What does Egypt’s ‘big economy’ represent for investors? Dr Amr Hassanein, Chairman of the Middle East Rating and Investors Services (MERIS), Moody’s affiliate for Egypt and other countries in the region, discusses Egyptians’ high purchasing power, their country’s achievements in recent years, and its high profit margins.
Egypt has been experiencing structural reforms implemented by this newly elected government after years of turmoil following the Arab Spring, which have put the country back on track within a stable framework. What would you define as the most important achievements in recent years?
The main achievement is that the current administration has managed to gain popularity among the people, and to maintain that level of popularity and of confidence. Right after the Arab Spring, confidence levels in the government had gone very low. With the current administration, that confidence level has gone back up.
The second achievement is the general level of security, which has improved to a great extent. Since the Arab Spring and since the Revolution, Egypt has gone through many internal security breaches. We used to have terrorist activities every other day, and we local Egyptians used to suffer from cars, purses and money being stolen.
All of this has subsided to a great extent, almost to the point of being non-existent. People are able now to go about and do their businesses in a very normal way. Before, there were child and adult abductions, as well as businesspeople’s. All of this has stopped and people have started going back to their normal lives. Internal security has improved to a great extent.
At the economic level, I can quote a major achievement, which is the Suez Canal. There are two things I can highlight about the Suez Canal project. The first one is the ability to raise local funding, which is related to what I mentioned about the level of confidence. Had people not had confidence in the administration, they would not have been able to raise the equivalent of $8 billion in a matter of six or seven days.
This is a major achievement itself, and it has led the rating agencies to realize that there is plenty of internal funding available. The level of internal funding in Egypt was not known before. This incident came to make the world recognize that there is plenty of internal funding. And, mind you, more than 50% of that money came from outside the banking sector. The fact that internal funding is available, and that a good part of this funding is yet untapped and yet unknown, that in itself was an achievement.
Then there is the fact that there was a promise to deliver the project within the year, when really it seemed it could not have been done in such time. And yet the promise was delivered, the promise was fulfilled and the project was completed within the year. I think this is a major achievement on the economic side.
How does this reinforced security and access to internal funding impact in the level of doing business in the country?
The improvement of security definitely adds to the security of the people and to the level of comfort, as measured in the Doing Business Index.
The internal funding thing is a very important aspect. What does internal funding mean? It means that the households in Egypt are not that poor, they do have cash. So, in terms of doing business, it shows that this is a big economy.
If you read the latest Moody’s report, they refer to something very interesting. They talk about Egypt being a highly diversified economy, a broad one, and also a big economy. The statement they used is that Egypt is multiples in orders of magnitude of similarly rated countries. If the GDP of a country on the same level is $30 billion, Egypt’s is $230 billion. It is a big economy.
What does this mean? It means that the consumer in Egypt is vibrant and strong. We have a market of 90 million people. Yes, many of them are poor. However, the overall purchasing power is very high. When they ask me, “How does this fit into investment?” The answer is that somebody who wants to establish a business here will find a big market.
I would say Egypt is the biggest market in the region, and it is a market that is capable. It has a lot of potential. The system was able to raise the equivalent of $8 billion in seven days. Imagine how much purchasing power there is! If anyone wants to establish a business here, they know that a good market exists provided that they have the proper product to sell. When there was a proper product to sell – such as the Suez Canal certificates – money became available very easily.
Not only in the Suez Canal but also in many other situations, the government has played a key role. The economy is growing at the moment, and 6% growth is expected to be achieved in the next years. What do you think will be the role of the government in the following years to assure economic stability?
The Suez Canal project was achieved by the government, but mainly by the army. This is a good thing, and it attests to how the armed forces are able to contribute to the economy of this country. The project was managed by the Suez Canal Authority, but the armed forces had a lot to do with it.
Going back to the government, the expected growth rate is 4.5% to 5%, which is good compared to the less than 2% that we went through in past years. However, the government still has a lot to do. At the moment, there is a strong feeling that the decision-making ability of the government can be tremendously improved.
Once the decision-making ability is unleashed, a whole new potential can be unleashed for this country. We need government people consisting of decision-makers who are strong and who are not afraid of making decisions. This is not a problem with the personnel themselves, as much as the system that needs to be enhanced in terms of laws, rules, regulations, accountability, transparency, and so on.
