In terms of Egypt’s ability to respond to the current global financial crisis, the government should be grateful that it did not strike a few years earlier.

The programme of reforms carried out by the Egyptian government, which came to power in 2004, have ushered in a new period of prosperity that has significantly bolstered the economy, propelling gross domestic product (GDP) growth to more than 7 per cent a year for the past two years, from less than 2 per cent in 2002 and 2003.

The most notable reform has been the aggressive consolidation of the Egyptian banking sector, which had long suffered from a legacy of non-performing loans and inadequate capitalisation.

Economic reforms

This reform programme has led to the number of banks in Egypt falling from 57 in 2004 to 34 in 2007, with those surviving having far stronger balance sheets. Today, the banks’ average loan-to-deposit ratio stands at 56 per cent.

“If the banking reforms had not happened, our banking and finance sector would be in a critical condition today,” says Egyptian Investment Minister Mahmoud Mohieldin.

“However, unlike most countries in the world, our banks are not exposed to toxic assets, our liquidity is sound and there has been no need for a financial sector bailout.”

But Egypt has not shied away from implementing economic reforms across the board. The government has more than halved customs tax from an average of 14.6 per cent to 6.9 per cent, undertaken sweeping tax reforms that have reduced company tax from 40 per cent to 20 per cent, and income tax to a maximum of 20 per cent, reduced registration costs for start-up businesses, improved its credit information systems and opened up the Egyptian stock exchange to foreign companies.

These reforms have allowed Egypt to take considerable strides towards improving its business environment and, for the third time in the past four years, have enabled Cairo to take a place among the world’s top 10 countries in terms of reforming business regulations, according to the Doing Business 2009 report from the World Bank.

The Global Economics report published by US investment bank Merrill Lynch in November 2008 classifies Egypt as one of the 10 countries that are least vulnerable to a downturn. Meanwhile, investment bank Credit Suisse ranks it as the equal seventh least vulnerable economy in the world. As a result, Egypt has been receiving unpre-cedented levels of foreign direct investment (FDI), which increased from $2.1bn in 2003-04 to $13.2bn in 2007-08, exceeding its target of $11bn for that year.

But as the global recession began to have an impact, the FDI fell to $4bn between July and December 2008, from $7.7bn in the same period a year earlier, a decline of 48 per cent.

Mohieldin predicts that FDI will reach a total of $7.5bn for the 2008-09 fiscal year – almost a 50 per cent drop on the previous year’s figure of $13.2bn.

Because of dampened external demand, those sectors of the economy that are dependent on foreign revenues have suffered a sharp decline in growth, particularly tourist traffic and Suez Canal transit revenues. Consequently, Egypt has unveiled a $2.7bn stimulus package dedicated to infrastructure projects.

“The crisis has resulted in some positive by-products, most notably in our case the enthusiasm of many investors – at home, in the Arab world and in many Asian countries – to invest in infrastructure projects, and we are trying to capitalise on this,” says Mohieldin.

According to Mohieldin, the Investment Ministry will shortly begin tendering 52 infrastructure projects with investment opportunities of just under $25bn, financed through public-private partnerships (PPPs) or project finance models. These projects will include road networks, ports and traditional and renewable energy schemes, all of which will be geographically diversified.

Foreign investment

“The FDI in the past three to four years has started to become very well diversified as we have seen the rise of the eastern hemisphere in Egypt’s investment portfolio,” says Mohieldin.

“China, India and other Asian countries have begun contributing nicely, and about 40 per cent has been originating in the Gulf states.”

Egypt is now the largest recipient of FDI from GCC states. The share of GCC funds in Egypt’s total FDI increased from 4.56 per cent in 2005 to 25.2 per cent in 2007.

Despite the current global financial turmoil, which has led to oil prices falling sharply from historical highs of $147 a barrel in July 2008 to about $50 a barrel today, Mohieldin is targeting future investment from the Gulf.

“Even at the current oil prices, I believe the surpluses that are in the Gulf are going to be searching for more tangible investments in areas that are geographically close,” he says.

According to a quarterly business report published by US consultant McKinsey & Company in July 2008, even in a scenario in which oil is at $50 a barrel, a conservative long-term estimate, the GCC countries would accumulate about $5 trillion by 2020.

“I think Gulf countries are going to be the main source of FDI in the non-oil sector in the coming two years,” says Mohieldin. “There is a huge interest in the agriculture sector from Emirati, Kuwaiti and Saudi investors, and Egypt will be taking a good share of that.”

Attracting investors

However, given that the project finance market has come to a near standstill, and capital inflows to emerging markets have dropped by more than 80 per cent to about $165bn, from about $929bn in 2007, attracting enough investment will be difficult.

Consequently, senior Egyptian government officials have been touring selected countries in the Middle East and Africa (Mena) region, and Asia to try to reach agreements with governments and major investors.

“I am fully aware that promoting these projects is not as easy as it used to be,” says Mohieldin. “But we are going to help co-finance many of these projects. While banks across the globe are complaining about a lack of liquidity, we have a 56 per cent loan-to-deposit ratio, which means we can help drive these projects forward.”

Mohieldin estimates that domestic banks will provide about $1.8bn in funding.

It is hoped that as the government proceeds with its fiscal stimulus package and spending on infrastructure projects is accelerated, more investors will be attracted and sectors with related activities will enjoy higher growth.

The efforts of the ministry to stimulate investment across the country through infrastructure projects will complement those of the General Authority for Investment & Free Zones (Gafi), which manages 10 general free zones and close to 300 smaller private zones based around individual firms throughout Egypt.

Gafi is also putting together an investment map of various regions across the country, with different investment zones designed to fit in with the strengths of the local economy. For example, Gafi is looking to develop a food-manufacturing zone in Upper Egypt, where at least 40 per cent of the country’s agricultural production takes place, as well as mining-related industries in areas that are generous in mineral resources, such as Aswan, Asyut and Wadi el-Gedid.

To date, it has launched six investment zones, five of which are dedicated to manufacturing and industry, and one to information and communication technology services.

“This is a planned way of developing the real resources of the country,” says Assem Ragab, chairman of Gafi.

“We are in the process of finalising five new investment zones, which includes our plan to transform the entire town of Luxor into an investment zone.”

At the end of last year, Egypt’s Petroleum Minister Sameh Fahmy confirmed that in extending the country’s natural gas network, the grid will be fully connected to all the Upper Egyptian governorates and will reach Aswan in the south of the country by the end of 2009.

“This will open up a lot of new opportunities for a variety of projects for fertilisers, cement, paper mills and other lines of projects that are not very competitive today because they are reliant on more expensive sources of energy,” says Ragab.

“We are currently working to position Egypt as a country for re-exporting bricks and mortar products, as well as more sophisticated products. There are now 1,000 multi-nationals using Egypt as a hub to export to neighbouring countries.”

Mohieldin says that if Egypt is to remain competitive for investors, it cannot just continue what it was doing in terms of reforms, but must “focus on speeding up the process of reform”.

The time it will take for the government’s expenditure on investment projects to have an effect on the economy will depend on the pace with which the government implements its fiscal stimulus packages.

The government is also looking to deregulate state-owned industries by transferring majority ownership of 85 state-owned Egyptian com-panies to the public by listing them on the Egyptian stock market, in an effort to continue its privatisation programme, which since 2004 has played a key role in attracting investment to the country.

Clearly, gaining access to finance will remain one of the government’s main challenges in the coming years. The lower volumes of total FDI, not just from the West but from countries across the world, including the GCC, will limit the resources previously available for a boom in service and manu-facturing activities.