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| Fiscal and regulatory reform is needed if Cairo is to succeed in creating sustainable and broadly based economic growth |
"When I rang our clients this time last year and said they should invest in Egypt, they laughed. I rang them up a few months later and told them they'd missed returns of 13%. I still didn't get any calls. I rang them up a few months later and told them they'd missed returns of 38%. That started to wake them up. And when in the next call I said 45% we really started to get some interest." Mohamed Younes, chairman of Concord International Investments, laughs as he recalls the uphill struggle to interest his clients - specialist foreign equity buyers and high-net-worth individuals - in a country that has suffered from its association with the Middle East conflict and the war against terrorism.
In particular, Younes is dismayed by what he sees as "the absolute dichotomy between perception and reality". By this he means that investors assume that the Egyptian economy, given its dependence on tourism, must have nose-dived after September 11 and then the invasion of Iraq.
In fact a brief history of the balance of payments deficit tells a different story.
In 2000 the deficit was around $4.4 billion - $3.3 billion taking into account privatization proceeds. By June 2001 it had fallen more than 75% to around $800 million. Then came September 11 - an event that forced the government to revise predictions for the deficit to $2.2 billion. The predictions were wrong. Tourism held up, Suez Canal revenues held up, remittances from Egyptians abroad held up.
In June 2002 the deficit was $447 million - though after a $1 billion Eurobond - on GDP of $84 billion. As of December the balance of payments was in surplus. After the float and devaluation of the pound earlier this year, the currency black market is now just 5% of the trading market and black market rates are only about 3% off the official market rate. In Younes's view: "The fundamentals are fabulous. We have companies here with an 18% to 20% dividend yield trading on five times earnings with the prospect of currency strengthening." Of course Younes is paid to be an optimist. If no-one buys Egypt, no-one uses Concord. But there is other good news.
The budget deficit is down from 20% of GDP in 1991 to around 2.5% of GDP now. Foreign debt as a percentage of GDP has dropped from 77.9% of GDP in 1991 to 32.1% in 2002. And, perhaps most significant of all, Egypt is set to move up the ranks of oil and gas producers and exporters after a series of recent discoveries.
Oil output in Egypt, deemed a mature producer, had declined in recent years to about 630,000 barrels per day (bpd) at the end of 2002 from around 900,000 bpd in the mid-1990s. However, in May BP Egypt announced the largest oil discovery in the Gulf of Suez in 14 years. The Saqqara field will pump at 60,000 bpd.
In July the Apache Corporation announced its most significant discovery to date in the country's Western Desert. According to Apache CEO and president G Steven Farris: "It is perhaps the most significant discovery in Apache's 49-year history and establishes the Western Desert as an important hydrocarbon province well into the 21st century."
Export liquidity
The country is also gearing up to become a major player in the liquefied natural gas (LNG) market. The first exports of LNG from Egypt are set to start in December 2004 from a project in Damietta involving Spain's Unión Fenosa.
The $1 billion project will produce the largest capacity and fastest developed LNG plant in the world and will generate substantial export earnings for Egypt. The UK's BG Group is involved in two significant export projects, including an export complex at Idku involving Gaz de France and Malaysian company Petronas. And an underwater pipeline to carry Egyptian natural gas to energy-scarce Jordan was recently inaugurated by Jordanian King Abdullah II and Egyptian President Hosni Mubarak in the Red Sea resort of Aqaba. The 16km pipeline runs from the Egyptian port city of Taba to Jordan's Aqaba, from where it is expected to be extended to northern Jordan, Lebanon, Syria, Cyprus, Turkey and Europe.
By 2006 Egypt expects to be exporting gas not just to its immediate neighbours and Europe but even the US.
Most encouraging of all is the government's attitude to foreign participation. Egyptian minister of petroleum Sami Fahmi says: "We want the support of foreign companies and we want to cooperate with them. We let them select their own acreage and do not try to keep sites from them."
Much still to do
However, in key respects, Egypt suffers many of the ills of other emerging markets. Foremost among these is the dominance of government in economic affairs. This is hardly surprising after 40 years of complete nationalization, but the price of government control, in terms of mismanagement and workforce conditioning, has been huge and will continue to depress growth and investment for years to come.
At the micro level, as elsewhere, an initial battle with inflation seemed to have been won only for fundamental imbalances to remain. Having brought inflation down to an average annual level of 2.3% in 2001 - it was almost 20% in the early 1990s - the government now has to face the consequences of this year's liberalization of the Egyptian pound. The official inflation index, the CPI, is measured from a basket of subsidized goods and is therefore no indicator of true inflationary pressures. Even with the government absorbing price rises in core goods and services, foreign economists believe that CPI inflation will rise to 4.3% in 2003. The true rate is estimated to be closer to 10% to 15% for the middle classes - and rising.
Worse, economic growth is sluggish. The Economist Intelligence Unit estimates that real GDP growth in fiscal 2003 was just 1.8%, with the economy suffering from the high interest rates needed to support the currency and from a lack of hard currency to pay for imports and raw materials. For a country of 68 million people growing by about 2 million a year, this is not fast enough.