If we improve our rules of accountability and our rules of responsibility and delegation, I think the country’s whole potential can be unleashed and that the government can add a lot and do a lot.
Moody’s last report highlighted Egypt’s level of accountability and transparency, even though the institutional indicators were not that favorable for the country. How does this impact on the decision-making ability of the government and enforcing predictability?
Yes, that is correct. The transparency levels of the government with the international community are at higher levels than what they used to be before. The government has learnt how to produce and present its figures in a proper way, and that has been one of the good things that rating agencies have started to see when compared to previous years.
What we are talking about here in terms of accountability and transparency is the local decision-making structure, and where the level of accountability begins and where it stops. We would like to feel that decision makers are protected when they make a decision, and the level of accountability extends only to the point where a criminal activity was behind the decision. This is where the level of accountability should stop; it should not extend beyond that.
But if, for example, an action took place due to lack of proper information, or due to absent information or even to a wrong decision with no criminal motive behind it, we believe the level of accountability should stop there. This is so that a decision maker can make decisions and not be afraid – what we call a ‘trembling hand’ when making decisions.
What this country needs is investment, which means spending. If officials were second-guessed in every check that they signed, and if they were held accountable after a few years for a decision to spend that they made a few years earlier with no criminal intent behind it, then decision-makers would be put in a very difficult situation.
We do not want to put our decision makers in these difficult situations, or else we are tying and reigning in a lot of potential, and depriving the country from using that potential.
Certainly, the country needs investment, and FDI is particularly important for facing large-scale projects.
Absolutely! There is lots of room for improvement of FDI.
What impact do the recent reforms in terms of taxation and the new law for foreign investment have in attracting more foreign investment into the country?
The new law for investment will have a very good impact, but of course we need the executive regulations of the law – which are not yet there – because these will tell you how the law will be interpreted.
But I think more important than the new law is the perception of how the law will be applied. It is very important that a decision-makers’ ability is unleashed to solve the problems of the investors. We have to admit investors still face a lot of red tape, they still face a lot of hesitation regarding the decision-makers’ ability to solve their problems and to help them jump over this red tape.
So it is the perception of how the law – not only this one, but other laws as well – will be applied that is important.
What determinant aspects can affect the forecasted growth for the country?
The forecasted growth has been set at 4.5% to 5%. After the plane crash took place [on October 31, 2015], I do not know whether this will be revised or not. However, I think there is lots of room to really improve and do things.
I have to admit that we have not yet been able to mobilize the real potential of this nation. The people of this nation have been so distracted and also fatigued by all that has been happening in the past few years, that they need some time to sober up and to make the decision to get back to work and work very hard.
If everybody starts going back to work and working very hard – which is what we need – and if the decision-makers are able to deal with proper decision-making ability and with red tape, I think we should be able to make it.
This country has been really blessed by a wide, diversified economy. There is no problem in promoting industry, agriculture, tourism, mining – not only metals, but also gas and petroleum. So there is a whole lot in this country. It is truly a very wide, diversified economy. Plus, there is a wide population with various abilities of spending. It is a big market in itself, and the biggest and most diversified economy in the region.
The potential is huge. All the country needs is mobilizing this potential, directing it in a common course of action for the benefit of the whole and unleashing the capacities of the decision-makers.
Where would you identify the main opportunities in Egypt for foreign investors that want to come into the country?
The power sector definitely provides a major source – whether we are talking about traditional or renewable generation of electricity; lots of transformation industries, based on agriculture; industries that need cheaper labor, such as textiles or tourism.
The fact that we currently have a problem due to the plane incident does not mean tourism is not a sector in which to invest. We are used to having problems and then months later the rebound takes place and we go back to normal.
There are also infrastructure projects, and there is a whole pipeline of infrastructure projects – public, private partnership projects. They are very diversified, on the wide scale and large scale. All these are opportunities.
What are the profit margins at the moment, here in Egypt?
Egypt is – and this is not something I am very happy to brag about – ranked at the second profit margin behind Brazil. The average profit margin is about 37%. But you see, high margins mean high risk, so Egypt has unfortunately been sold as a high-risk, high-profit economy. We do not want this to be the case; we would like to have lower risk and healthy margin levels.
If you ask most of the expert companies working in Egypt, they will tell you that among the highest profit margins that they achieve in the world are in Egypt.
Could you comment on how the finding of natural gas resources could help alleviate the balance of payment pressures?
