Lifting Egypt's Economic Curse

With four despots ousted - one of them killed - and two clinging on, the aftershocks of the Arab Spring will reverberate for years. But 12 months on, what are the business prospects for North Africa, cradle of the Jasmine Revolution?

As 2012 dawned, foreign investors could be forgiven for giving Egypt a wide berth. Scenes of protestors still being beaten, a military determined to hang on to power, a public purse haemorrhaging by the day, a plunging stock market and ratings downgrades are not exactly incentives, even among those who welcomed the country's revolution. More recent images of deaths at a soccer riot and bulletins on the kidnappings of Westerners have hardly helped.

Turn the page, though, and another view emerges. Gurus such as Goldman Sachs's Jim O'Neill and Templeton's Mike Mobius are saying that Egypt, with its population of 85 million, could soon outperform the BRICs. The reasons: its rapidly growing, educated and multilingual population, its strategic location between Europe, Africa and the Middle East, its oil and gas reserves and an economy that has huge industrial and agricultural resources, as well as great potential in tourism and construction.

Indeed, London-based O'Neill maintains that Egypt "could be one of the top 10 contributors to global GDP this decade, adding well over $2trn". In contrast, the number of people older than 65 in Brazil, Russia, India and China will rise 46% to 295 million by 2020, and to 412 million by 2030, the UN estimates. The number of young workers and consumers, however, will shrink to 61 million.

This, O'Neill's team reports, will shrink labour forces and curb expansion in the BRICs, hitting global growth. Egypt and the other 'CIVETS' (Columbia, Indonesia, Vietnam, Turkey and South Africa) may be a better bet, they suggest. S&P's 60 Price Return Index for the CIVETS has risen by 78% since 2009, compared with 52% for the MSCI BRIC Index.

Mobius, whose Hong Kong-based Templeton Emerging Markets manages more than $40bn in investments, says frontier countries like Egypt, Nigeria and Argentina "are now in the position that emerging markets like the BRICs were 20 years ago". Many are "in their take-offstage where self-sustaining development is taking place as a result of high consumer spending". In Egypt, telecoms, consumer goods, auto-makers, energy, metals and minerals will be particularly attractive, he says. Despite its turmoil, AT Kearney's Global Services Location index ranked Egypt fourth in the world for offshoring and outsourcing in 2011, up from 13th in 2007.

Companies such as Vodafone, Motorola, IBM, Xerox, Microsoft, Hewlett Packard, Ericsson and Intel are expanding their operations in Egypt's ICT and telecoms sector, which accounts for 11% of GDP and more than $1bn in exports. Indeed, British officials estimate that the demand for ICT, not least because of all the new local start-ups, could nudge $5bn a year by the end of 2013. Vodafone is going ahead with additional investments worth $3bn. Yasser Elkady, CEO of Egypt's Information Technology Industry Development Agency, says that there have been "17 new investments by multinationals in the past two years [with] a number of substantial deals in the past 12 months" and "a 12% increase in the number of ICT companies in Egypt, and a nearly 10% increase in the number of people employed in the sector".

Motorola, Sweden's Electrolux, and Valeo, the French automotive supplier, are also expanding to take advantage of the country's wealth of engineering graduates and its extensive assembly and manufacturing industries. Motorola is setting up an engineering centre in Cairo to service its regional operations, while Electrolux acquired a majority shareholding in Egypt's dominant electric appliance manufacturer, the Olympic Group, last December to take advantage of rising local demand, as well as in the group's extensive export markets throughout the Middle East and North Africa.

Egypt's vast potential in agriculture, agribusiness, textiles and the food and beverage sector is also exciting foreign interest again, despite red tape. Britain's Marks & Spencer is one of the latest entrants, joining Unilever, Cadbury, Danone, Heinz, Kraft, Sara Lee, Calvin Klein and Coca-Cola. As well as hoping to gain a larger share of growing domestic and regional markets, they are attracted by the government's ambitious programme to reclaim desert land for 'mega-farms' and to invest in more high-value production and processing as part of an initiative to create 500,000 jobs by 2020.

