Investors Eye Egypt Even as Politics, Economy Remain Shaky

The Media Line Staff

Cairo, Egypt (TML) – There’s bloody sectarian violence, privatization deals are being rescinded, businessmen are being jailed and the prospects of short term economic growth remain dim. But even as the country is gripped by political and economic distress, foreign investors are taking a surprisingly positive view on Egypt.

Financial investors, particularly from the Gulf, have been putting money into Egypt’s stock market, as evidenced by the relative strength of the Egyptian pound and the cost of short-term money. But long-term investors are eyeing the country, too. Sweden’s Electrolux announced in April it was dusting off plans to acquire an Egyptian appliance maker and an unnamed Qatari group is reportedly in talks with the government to buy the iconic chain store Omar Effendi.

“There is a lot to be positive about,” Daniel Broby, chief investment officer at London-based Silk Invest, told The Media Line. “If you look where the yield on bonds is, for example, and what’s happened to the currency, the yields could have been substantially higher and the currency substantially lower than where they are were it not for institutional investors. A number of people are taking a second look.”

Foreign investment will be critical for Egypt, a key U.S. ally in the Middle East, as it navigates a difficult path to democratic government. As much as demonstrators called for freedom and political reform, they also want an economy that can provide jobs and a higher standard of living for the nation of 80 million. Short of cash itself, the government is counting on the private sector to build factories and drill the oil and gas wells that will do the trick.

Right now, the country’s political future is cloudy. Elections for parliament and president are slated for this autumn but, with the exception of the Islamist movement, the Muslim Brotherhood, political parties remain small and unorganized. Sectarian strife has exploded again after a hiatus of several weeks and Cairo is wracked by crime.

Meanwhile, Egypt’s economy shrank about 7% in the first quarter. The Institute for International Finance (IIF) forecasts gross domestic product will shrink 2.5% for all of 2011 and grow just 4.2% in 2012, far more slowly that it needs to in order to keep up with population growth and the need to create jobs. Finance Minister Samir Radwan has forecast foreign direct investment will fall 40% to $4.1 billion in the 2010/11 fiscal year from the previous year.

Indeed, foreign investment fell to $1.2 billion in the first quarter of the year, down by $400 million from the same period in 2010, but given Egypt’s troubles the decline was small. The Egypt pound has shed only a little more than 2% of its value since January 25, when mass protests began that toppled Egypt’s president, Husni Mubarak.

Yields on three-month bills are at their highest in two years because of the government’s yawning budget deficit, but they are not substantially more than before the revolution. Investors are cheerfully buying the debt. At yesterday’s auction of the bills, the government met its target of raising 5.5 billion Egyptian pounds ($927 million). It was the first time it hit it target after three misses.

Foreign currency reserves have fallen $8 billion since December to $28 billion, but considering the fact that tourism revenue has evaporated, the figures suggest that the much-feared phenomenon of capital flight hasn’t materialized, Broby said.

Last October, Electrolux was on its way to buying Olympic, Egypt’s biggest home appliance maker, for 2.2 billion pounds ($370 million). It pulled out in February, but Keith McLoughlin, its chief executive, told The Financial Times April 27 that he hoped to seal a deal by the end of the year.

“We’re spending time observing and assessing what is going on politically in the country and the wider region,” he told The FT. “But the [Olympic] business continues to be strong and we’re cautiously optimistic that we will complete the transaction.”

The sale of Omar Effendi follows a court ruling on May 6 that voided its 2006 sale to Saudi investor Jameel Al-Qanbeet, citing “several legal violations.” It is one of several privatization backtrackings that have worried investors and is subject to a legal appeal by Al-Qanbeet. Nevertheless, Egyptian Prime Minister Essam Sharaf negotiated the fate of Omar Effendi with Qataris in a deal that would sell management of the chain rather than its assets.

Egypt General Petroleum Corp. plans to auction licenses for oil exploration by the end of the year and for gas exploration by state-owned Egas afterwards, Petroleum Intelligence Weekly reported on Friday. But Egypt must also assuage concerns about political instability while sustaining costly – and politically sensitive – energy subsidies at home.

Egypt needs overseas companies’ capital and technology, but the price cap for selling gas from deep-water wells makes development uneconomic in some cases, though Egyptian authorities have shown flexibility on a case-by-case basis, Jill Junnola, North Africa correspondent for PIW, told The Media Line.

“Egypt has been seen as a country where you can do business,” she said. But whether it will stay that way remains to be seen. “Before parliamentary elections, it’s very difficult to say. I think Egypt will continue to want to attract foreign investment, and it has sent signals that it wants to keep the energy sector ticking over, but the political situation is in flux right now.”

All this won’t be enough to tide Egypt over the rough patch ahead. The International Monetary Fund said last Thursday that Egyptian authorities had indicated that they will require some $10 billion to $12 billion in loans from now through June 2012. The Washington Post reported that the U.S. is considering forgiving some $1 billion in debt.

“People in the street were demanding jobs and being squeezed by inflation, but you can’t address that without increasing the budget deficit, which is about 9.4% of GDP,” said Silk Invest’s Broby. “The budget deficit is ballooning and they need to do something about that. They need it to tide them over.”

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