Part of the pressure on the balance of payments is the need to import gas for our local use. So if we are able to get the gas for our local use from what we have, then we will not need to import that. That would have an immediate and direct impact on the balance of payments. The exploration and production of gas is expected to take approximately three to four years.
How does the fall of the international commodity price affect Egypt in that sense?
I think that in the long run this will be good for the country, because Egypt will consume its own gas, of which it is a net importer. Egypt imports almost three times as much gas as it exports. So if the commodity’s prices fall, Egypt’s balance of payments should improve.
I would like to discuss the bond issued in July last year, which marks the moment of Egypt re-entering the international markets. How do you see this moving forward?
When Egypt issued bonds, it was part of this whole program that was launched. This is probably one of maybe three or four tranches that are expected to go out. The whole program was launched from the beginning, and they are just fulfilling the various tranches of the same issue.
As a matter of fact, there is talk about issuing another bond, but I think the government has gone back on that, and is maybe thinking of other sources rather than issuing a bond right now.
We would like to have your opinion on what the challenges are for the developing economies and the role that these countries should play in terms of environmental awareness.
The debate regarding environment between developed and developing countries is a very interesting one. It seems that some nations have used up some good portions of the resources of the world, and other nations that have not yet even started using them are being asked to pay for that.
This is always a very interesting debate. It sounds like the nuclear club to me. There is a nuclear club, and they have decided to close it and that no one else should be allowed to enter into that club. And then, the countries that are outside the club are asking the countries that are inside ‘Are you going to get rid of the weapons that you have?’ And they answer that they will, but when they are asked ‘When?’ that answer never comes.
This is a very interesting debate or dialogue, the one between developed and developing countries regarding the environment. Sometimes it gets a little bit tricky, but I guess we all need to work towards a better environment. We have talked about the carbon credits, and about the transfer of these credits.
Egypt has one of the best readings in two things: wind energy and solar energy. We have the clearest days of the year for solar energy, and we have the best readings in Zaafarana in the Red Sea. There have been talks about developing clean electrical energy in Egypt and exporting that energy through cables all the way to Egypt.
These are the kinds of cooperation that should be talked about. These, I think, are the kinds of dialogues that should be had: using what resources are available in a clean and healthy way, and cooperating between both sides of the Mediterranean, or between both sides of the spectrum – developed and under-developed. There is room for the dialogue to take this form.
The bond between France and Egypt is now tighter than ever. There has been a lot of improvement in the relationship in various aspects – economic and political – and Egypt is a key ally of France within the region. However, there is sometimes a lack of communication and of commitment between the Western world and developing countries in Africa. How do you think this relationship between Egypt and France, in particular, could be improved?
France, over the past 20 to 30 years, has been among the strongest allies of the region. France has been among those countries that have always demonstrated a better and deeper understanding of the conflicted situation in the Middle East region, more than many other countries. France has been very sympathetic with certain rights in the region, and has demonstrated ability to intervene and to apply good diplomacy to solve problems in the region.
Regarding the relationship between Egypt and France, I think there has been a recent and significant improvement, and that there are lots of opportunities to advance and to thrive. I do not want to attribute that to the weapons-sale or stuff like that. On the contrary, the cultural aspects in both countries have always benefitted this relationship. Let us not forget that Egypt is a very old civilization, and France is as well, so there has always been cultural understanding between both nations.
The fact that a couple of transactions have recently taken place is not what is improving the relationship. The relationship has always been there, and it has been at the level of the nations. Most of our grandparents had to speak French as a second language, because these were the people that went through France’s existence in Egypt at certain points in time.
It is also well known that when the French went into a country, they cared a lot about leaving a legacy and a culture behind. The advent of understanding the hieroglyphics of our pharaonic culture, for example, was attributed to the French. The whole pharaonic age, for centuries and centuries, left all these hieroglyphics, but we were not able to decipher them. They were deciphered by Napoleon.
When Napoleon occupied Egypt, he brought with him a whole cast of scientists who worked on various aspects of the Egyptian culture and economy. One of the things that were done during that time was the deciphering of the Egyptian hieroglyphics. All the calligraphy was first deciphered by Napoleon’s scientists. And this is when we started reading what was on our walls, and what the pharaohs meant, what they intended, what the meaning of what they were saying was, what stories they had printed on the walls. The wealth of our pharonic history and its knowledge emanated from there.