"The fundamentals of the Egyptian market are strong, with a favourable demographic profile, a diversified economy and a strategic geographic location," observes Yaser Gamali, head of HSBC Global Banking and Markets in Cairo. Egypt can expect "to see growth strengthen in 2012. Delivery of the regional and international aid pledges, such as IMF funding, should reduce its fiscal deficit." A weaker currency will help the country's competitiveness in industry and tourism, he adds. "HSBC expects not only a pick-up in foreign investment in 2012, but also domestic consumption should progressively pick up, after having been put on hold last year."

"The foreign reserves lost $18bn or 50% after the revolution," Hisham Ramez, vice-president of Commercial International Bank, one of Egypt's largest private lenders, reported mid-January. "But we can overcome the crisis, especially as the infrastructure is still in place efficiently, and the banking system can contribute to growth and development. Egypt's external debt is not more than 16% of GDP," he added, noting that "most of this is long-term".

"We think countries like Egypt and Tunisia will hold up better than some of the Eastern European states when they embarked upon their transitions," says Florence Eid, founder of the advisory firm Arabia Monitor. "Price stability has been maintained, and input-led growth will support that going forward."

Meanwhile, foreign investors are slowly being reassured by indications that although the Islamic parties hold an overwhelming majority, parliament will put prosperity first. Even the Muslim Brotherhood, which won more than 45% of the seats in last year's election, has distanced itself from the hardline Salafists (who won some 20% of the vote), wooing instead the smaller liberal and secular parties. It has gone to great lengths to reassure investors that it is committed to an open, transparent economy and to the protection of human rights, minorities and women. Shibley Telhami, a professor at the University of Maryland, points out that Egypt will want to continue to receive US and other foreign aid in an effort to restore economic growth, which has fallen from about 5% before the revolution to around 1%. "It is also unlikely to ban alcohol or bikinis as it tries to revive tourism."

There have been fears that the party would revert to socialism as in the 1960s and 70s, or embark on a massive nationalisation programme, concedes Mahmoud Ghozlan, a Brotherhood spokesman in Cairo. "We have sought to reassure people that a free market in Egypt is the only way forward," he says. Former stock exchange chairman Mohamed Abdel Salam, who is now a top adviser, backs this view but feels that the new government may allow more state-controlled companies to list as a way of sharing the country's wealth.

Support from top officials in the US, the UK and Germany for the Islamic-led legislature, including new policies to encourage trade and private-sector investment, is also rekindling hope. So too is the promise of billions of dollars of new financial aid from the IMF, the World Bank, the London-based European Bank for Reconstruction and Development (EBRD) and the European Investment Bank in Luxembourg, on top of the $4.4bn pledged by Qatar and Saudi Arabia.

The EBRD could invest up to €1bn a year in Egypt, "the single largest part" of the €2.5bn the bank plans to allocate annually to the emerging Arab democracies, says EBRD spokesman Anthony Williams. About 70%-80% of the funding would go to support the private sector, particularly small and medium-sized enterprises.

These "are best placed to create employment, especially among the unemployed youth". Priority would be given to "financial services, agriculture and municipal services".

Private as well as state funding is also expected to increase from investors elsewhere in the Arab world. Arab banks "continue to be quite expansive" in Egypt, observes George Kanaan, CEO of the Arab Bankers Association in London. "The National Bank of Abu Dhabi and Banque Audi in Lebanon, for example, already have a large presence there. They have big plans for Egypt."

Despite exports holding up well, few analysts doubt that in the short term the going will be hard, given the downturn in Europe. But once a constitution is agreed, and presidential elections are held in June, the growth rate is likely to recover rapidly, they say. So too is investment in the stock market, particularly by Egyptians at home and abroad. (The benchmark EGX 30 Index leaped 28% in January, the best monthly gain in seven years.) And finance minister Mumtaz Al Saeed is reducing the budget deficit, expected to drop to 8.6% by June from 11% last year. On that score at least, his European counterparts must be envious.