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The American Chamber of Commerce in Egypt, Citigroup and The Bank of New York jointly hosted a conference entitled “ Egypt: Open for business” on March 16 at the Waldorf-Astoria Hotel in New York. US and Egyptian business executives attending the conference discussed the business and investment opportunities emerging in the Egyptian market as the government of Egypt continues its aggressive program of economic liberalization and privatization.
The one-day conference sought to acquaint potential investors with the transformations that are currently taking place in Egypt on the economic and trade fronts, and the effect these changes are having on the investment climate and the availability of business opportunities. It addressed the economic reform measures taken by the Egyptian government, the performance of the Egyptian economy in recent years, the opportunities for both direct and indirect investment in Egypt, and prospects for investment in the qualifying industrial zones (QIZs). Over 250 participants attended the conference, representing major financial and business corporations in the US.
The conference began with opening remarks by Taher Helmy, president of AmCham Egypt; Christopher Sturdy, managing director and global head of depositary receipts, The Bank of New York; and William Rhodes, senior vice chairman of Citigroup. Minister of Investment Mahmoud Mohieldin, who represented the Egyptian government at the conference, gave a keynote speech.
Session 1 discussed recent trends in Egypt’s economy with Mohamed El-Erian, president and CEO of Harvard Management Company, moderating the session and speakers Arvind Subramanian, head of the research department at the International Monetary Fund (IMF); Hisham Ezz Al-Arab, chairman and managing director of Commercial International Bank (CIB); and Stephen Taran, managing director of debt capital markets and sovereigns at Citibank, who gave a presentation entitled “Egypt: A case for rational exuberance?”
Taran discussed the reasons for the real and sustainable decline in Egypt’s risk premium including “broad-based economic reforms aimed at transforming the economy, increased room for the private sector, the refocused and reduced public sector, the potential for economic growth in the 6-percent range, and the country’s relatively low vulnerability to shocks.” He said external liquidity measures are strong and government debt is high but on a stable funding base.
He said the success of Egypt’s economic reform program is driving foreign investors’ “bullish sentiment.” Specifically, he noted that the exchange rate system has moved to a unified, floating rate, which has made Egypt more attractive to investors. He also lauded trade reforms such as reduced and simplified tariffs, abolishment of import fees and surcharges, reductions of fuel and food subsidies, cuts in corporate and personal income taxes, improved budgeting, better expenditure controls and treasury management, and accelerated privatization, which earned the state approximately $2.9 billion from July 2004 through December 2005.
Taran estimated that economic conditions point to growth in the range of 5-6 percent. He pointed out that from 2005 to 2006, domestic demand increased from 4.4 percent to an estimated 6 percent, while gross capital formation grew from 8.8 percent to 10 percent. Meanwhile, the current account balance dropped from 3.1 percent of GDP to 1.8 percent, and foreign exchange reserves rose from 18 percent of GDP to 23.5 percent during the same period.
Despite the favorable outlook, Taran cautioned that while external indicators underpin a lower risk premium such as low external debt service ratio, external liquidity ratio and external vulnerability indicator, domestic indicators highlight concerns including low gross domestic investment as a percentage of GDP as well as low GDP per capita. “Driving Egypt’s risk premium lower and bond ratings higher will require putting government debt on a declining trajectory since the pace of fiscal consolidation will largely determine the pace of upgrades,” Taran said. “It will also require human resource development, which is a key to raising productivity, and resilience of political institutions and leadership in meeting emerging political challenges, as politics will exert considerable influence on investment ranking.”
Session 2 addressed the issue of investing in Egypt with Omar Mohanna, chairman of Suez Cement and treasurer of AmCham Egypt, serving as moderator. Panelists included Robert Willumstad, former president and chief operating officer of Citigroup; Michel Accad, Citibank’s division head for the Middle East and Africa; James Williams, regional director for insurance at Overseas Private Investment Corporation; and Karim Ramadan, general manager of Microsoft Egypt and an AmCham Egypt board member.
