‘Political instability has an impact on the composition of the investments and usually attracts the kind of FDI that doesn't create jobs or boost growth' — Shantayanan Devarajan As the country remains politically divided and struggles with slow economic growth rates, a widening budget deficit and a dramatic drop in tourism, it came as no surprise when the latest Central Bank of Egypt (CBE) figures showed that inflows of foreign direct investment (FDI) into Egypt had retreated by $3 billion in the year ending in June 2013, with estimates putting the figure in the first half of the current fiscal year at a mere $301 million. However, the net FDI figure is arrived at by subtracting outflows from inflows, with the result that of the $11.7 billion in FDI entering the country in fiscal year 2012/2013 only $4 billion is presented as direct investment in reports, as the balance represents outflows. This means that the overall investment picture may be better than it seems. Minister of Investment Osama Saleh said early this month during the Egypt-GCC Investment Forum held in Cairo that he expected foreign direct investment into Egypt to reach $5 billion in 2013/2014. Last year, inflows were set at $4 billion. Throughout 2013 and despite the turbulent political scene, new investments kept on coming, he said, though not in large enough amounts and not in job-creating sectors. A week before the 30 June Revolution that toppled ousted former president Mohamed Morsi, Actis, an international private equity firm, said it was injecting $102 million into Egypt to buy a 30 per cent stake in Edita, the Egyptian snack food firm that makes well-known brands like Molto croissants and Todo cakes. Actis, which focuses on investments in emerging markets in Africa, Asia and Latin America, said that selling cheap snacks in an over-populated country like Egypt was an investment “that can't go wrong”. This perception has apparently been shared by other investors. In October, Nestle revisited a postponed plan to expand its ice cream facility in Egypt and injected LE1 billion of investments into the country. The company, which has three factories and 10 distribution centres in Egypt, said that it was determined to continue local growth. Samsung, the Korean electronics giant, inaugurated its factory to make computer and television screens in Beni Sweif last July, with investment of around $100 million and plans to make more to increase manufacturing lines, such as panel assembly lines. While a lot of fuss was raised when the American Apache Corporation said it wanted to sell part of its stake in Egypt, with rumours that this was happening because of the lack of security, things calmed down when China's Sinopec group stepped in to buy one third of Apache's Egyptian oil and gas business for $3.1 billion. The transaction is Sinopec's first venture into Egypt, according to a group statement. Minister of Petroleum Sherif Ismail signed nine agreements with companies in the natural gas and oil exploration field earlier in November, which required $470 million in investments and were the first to be signed since 2010. The agreements were signed with Shell, BICO, Greystone, Petzed and the Egyptian General Petroleum Corporation (EGPC) to authorise the exploration for petroleum in Sinai, the Gulf of Suez and the Western and Nubian Deserts. Shell secured three of the agreements to drill 17 wells, worth $13 million in investments, in new areas in the Western Desert, stated the Ministry of Petroleum. At the same time, General Electric and Carbon Holding signed a $500 million agreement in November to establish the largest petrochemical production facility in Egypt, according to an official statement from the Ministry of Industry and Foreign Trade. Under this agreement, General Electric will provide technical and financial support to the Naptha Cracker project in Ain Sokhna, which is affiliated with the Tahrir Petrochemicals Company. During the Egypt-GCC Investment Forum, businessman Naguib Sawiris said he planned to invest $1 billion in Egypt in 2014, immediately after the planned adoption of the new constitution. Hisham Zazou, the minister of tourism, also said during the Investment Forum that the ministry had received offers from Egyptian and foreign investors to construct about 200,000 new hotel rooms over the next five years. Last June, amid the country's growing unrest, a report issued by the advisory services company Ernst & Young ranked Egypt as Africa's second country in attracting foreign investments. According to the report, Egypt had drawn 10.5 per cent of Africa's foreign investment since 2003. Ernst & Young declared that 52 new projects had been established in Egypt in 2011. Another 60 new projects were registered in 2012. The company said Egypt also ranked third in Africa for infrastructure projects up to February 2013, as it hosted 82 projects and over $60.2 million of capital investment. The Muslim Brotherhood-affiliated government at the time announced that it would be setting up 120 new projects with investments of LE150 billion, among them investment opportunities in the Suez Canal area that favoured the Gulf state of Qatar. As sentiments have changed, wealthy Gulf Arab states, minus Qatar, are now encouraging investment in Egypt to support its interim government. Saudi Arabia, Kuwait and the United Arab Emirates have given more than $12 billion in aid to Egypt after the ousting of the government led by Islamist former president Mohamed Morsi in July following mass protests against his rule. Despite these items of encouraging news, the political turmoil has nevertheless negatively affected the level of FDI in the MENA region and not just Egypt, as well as its composition, according to a recent report by the World Bank entitled “Middle East and North Africa: Investing in Turbulent Times”. “FDIs are skewed towards activities that create the least jobs or that create jobs in non-tradable goods. At the same time, the political unrest has discouraged the high-quality FDI in labour-intensive manufacturing and services needed for export upgrading and diversification,” said Elena Ianchovichina, World Bank MENA lead economist and principal author of the report, during a video conference with members of the press in Cairo. Egypt, with FDI still below its potential, attracts investments that are sometimes not beneficial to its economy. Like most developing countries in the region, Egypt receives most investments from the GCC countries, especially after investments from the leading technologically-advanced Western countries have retreated. This was worrying because “countries like Egypt in the region won't be receiving any investments that will add or introduce new technology, research, development or any structural transformation. This is not the kind of FDI that we would have wanted,” said Shantayanan Devarajan, World Bank chief economist for the MENA region, during the video conference. He added that productive FDI was sensitive to political instability. “Political instability discourages good FDIs from coming into the country,” he said. After the Arab Spring revolutions that transformed the region in 2011, political unrest has become one of the most cited problems worrying the business milieu, second only to corruption. Nearly 65 per cent of business owners in the MENA region complained about political instability and failing institutions, according to recent World Bank surveys. Devarajan said that countries like Egypt should be seeking long-term greenfield investments in manufacturing sectors that can be a source of capital, jobs, technology and productivity spillovers. “But political risk hinders this type of investment, although you can still make money despite the risk. Political instability has an impact on the composition of the investments and usually attracts the kind of FDI that doesn't create jobs or boost growth. Investments tend to be choosy; they go where the business environment is the best,” he said. There was an urgent need to review investment priorities in Egypt, which should focus more on attracting investment in labour-intensive sectors, he said, and this should begin by evaluating the reasons behind the country's failure to attract useful investments. “Developing countries in the region can't afford to continue neglecting long-standing economic impediments,” Devarajan said. “The absence of significant economic reforms, combined with political and macroeconomic instability, especially in the transition economies, will keep investment and growth below potential not only in the short run, but also in the years to come, unless there are remedial actions.”
