Investing in Egypt after the 2011 revolution
“Egypt’s trade agreements with the Arab World, Europe and Asian Pacific are a tool yet to be optimized by foreign investors whom will tap into the potential and wealth that this nation encompasses,” noted Hisham Fahmy, Executive Director of American Chamber of Commerce in Egypt.
There are two main ways a foreigner can invest in Egypt: portfolio investment (e.g. stocks and bonds) and foreign direct investment (or FDI, which is bricks-and-mortar stuff like factories and buildings).
Whereas portfolio investments can be quickly sold and the money repatriated, foreign direct investment is immobile.
No surprise then that the government loves foreign direct investment but is generally ambivalent about portfolio investment—welcoming it when it flows in and cursing it when it flows out.
Having dried out due to the global economic crisis and later the 2011 sociopolitical revolution, foreign direct investment inflows successfully recovered in 2012. According to official estimates, foreign direct investment flux rose by 33% in the course of the fiscal year 2012/13.
According to the World Investment Report 2013 published by the UNCTAD, Egypt is the 7th largest recipient of foreign direct investment in Africa.
Foreign direct investment comes mainly from the European Union, the United States and the Arab countries. “Egypt’s trade agreements with the Arab World, Europe and Asian Pacific are a tool yet to be optimized by foreign investors whom will tap into the potential and wealth that this nation encompasses,” noted Hisham Fahmy, Executive Director of American Chamber of Commerce in Egypt.
“Security has been stepped up. You will also find much more security on the streets. The authorities have started to have confidence in themselves once more,” said Klaus Holm Laursen, CEO of the Suez Canal Container Terminal (SCCT).
Investments focus primarily on tourism, construction, telecommunications, financial services, energy and healthcare.
FDI in Egypt increased from $2,855.40 million in the fourth quarter of 2013 to $3,073.20 million in the first quarter of 2014.
What factors could discourage FDI flows to Egypt?
General uncertainty and the government. With its sudden announcement of changes in tax laws (as in the treatment of bonds by banks) or business practices (such as printing in the free zone), the government of Egypt has not exhibited a long-term commitment to playing by the rules.
Economies in transition often find it difficult to attract foreign direct investment because a couple of years of economic reform are not a long enough track record to off-set decades of socialist or protectionist policies.
Street violence, unrest and turmoil of course played a large role in investor’s withdrawal of Egypt. “However, I have to say that since last fall we have since good progress. Security has been stepped up. If you drive up to the Suez Canal you will see how much more security is available. You will also find much more security on the streets. The authorities have started to have confidence in themselves once more,” said Klaus Holm Laursen, CEO of the Suez Canal Container Terminal (SCCT).
Despite privatizations, the inefficient and loss-making public sector remains ubiquitous in some sectors.
Also, the rapid population growth continues to curtail the improvement of the standard of living for Egyptians. In fact, the country registers a delay in its infrastructures in which current investments are not able to make up for.
Other obstacles to investment—which are to be found also in other countries—include excessive bureaucracy, a shortage of skilled labor, and limited access to credit, slow and cumbersome customs procedures and non-tariff trade barriers.
In addition, “The problem in the business environment here in Egypt after the revolution is that most of the clerks or the highly placed government officials are afraid to take decisions. So, decisions are taking too long and this damages the whole business,” explained Sameh Attia, Managing Director of Engineering Square (Industrial Development Group), the largest industrial developer in Egypt.
Despite the negative points listed above, the FDI outlook for Egypt is gradually improving with the new government.
The role of the General Authority for Investment and Free Zones (GAFI)
Since September 2004, the General Authority for Investment and Free Zones (GAFI) has established an economic program to attract foreign investors, together with an average reduction of 35% customs duty and tariff simplification.
Though all the economic sectors are open to domestic and foreign investors, there are some that are especially targeted by the Law, which expressly provides the possibility to execute projects under the BOT (Build, Operate, Transfer) form, in the agricultural, industry, mining, tourism and hospitality, air travel, off-shore shipping transport, goods transport services, oil prospection and drilling, infrastructures more specifically for drinking water conveyance, roads, housing and used water recycling sectors.
Other sectors are added to this list depending on the actual needs (leasing, venture capital, creation of computer programs and software, etc.).
Privatization programs are also open to foreign investors.
Some sectors are considered strategic and hence subject to specific legislations: Aerospatiale, defense, newspaper publishing.
Following the revolution, Egypt put into place capital transfer restrictions that prevent foreign companies from sending more than $100,000 out of Egypt without a valid commercial purpose, original documentation and an approval by the Central Bank of Egypt.
Investors report that it can take several weeks for legitimate transfers to be executed.
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