While it was not a donor conference, the EEDC attracted pledges of $12.5 billion in assistance from Egypt’s allies in the Gulf Cooperation Council (GCC).
It also met high expectations, from the level of attendance, securing financial support, attracting FDI and presenting investment-enabling legislation.
Beyond that $12.5 billion figure, the EEDC served as a forum for the signing of $33.2 billion in investment agreements and a further $89 billion in MoUs/HoAs. Such a positive outcome is not without risks, which we see mainly centred around the enactment of the various reforms, availability of FX liquidity and maintaining reform momentum.
Our note that follows sheds light on the key successes of the conference and also highlights the risks that could hinder implementation.
How well-attended was the EEDC by global political leaders?
It was a given that global CEOs – including the heads of Coca-Cola, Siemens, BP, Abraaj Capital, GB Auto and Majid Al Futtaim – would attend, with the question being the level of political support.
In the end, delegations from 100 countries and 25 international organizations attended, led by heads of state and senior political leaders from the GCC. The presidents of the International Monetary Fund (IMF), European Bank for Reconstruction and Development, and European Investment Bank attended, as did the US Secretary of State John Kerry.
Various speakers praised the government for initiating a credible reform momentum, highlighting that continued reform is critical to take the economy to its next stage of economic growth.
Christine Lagarde, managing director of the IMF, gave a speech titled ‘Moment of Opportunity’, which carefully balanced between praising the government’s reforms and stressing that further reforms are needed to ease doing business, develop an export base and improve access to finance.
Is the GCC support package sufficient to finance Egypt’s funding gap?
Egypt received pledges of $4 billion from each of the United Arab Emirates, Saudi Arabia and Kuwait, and an additional $500 million from Oman. This support will prove a crucial tool in the Central Bank of Egypt’s ongoing drive to plug its funding gap and eradicate the parallel market for foreign exchange.
The package is divided into three main tranches – $6 billion in deposits, $6.25 billion of investments and $250 million in budget support – and will allow Egypt to finance its funding gap for the coming 12 to 18 months. This immediate influx of funding should provide the government with breathing space until the FDI cycle kicks in.
|Summary of contracts and MoUs|
|Source: Media Reports, EFG Hermes|
|EEDC final tally|
|Source: Media Reports, EFG Hermes|
Did the EEDC tally meet expectations?
In preparation for the Sharm El-Sheikh event, the government screened more than 120 projects – 52% of them in transportation, logistics, housing and utilities – to short-list 60. The most notable short-listed projects included the $45 billion new administrative capital, $21 billion in upstream oil and gas projects, and a further $99 billion in infrastructure and real estate.
The power sector was the main beneficiary of the sealed deals and MOUs, driven by the government’s recent efforts to introduce legislation to deregulate the sector. Regulations on the feed-in tariff for renewable energy were issued in December. The contours of the new electricity law, which deregulates the sector and transforms the government’s role from manager to regulator, was public about a month ago.
This overhaul opens the door for private-sector investment for the first time, allowing for considerable capacity additions and serving as a precursor for accelerated GDP growth.
The second-largest attractor of investment pledges was the real-estate sector, with two major real-estate project announcements, namely the $45 billion Capital Cairo project and the $19.0 billion PHD-Aabar JV, as well as several smaller scale investments.
Key take-away #1: We estimate that the announced contracts will translate into at least $2 billion to $3 billion of FDI per year over the coming five to seven years, with the deployment of funds likely to take place towards early 2016.
Key take-away #2: The multiplier effect of these investments has the potential to accelerate GDP growth to 6.0% by 2017. This is provided authorities start to act to expand the economy’s capacity to meet the expected pressures within two to three years.
Which begs the question:
Does the Egyptian economy have the capacity to absorb the announced investments?
Assessing four factors that affect the economy’s capacity – namely manpower, funding, construction materials and foreign exchange – we adopt the view that the economy is indeed capable of absorbing these investments.
In terms of building materials, the cement and steel sectors are running at a utilization rate of c.70% partially due to energy shortages. We therefore believe that there is capacity to absorb potential growth for the next three years.
However, both sectors will require capacity expansions in three to four years to accommodate higher investment levels.
What are the key risks following the conference?
Execution – the devil is in the details: While the government has taken bold steps in legislative reform, there is more to be done.
For example, the government is yet to issue the tariffs for coal-fired electricity, and the executive regulations of the new electricity law are yet to be announced, nearly six months after the publishing of the law in the official gazette. This legislative framework needs to be completed so that the focus can be shifted towards execution, with institutionalizing these reforms the underlying factor.
FX liquidity: Foreign-exchange availability and a natural stabilization of the balance of payments are by far the most critical short-term challenges facing the country’s economy. To put the numbers in context, a 10% yearly growth in imports means that the economy needs to provide an additional $6 billion in FX funding to fuel economic growth.
The Egyptian pound, in our view, needs to be further weakened to attract additional FDI and portfolio flows. Thus the government is likely to increasingly resort to external debt to finance the budget deficit and provide the needed FX liquidity to fuel growth.
Maintaining reform momentum: Egypt’s high fiscal deficit and debt levels require a further push in fiscal reforms in order to reach a more stable macro outlook. Constitutional obligations dictate that the government must increase spending on education, health and R&D by $21 billion in the three years to 2017.
Therefore, Egypt needs to deliver ongoing structural reforms, and large fiscal consolidation measures in particular, to sustain macro stability.
It is clearly too early to speculate on implementation, but as the EEDC and the New Suez Canal prove, the current council of ministers is capable of execution across multiple fronts simultaneously, and the engagement of investment bankers and the private sector to package and market major investment projects — including Airport City and others taken on by EFG Hermes at no cost to the state’s coffers — is a positive step.
Their ability to do so after the exhilaration policymakers clearly displayed in Sharm El-Sheikh will be tested daily, with the next major markers on the road being elections and the summertime opening of the New Suez Canal.