The 20th Euromoney Conference held in Cairo this week comes at a time when the economy has been witnessing many important events, including the discovery of a major gas field, unrest triggered by a new civil service law, fears of Chinese contagion and one of Egypt's largest corruption scandals. The conference, entitled Financing the Future, saw generally positive sentiments towards the Egyptian economy and governme-nt efforts towards reform. Minister of Finance Hani Qadri Dimian ran the audience through the government's achievements in the past year-and-a-half, highlighting performance to date and giving the government the positive energy to move on with what it wants to do. The Egyptian economy grew at 4.2 per cent in fiscal year 2014/15, he said, compared to an average of two per cent after the 2011 Revolution. The government was aiming for five per cent in the current fiscal year, Dimian added. Such achievements are not going unnoticed. “The economy has come a long way in recent years,” Richard Ensor, chairman of Euromoney Institutional Investor PLC, told Al-Ahram Weekly. In the wake of the Arab Spring, according to Ensor, there were riots in the streets and people invaded the downtown hotel where the conference usually takes place. “You have gone from a really horrific set of circumstances to an ordered society again. You have economic growth, foreign direct investments are coming back, and many sectors of the economy are doing well,” he said. “Of course, there is quite a lot more to do,” Ensor said. But foreign direct investments doubled in 2014/15 to $8 billion compared to their level a year earlier, he added. Even so, the government must not take its foot off the pedal if it wants the economy to grow further, Ensor told the conference in reference to reforms begun since the summer of 2014 which include cuts in energy subsidies. Dimian underscored the government's intention to continue the reforms it started a year-and-a-half ago. “Our bet is to reform the economy. We embarked on aggressive reforms last year, and we will continue despite the challenges,” he said. In July 2014, the government introduced long-postponed subsidy reforms that saw fuel prices and electricity rates increasing, introduced a cash-transfer programme through which people can get subsidised food items through smart cards, adopted a new investment code, and has been working on the new civil service law. “The minister of finance is being tough and is supported by the government. Getting rid of energy and bread subsidies was very difficult, and you have to admire the cabinet for taking such unpopular decisions,” Ensor told the Weekly. “Egypt now has a government which recognises the need to restructure taxation and subsidies and adopt reforms in institutions to deal with corruption. The government has moved very much in the right direction, but there are more unpopular decisions to be taken,” he said. Ensor highlighted three broad issues that are of concern to investors: the pace of reform, public finances, and red tape.
Investor concerns: A poll carried out by Euromoney ahead of the conference showed that 36 per cent of investors were worried about the widening budget deficit. While public finances are an issue, progress is being made, Dimian said. “The preliminary budget figures for 2014-2015 show a deficit of 11.5 per cent. However, if you take out grants in 2013-2014 we find a financial consolidation of four per cent last year.” Nonetheless, he said that “we understand that we still have a big financing gap,” estimated by the IMF at $36 billion. While acknowledging the role of the Gulf countries in supporting Egypt in times of hardship, stressing they had not hesitated to help, Dimian said that Egypt's best bet to cover the gap was reform. The Gulf aid had acted as a lifeline to an economy suffering from depleted resources, he added, extending around $25 billion to it since July 2013. Dimian highlighted the various tracks Egypt could use to bridge its financing gap. Egypt is going back to the international capital markets this fiscal year, and in June the government tapped the international debt markets after five years of absence, selling $1.5 billion of 10-year bonds at a yield of six per cent. The issue was three times oversubscribed, and Egypt has also approved a bond-issuance programme of up to $10 billion in other offerings, Dimian was quoted as saying by the state-run Middle East News Agency. The government is also planning to introduce Islamic sukuk bonds as another form of financing. Another track is the launch of mega-projects to help boost the economy. According to Dimian, “when the economy grows, the gap will be self-financing.” One of the latter projects, the expansion of the Suez Canal, was inaugurated in August, and it has already started to bear fruit, Dimian said. On 1 September, the volume of two-way traffic along the Suez Canal hit a new record of 70 vessels a day, compared to an average of 47 in 2014, out of a total maximum capacity of 78 ships a day. The Suez Canal Authority (SCA) estimates that the average number of ships per day will rise to 97 by 2023 and annual revenues will double to reach $13.2 billion. Besides the budget deficit, the Euromoney survey also showed 39 per cent of those interviewed worried about the availability of hard currency and a lack of clarity on the future of the Egyptian pound. This has been affecting investment decisions and the ability of manufacturers to import production inputs. For the second month in a row international reserves fell to $18.1 billion at the end of August, the lowest level since March. The reserves were hard hit by the 25 January Revolution, which saw them decline from $36 billion in January 2011 to around $13 billion some months later as both foreign investors and tourists shied away from the country. “The depletion of reserves is not a choice,” said Minister of Investment Ashraf Salman when questioned about whether Egypt would prefer a devaluation or a depletion of the reserves. He said that any devaluation would be a matter for the Central Bank of Egypt (CBE). Meanwhile, many commentators and investment banks expect the pound to lose more of its value against the dollar to reach LE8.20 by 2015/2015 and LE8.6 in 2016/2017. Currently it is traded at LE7.78 in the banks for buying and LE7.83 for selling. In a move aimed at conserving hard currency and putting an end to the currency black market in the country, the CBE put a ceiling earlier this year on foreign currency deposits at commercial banks at $10,000 a day and $50,000 a month. Though successful in containing black market transactions, the move has made it difficult for firms to open letters of credit for imports.
