By Alia Stouhy, Mahmoud El-Qesas, and Ahmed Daoud "The Suez Canal is a project any investment banker would dream of funding." So began Al-Borsa's conversation with Karim Helal, economic adviser to the Egyptian Chamber of Tourism and Chairman of the Asia-Egypt Business Association. Helal went on to say that there is a multitude of considerations in pegging down an effective method to fund the Canal. Of primary concern is the efficacy of investment certificates versus other savings instruments, as well as the future of interest rates, inflation, and growth in light of the current lack of liquidity. Helal believes that other opportunities to revitalise Egypt's economy must be explored, particularly in order to create an active market for bonds, stocks, and newer financial instruments such as revenue bonds. Helal explained that although those directly involved in financing the Canal would be more familiar with the details, the choice of financial instruments should have been left to investment banks with a more nationalistic strategy. In this way, appropriate investment vehicles could be made available depending on the stage of the project. The government recently announced a 10-year plan for the development of the Suez Canal, in which digging for a new channel would begin within one year, rather than three. Helal added that increasing the variety of investment packages could attract 50 times more investors than are currently contributing to the project, in addition to creating a broader class of financially literate investors. The number of investors in the stock market has hovered at around 50,000 since the speculation-driven credit crunch that undermined confidence in the market. Helal continued to point out that the United Kingdom deliberately launched British Telecom a year before it went public in order to bolster investor confidence and build hype for the company's IPO. He went on to say that Britain has devised new methods of privatising the public sector in order to further develop financial literacy and deepen market penetration. Additionally, they maintained high levels of employment and inflation while raising taxes and managing state assets in a professional manner. These are approaches that we must take into account as we move forward with the Suez project. He then pointed to the possibility of utilising foreign funds without compromising national security by offering foreign investors preferred shares with no voting rights, while also offering another portion of shares to Egyptians on the stock market in an attempt to bolster the capital market. Helal stressed that competition in the banking sector will increase in light of weak lending ratios and declining liquidity due to the issuance of new investment certificates. He also mentioned that loan to deposit ratios are still low compared to global ratios, averaging 45% versus 100% or greater in developed economies. Helal explained that investments in projects that complement the Suez Canal's operations, such as storage operations or ship repair, would encourage domestic and foreign investment in the Suez project itself. He also pointed out that large investment companies that may be attracted to the new Suez project would require a high level of logistical rigour. Helal believes that the cost of the project, which has been estimated at EGP 80bn, is dependent on funding from the Suez Canal Authority as well as long-term loans. This, along with long-term purchase agreements for specialised equipment, would place additional strain on the state budget. It is clear that the Suez Canal investment certificates present a good opportunity for investors, with yields of up to 12% via quarterly reinvestment, but this drains savings away from banks. Helal emphasised that there is currently no market for bonds in Egypt: "Any talk of a bond market in Egypt is pure fantasy." He went on to say that achieving social justice is difficult with such high poverty rates, and he believes that the international poverty line of $2 (EGP 15) per day is insufficient for humane living. He explained that the decision to raise energy prices was part of a strategy to combat inflation and take control of the public debt of over EGP 2tn. He pointed out that the annual public debt is more than EGP 220bn, which amounts to roughly EGP 600m per day. Helal stressed the need to increase tax revenues by reorganizing tax brackets and broadening the tax base, as former finance minister Boutros Boutros-Ghali did, rather than by raising tax rates themselves. He continued, noting that increasing production is one way to increase tax revenue. Producers must be encouraged to increase investment in order for income taxes to be lowered. In this context, Helal said that the Egyptian economy requires a growth rate of about 7%, roughly double the growth rate of the population, in order to begin an economic revival. This, he believes, will ensure the creation of employment opportunities. "Egypt is in need of foreign investment now more than ever," he said. Helal also believes that a minimum of five years is required to reach this rate of growth if this program is fully implemented. He then stressed that the government's plan to reach a rate of growth of 3.2% this year is impossible in light of the deteriorating economic situation, which is marked by multiple energy crises, the absence of foreign direct investment, and declining cash reserves. He stated that the decline in foreign exchange reserves has made the government incapable of paying dues on its foreign debt of $6.2bn. This has prompted several companies to decrease production, lowering the demand for energy and leaving the country in a vicious cycle of debt repayment and falling production. Helal condemned the nation's failure to utilise Egypt's abundant alternative energy sources, citing the volume of technical studies that have found that Egypt has the most hours of direct sunlight of any nation on earth. Additionally, Egypt has sufficient wind speeds to generate electricity from wind farms. He then mentioned that the energy crisis in Egypt has arisen due to distorted prices and the high cost of producing solar power and wind power. He believes that the lack of legislation which establishes economical prices for alternative energy sources has also played a role, adding that former president Mubarak "should be held accountable for what he didn't do, rather than what he did." He added that Mubarak's mistakes became the driving force behind the revolution and the successive political turmoil that has lost Egypt $18bn in tourism revenue and $12bn of foreign direct investment. Helal, who also acts as an economic advisor for the Chamber of Tourism, has rejected the notion that domestic tourism will bring Egypt out of the current recession, stressing the vast returns that foreign tourism brings into the country. He pointed out that domestic tourism is not profitable enough to revitalise the industry due to the lower prices locals enjoy. In this context, Helal said there are many indications that Egypt's tourism sector will rebound now that most countries have lifted their travel bans and political stability has largely been attained. Helal noted that the exchange rate between Egypt and Asian countries has reached $10bn, including $8bn in Asian exports to Egypt and $2bn in Egyptian exports to Asia. He described Asian investors as cautious about where they place their money, so despite the benefit Asia derives from Egypt's pivotal geographic location, the past three years of political turmoil have deterred large investors. Helal is confident that Asian investments would return to Egypt as political stability returns to the country. Several Asian investors have expressed their desire to invest in new Suez Canal projects. He added that new economic legislation is necessary to reassure investors and attract foreign funds to the market. Helal revealed that the CEO of Abu Dhabi Investment Company (ADI) manages Islam-compliant investments valued at $60m for the Egyptian Drilling Company (EDC) via Abu Dhabi Islamic Bank. Their goal is to finance the company's future and revitalize exploration and refining. He added that the company managed more than $360m in loans during the first half of this year, including a $150m fund for the Maridive Group via Abu Dhabi Islamic Bank and the Arab-African Bank. Lastly, Helal mentioned that the company arranged a EGP 1.5bn loan to Al Nouran Multi Trading for a new EGP 2.5bn sugar plant. Three other banks, including the Bank of Abu Dhabi, have jointly provided a loan worth EGP 500m, and a further EGP 1bn was provided by an alliance of 10 other banks.
