The Egyptian economy is shifting gears. Niveen Wahish gauges directions Earlier this year, the main message delivered by Egyptian Prime Minister Ahmed Nazif to the World Economic Forum held in Davos was that Egypt is "open for business". With the annual WEF meeting on the Middle East due to convene in the Red Sea resort of Sharm El-Sheikh next week, WEF participants should be getting a first-hand view of just how this promise is materialising. Egypt has a story to tell. Economic growth for the first quarter of 2006 year reached 6.1 per cent, with inflation going down to around three per cent. Egypt's foreign currency reserves currently stand at almost $23 billion, thanks to higher net capital inflows generated from tourism and Suez Canal revenues. Foreign direct investments grew in 2004/2005 to reach $ 3.9 billion, which is an increase of around $2 billion from the year before. The improved macro-indicators directly reflect the multi-faceted approach to reform recently adopted by the Egyptian government. When the new cabinet headed by Nazif was sworn in, in the summer of 2004, it tackled the immediate and pressing problems of investors, especially regarding the customs and tax regimes which many saw as over- bureaucratised and not offering sufficient incentives. Reforms in these two domains in particular have helped reinstate confidence in the economy. With its renewed emphasis on providing a better investment environment, the government is now hoping to attract the foreign investment needed to generate jobs in a market which absorbs some 700,000 new entrants every year. To this one may add a backlog of unemployed youth, some of whom have been without a job for over a decade. "Domestic investment is simply not sufficient to attain the desired growth rates of seven to eight per cent." says Tareq Allouba, International Finance Corporation (IFC) senior investment officer. While striving to make investors' life easier, the government has also begun to speed up privatisation. The new momentum which the privatisation process has gained was lauded recently by an International Monetary Fund (IMF) mission which described it as "exceeding expectations". The banking sector has also undergone reforms that are changing the face of the industry. The government's stake in joint-venture banks is now being speedily divested, with the long-awaited privatisation of the first of the four main public sector banks underway. Last April, interested buyers submitted their proposals for the purchase of a 75 to 80 per cent stake of the Bank of Alexandria. Two other public sector banks, Banque du Caire and Banque Misr will be merged together later this year. With the finalisation of sale of Bank of Alexandria, and the merger of the two public sector banks, only two public sector commercial banks will be remaining in business. The Egyptian banking sector is one area that has received an influx of foreign investment, with the entry of the Greek Piraeus Bank which purchased the Egyptian Commercial Bank and the expansion of the existence of Calyon Corporate and Investment Bank, part of the French Credit Agricole Group, through its purchase of the Egyptian American Bank. Société Général also grew its presence in the Egyptian market by buying out Misr International Bank. And the Lebanese Blom Bank took over Misr Romania Bank. Also, a consortium including Ripplewood Holdings, Eton Park Capital Management and RHJ International purchased the National Bank of Egypt's share in Commercial International Bank. However, banking sector reform is not comprised of privatisation only. The Central Bank of Egypt (CBE) is working on establishing an inflation targeting regime, through which it has introduced a new range of tools that will create a more coherent and functional monetary policy. The mechanisms of a free currency exchange market are also in place. The inter-bank market that allows banks suffering a shortage of dollars to borrow from those with a surplus -- has insured that hard currency will be available and also eliminated the parallel market. Along with strong foreign currency earnings, this has further boosted confidence in the Egyptian pound. The telecommunications and information technology sectors have also undergone major structural changes. Foremost amongst these was the privatisation last November of 20 per cent of the formerly state-owned fixed line operator Telecom Egypt. The telecommunications sector is currently being eyed by international investors. A number of consortiums, 11 in all, which also include international operators, have presented their proposals for a third mobile licence. The government will also announce yet another lucrative licence for an international gateway in the summer. Developing the manufacturing sector is yet one more area that the government has been working on. This is being carried out in cooperation with the private sector through Public-Private- Partnerships. The objective of this endeavour is to smooth out the difficulties faced by industries, and provide them