Energy issues: The availability of energy was another major issue on investors' minds. Industrial plants are running at 40 to 50 per cent of capacity because of energy shortages, which are affecting exports and employment, said Hazem Badran, deputy chief executive of the CI Capital Group. Energy shortages have been plaguing Egypt for the past couple of years, and daily power cuts have been common. This year saw an improvement for households, but industries have continued to suffer. The improvement came on the back of increased power-generation capacity as a result of agreements signed during the Egypt Economic Development Conference in March 2015. The shortages have been taking their toll on the growth of the economy, which grew by almost two per cent in the first half of 2015, compared to 4.3 per cent year-on-year during the last quarter of 2014. The recent weakness, according to a report by Capital Economics, has been concentrated in the manufacturing sector where output contracted by almost 30 per cent year-on-year in June. Capital Economics attributed this to a shortage of gas supplies to factories as the government has diverted its limited supplies towards power generation for domestic use. It has also blamed the impact the CBE's measures to curb the black market have had on the availability of the hard currency needed to buy raw materials and machinery from abroad. The discovery of the $30 trillion gas field by Eni last week has renewed hopes that the energy deficit can be closed, however. Eni's Zohr Field discovery in the eastern Mediterranean was in the limelight during the conference sessions as a result. “The new exploration will not give us Dutch disease… it will not slow our reform efforts,” Dimian told attendees. But he described it as “a blessing from heaven” which would inspire more confidence in the future of the country. The find would end Egypt's energy crisis, which had resulted from booming consumption coupled with foreign explorers' reluctance to produce more gas due to the government's delay in paying their dues. The government has been forced to ration gas supplies to industry as a result, crippling production and hampering Egypt's economic recovery. It also started to import gas earlier this year. The reform of the energy sector will continue as the openness of the sector was one of the reasons behind the Eni find, according to Investment Minister Salman. “The number of contracts signed in the past six months alone is equal to that signed in the last three or four years,” he said.
Red tape: Another issue which figured high on the list of investor concerns was red tape. In fact the Euromoney poll showed 49 per cent of respondents saying that the removal of red tape was necessary to attract global capital to Egypt. The government is well aware of this, and Dimian spoke of the new civil service law at the conference and the government's determination to implement it despite various challenges. This week protests have been organised against the new law, led by Tax Authority personnel who have claimed they will suffer pay cuts as a result. The law fixes annual salary increases at five per cent, in addition to linking bonuses and promotions to performance and centralising hiring to prevent nepotism. If applied, the law, according to a study by the Egyptian Centre for Economic Studies, will save LE22 billion from the cost of salaries, which grew by an average of 18 per cent over the past three years. Public-sector salaries represent 25 per cent of the state budget. However, the downsizing of the bureaucracy cannot happen overnight, Dimian said, pointing to the example of France where one person has been hired in the public sector for every two who have retired. This has been successful in trimming government employees while not harming the system, he said. Tax reforms are also counted on by Dimian to reflect positively on the economy. The introduction of the value added tax (VAT) and the implementation of a unified 22.5 per cent tax rate, closing loopholes for tax arbitrage, will increase the competitiveness of Egyptian producers, he said. A decree was signed by the president a few weeks ago unifying income and corporate tax at 22.5 per cent, down from a maximum of 30 per cent earlier. The introduction of the value added tax is also seen as a way of improving the competitiveness of the business sector. While no specific date has been announced for this, the tax will be implemented in the current fiscal year. The VAT is counted on to include activities that are currently not taxed, thereby broadening the tax base.
Mega-projects: The government is counting on the development of the Suez Canal Zone to attract investment and some one million jobs over 15 years. With six ports, the government hopes the 460 km Zone will be transformed into a world-class industrial and logistics hub. But it looks as if the government will need to work on clarifying these opportunities. The Euromoney poll revealed a substantial number of respondents, some 46 per cent, who did not understand the investment possibilities offered by the Suez Canal Zone. Salman said that investor concerns regarding red tape, land allocation, licenses, logistics, and infrastructure would be taken care of. In a special session of the conference, those behind the project master plan said the area was ready for business and had officially been labelled a Special Economic Zone. To expedite business in the area the government has decided to rely on an already existing entity, the North West Gulf of Suez Authority, to manage the Zone, said Hanie Sarie-Eldin, managing partner of Sarie-Eldin & Partners and part of the consortium that drew up the master plan. He hoped a new chairman would be appointed to head the Authority this week to be followed by a board of directors. Coming only a couple of weeks after the rout in the international financial markets on the back of China's devaluing the yuan, the conference also presented fears of Chinese contagion. While Salman voiced concerns that the crisis might affect the Chinese willingness to invest in Egypt, he said the economic group in the cabinet was working on how to make use of the situation by making Egypt more attractive as a destination for foreign investments from other places worldwide. In fact the positive outlook for Egypt in the long term was one thing the participants agreed upon. The markets think the economy is underperforming on its potential, said Alia Mobayed, head of research for the MENA region for Barclays Bank, in a video shown to participants. She said the economy could achieve growth of six to seven per cent a year provided it pursued important reforms to enhance productivity and push growth potential. Ahmed Eissa, chief financial officer of Commercial International Bank, agrees. “The return on capital in Egypt is one of the highest in the world,” he said. “The risk adjusted returns are like no other.”
