The pace of local reforms and political tension in the region are not helping attract investors to the market. Yasser Sobhi reports The Egyptian economy is badly in need of foreign investments. In the first nine months of the last fiscal year (July 02/March 03), foreign direct investment (FDI) flows were a mere $588 million, while net portfolio investments were a negative $200 million. Those figures suggest that total foreign investments will add up $500 million for the entire last fiscal year, roughly the same as the previous year. These figures are disappointingly modest in comparison with the first seven years of the '90s, when FDIs averaged nearly $2 billion a year, while net portfolio investment came out to $600 million a year. "We remain optimistic for the future of the Egyptian economy, as our investments and strategy show, but there is still a recession in the market and no important decision has been taken recently that gives hope for an imminent improvement", said Jerome Guiraud, managing director for National Societe General Bank (NSGB), the third largest private bank in Egypt, which has invested heavily in the last two years. "In the meantime, the signals from the economy to investors are not so great. The fundamentals of the economy are solid and encouraging, but investors need more. They're looking for the future and need a clear commitment saying that the path and direction (of the economy) are favorable, and that is missing for the time being." He argued that the Egyptian pound is actually undervalued relative to the US dollar, taking in consideration the fundamentals of the economy. The current distortion in the exchange market then reflects the uncertainty of investors toward the future of the economy. He explained that the recent decision of the government to sink money via the National Investment Bank into Suez for Cement, a private company with 38 per cent ownership by Ciment Français, is a confusing signal. Investors are unsure whether to interpret this as a sign that the government is encouraging private foreign investment or whether it is simply trying to maintain direct control over certain sectors of the economy. Foreign investors face also costly difficulties in transferring dividends and profits outside the country, due to the difficulty of obtaining foreign currency in the formal market. The process routinely takes up to two weeks, while exchange rate differences can eat away at profits. The government responded to these concerns two weeks ago by creating a new foreign investors' fund which would receive foreign investments and facilitate exchange for hard currency. The political tension in the region and the recent Standard and Poor's downgrading of Egypt's long term credit worthiness in local currency, while the outlook for foreign currency became negative, are not ameliorating the situation. "We're witnessing fewer inquiries from investors, especially from newcomers, about the Egyptian economy. Actually they're facing difficulties in their own markets, especially in Europe, so they're also waiting for more clarification on the evolution of the Egyptian economy," says Guiraud. Indeed, the government has repeatedly stressed that foreign investments are a crucial economic catalyst to stimulate growth and employment opportunities in the economy, while helping to develop an export sector that relies on modern technology and sound management. The increase in public expenditures increases the government's need for an inflow of foreign resources to finance growth. The current budget deficit has reached actually nearly 6.5 per cent of GDP and is expected to rise to seven per cent this year. The government deficit has been a factor in the decline of savings rates to nearly 12.5-15 per cent of GDP, down from 18- 20 per cent in the mid-90s. Economists said that Egypt needs rates to be between 22-25 per cent to help propel an annual growth of five per cent. With this in mind, the government strategy is to fill the savings gap from abroad through foreign investments and loans. Since the government is reluctant to repeat the painful experience of the late 80s of a mushrooming foreign debt burden, and is diligently struggling to keep it around its current level of $28 billion, there is no alternative readily available other than revived foreign investment. "We need nearly $2 billion annually of foreign investments to close the savings gap and make GDP growth five per cent. We're receiving only a quarter of that as the investment climate is not stimulating," says Fakhri El-Fiqqi, professor of economics in Cairo University. He explained that recent foreign investment generally came to Egypt through privatisation or backed by government guarantees. But very little has come by simple entrepreneurial initiative due to the lack of strong economic signals that Egypt is a secure place to do business. "It's not that the government is missing a clear vision for reforms and the future, but it's not succeeding in finding the mechanisms to put them in place. Indeed, recent reforms have been made separately, like isolated islands, without coordination or harmonisation. An agreement with the International Monetary Fund for a new programme of reform actually seems indispensable to regain credibility and international confidence," says El- Fiqqi. In El-Fiqqi's opinion, the reforms of the last few years have been too haphazard to reassure foreign investors, meaning that the reforms have had little positive impact on the economy while government credibility has been ailing. A comprehensive reform programme with a strictly followed time table, designed with IMF advice, would be a sign of wholehearted commitment and help regain investors' interest.