with the training needed to develop their export potential. Textiles, food, and furniture industries top the list of candidates regarded as promising. There are several remaining areas concerning which the government needs to improve the investment environment however. "Egypt is one of the least efficient countries in the world when it comes to enforcing contracts," says Allouba. He adds that it takes on the average some 55 procedures to enforce a contract in Egypt, compared to only 14 in Greece and Tunisia, 15 in Denmark and 16 in Ireland. Registering property will take up to an average of 193 days and cost some six per cent of the value of property registered. The burgeoning budget deficit is yet another persistent problem which is draining a significant portion of government revenues. According to the Economist Intelligence Unit, the budget deficit widened to attain 9.6 per cent of GDP in the fiscal year 2004/05. The unit has also forecast a deficit of 10.2 per cent of GDP for 2005/2006. Widening the deficit further is the fact that some LE93.7 billion, which comprise 50 per cent of total expenditure of the 05/06 budget, have been earmarked for subsidies, grants and social benefits. Of these, LE35.4 billion was also earmarked for direct subsidies which cover basic commodities and services, aside from energy subsidies. The government seems bent on resolving the question of subsidies this year, however. While it is not planning to cancel them altogether, it is thinking of re-channeling the existing subsidies. Total abolishment is viewed as a politically sensitive question that can lead to social unrest. The government is already propagating the view that society needs to re-think of the viability of subsidies on petroleum products, which are estimated to rise to some LE40 billion in the 2006/07 budget. The expected rise will in part be due to the higher oil prices coupled with increased consumption. Anticipated subsidies on petroleum will exceed those which are currently directed to the health and education sectors combined. Weak public finances were a major constraint on Egypt's credit rating, that was cited by Fitch Ratings last Thursday. The rating company affirmed Egypt's foreign currency Issuer Default rating (IDR) at BB+ and local currency IDR at BBB, both with Stable Outlooks. It also affirmed the short-term rating and the Country Ceiling at B and BB+ respectively. "Egypt's sovereign ratings strike a balance between impressive progress on economic reform and a strong external position on the one hand, and weak public finances, continuing data deficiencies despite some improvements and a perceived rise in political uncertainty on the other," says Paul Rawkins, Senior Director in Fitch's Sovereign team. Fitch had given Egypt a similar rating at the end of 2004, a couple of months after Ahmed Nazif's government took office. Credit ratings are an assessment of the relative ability of an entity to meet its financial commitments. Issuer Default Ratings are relative measures of default probability. Short-term credit ratings give primary consideration to the likelihood that obligations be met on a timely basis. Country ceiling ratings reflect Fitch's judgment concerning the risk of capital and exchange controls imposed by the sovereign authorities that would prevent, or materially impede, the private sector's ability to convert local currency into foreign currency and transfer to non-resident creditors. Fitch said in a press release that the gross general government debt of 113 per cent of GDP for the fiscal year 2005/06 remains far above the BB median of 47 per cent. It added that "budget outcomes remain uncertain, and a continuing lack of central control over public finance is a cause for concern that, left unaddressed, could trigger a negative rating action." Another issue that the government must contend with is that the average Egyptian citizen has not yet enjoyed the positive impact of adopted economic reforms. Allouba says, "this process takes time, and it cannot be expected that the benefits of reform will be felt immediately after they are undertaken." But he adds that the situation whereby Egypt suffers a severe disparity in income distribution and in which a small minority enjoys the economic benefits of the current climate, while the vast majority lives under severe hardship, creates social tensions that need to be urgently addressed. Allouba says that there is no longer the luxury of time to wait for the long- awaited "trickle-down effects" of economic reform to happen. Another question towards which Fitch expresses concerns is that of perceived procrastination on political reform. The rating company says that the "untrammeled progress of economic reform stands in marked contrast to the more halting pace of political reform, and the attendant rise in political risk." Fitch also advised that sustained economic reforms between now and the next elections due to be held in 2011 should do much to address Egypt's political, social and demographic challenges.
