.

Egypt’s oil industry accounted for 61.2% of total FDI inflows in the last fiscal year, according to government figures, with manufacturing accounting for just 5.8% and construction 0.9%.

The government won over oil investors with its 2015 Electricity Bill, which paved the way for the liberalisation of the market and greater private sector involvement. Egypt has also been working to repay outstanding debts it had accrued to international oil companies.

The main attraction for global oil companies was the discovery of the Zohr offshore gas field in 2015 – Egypt’s biggest find to date. The Italian firm Eni is co-operator of the project, alongside the Egyptian government. BP holds a 10% stake in the field as well.

The Zohr field is expected to save the Egyptian government from spending much-needed dollars on fuel imports as well as boosting the country’s real GDP.

There will also be indirect benefits through an increase in incomes and an alleviation of electricity blackouts, says Jason Tuvey, Middle East economist at Capital Economics, in a research note published in March 2018.

BP is also overseeing the West Nile Delta development, a project approved in 2015. The company announced that the first gas was exported to the national grid on March 24, 2017, and that development will be fully on-stream by 2019.


Next steps

Analysts warn that to ensure the longevity of Egypt’s economic revival, foreign investment needs to be directed into industries other than the increasingly attractive energy sector.

They advocate that there be particular focus on sectors that can employ Egyptians and help tackle the high unemployment among the country’s youth (15-24 years old), which reached 33.1% in 2017, according to World Bank data. If not tackled, it could lead to further social unrest in the future.

“Egypt’s potential growth and competitiveness challenges remain elevated in the global comparison,” says Elisa Parisi Capone, senior analyst at Moody’s.

“These include rigid labour markets and skill mismatches leading to chronically high unemployment rates especially among the youth and the female population, and comparatively low levels of per capita income which can pose a risk to social stability,” she says.

Tuvey at Capital Economics agrees that there needs to be a “shift towards higher-productivity sectors, such as manufacturing”, to help sustainable growth and create better-paid jobs.

A recent sign that this shift is beginning to happen came with the news in March that South Korea’s Kia Motors had signed a five-year contract to assemble cars in Egypt. The new factory is expected to employ 1,000 workers and produce 15,000 cars a year – perhaps just a drop in the ocean for a country with a population of 95 million and counting.

Analysts are urging Egypt to push forward with its reform programme to encourage more businesses to set up shop in the country and help maintain social stability.

“Failure to deliver on reforms, coming in an environment in which political dissent is being repressed, would raise the threat of a renewed bout of unrest. Recent experience shows that this would hit the economy hard,” says Tuvey.

“For foreign corporates, the business environment in Egypt is still far less than optimal,” says Colliac at Euler Hermes, citing difficulties for companies to pay taxes and enforce contracts, as well as problems surrounding insolvency regulation.

“We should see quite high growth in Egypt during this fiscal year, probably 5.2%, but in the longer run, Egypt still needs many reforms in order to sustain this growth level,” he says.

Coface also sees room for improvement in Egypt’s business climate, with the insurer giving it a ‘C’ in a ranking system ranging from A to D. “The limits on trade are still there,” says Tozy. “One of the main issues our Egypt subsidiaries are facing as a credit insurer is to gather transparent viable information on companies,” she adds.

Despite the flurry of announcements this year about chocolate bar makers, soy bean factories and car manufacturers, analysts are treading carefully with their outlooks for the country.

Tozy recalls the excitement after Sisi was elected back in 2014: “Confidence was back. The government started to communicate a lot about mega projects. People started to believe in Egypt again.”

Then the Russian plane carrying tourists back from Sharm El Sheikh crashed in October 2015, killing everyone onboard. Egypt eventually confirmed it was due to a terrorist attack.

The ramifications of the crash hit Egypt hard. The security of the country was thrown into doubt; foreign airlines refused to fly in to the Red Sea resort; tourism fell and foreign reserves were damaged.

“It was the end of the euphoria,” laments Tozy, saying that confidence in the country can still be easily shaken by these shock events. “That is why I am always cautious on Egypt. A lot of things have been done to encourage foreign investors back, but the country is still fragile.”