Ziad Bahaa El-Din, chairman of the General Authority for Investment & Free Zones (GAFI), spoke about the recent developments that have improved the business climate in Egypt, including the surge in FDI, the doubling of invested capital, the wave of privatization, the stable currency, the rising growth rate and reduced inflation. “Investing in Egypt is a sound business opportunity due to our large domestic market; access to international markets via Europe, the Arab world, COMESA and QIZs; competitive input pricing in energy, land and skilled labor; vast infrastructure; and a diversified economy that is open to foreign investment,” he explained.
Bahaa El-Din described the reforms taking place as “further enhancing the business climate.” He briefly explained the new taxation policy, new customs policy, reinvigorated privatization program, banking sector reforms, introduction of mortgage finance, capital market regulation, and the opening of new sectors to investment and corporate governance reforms. He also highlighted the benefits reaped by streamlining investment procedures and opening the one-stop shop for investors.
Although much has already been done, Bahaa El-Din pointed out that the momentum will continue in the form of deeper reforms, institutional reforms and mechanisms that tackle the underlying issues. Specifically, he noted that deeper reforms will encompass access to land in the form of reformed industrial authority, registration of real estate and reduced cost of land, as well as the reduction of red tape with improved licensing facilities, and better transparency of rules.
Bahaa El-Din discussed the role of GAFI in improving and promoting the business climate in Egypt. “GAFI is making a transition from regulator to promoter/facilitator that will focus on company registration and licensing, one-stop shops, free zone management, a potential investor facilitation service, investor aftercare, research and information and policy advocacy,” he said. In addition, GAFI will focus on communication of the reformed investment environment and the proactive promotion of PPP projects in the areas of tourism, North Coast development, transport, development of East Port Said Port and industrial zone, new road networks and upgrading, railway development, specialized industrial zone development, agriculture and agribusiness, and industry.
Session 3 focused on the capital market with Mohamed Taymour, founder of EFG-Hermes and board member of AmCham Egypt, as moderator. The panelists included Philip Khoury, head of research at EFG-Hermes, and Mahmoud Salem, vice president for depositary receipts at The Bank of New York. As the session speaker, Sherif Raafat, former chairman of the Cairo & Alexandria Stock Exchanges (CASE), discussed how Egypt can benefit from regional market developments.
Raafat began by outlining the differences between the capital market in Egypt and the GCC, noting that Egypt has spent the last decade developing a strong market foundation including legislation and regulations that do not exist today in the GCC. He explained that the upswing and subsequent decline in GCC markets was primarily due to retail investors responding to start-up companies and IPO practices that encourage speculation. “ Egypt, however, receives mostly institutional investments and has developed a long-term strategy to adopt international best practices including appointing a strong capital market regulator and regulating the stock exchange,” he said. “If you have both depth and breadth in the market, as well as a broad collection of institutional players, you will get the stabilization effect from established institutions.”
He pointed out that there is a surplus of funds available in the region and Egypt needs to capitalize on those funds either through capital investment or the stock market. To do so, he recommended that Egypt speed up reforms and institution building, including pension reform such as retirement accounts and tax incentive structures, in order to introduce the long-term domestic investor to the Egyptian market.
Salem spoke on the topic of international investing opportunities in general and depository receipts (DRs) in particular. He noted that US equities account for only 13,000 of the 36,000 regularly traded stocks worldwide, and 60 percent of the world’s capitalization is outside of the US. Yet obstacles remain for international investors in non-US markets, especially as quotes and dividends are in foreign currencies and converting them to US dollars is costly and inefficient. In addition, clearing, trading and settlement in foreign countries is unfamiliar and cumbersome, and language barriers often exist.
He suggested a solution to overcoming these obstacles in the form of depositary receipts, which are US- or internationally-traded equities that represent home-market shares. “They can be used to list on an exchange or to raise capital in the US or globally and can be adapted to meet specific marketing needs,” he explained.
Following a brief history of the DR market from 1930 to 2005, Salem discussed their benefits to both issuers and investors. “DRs allow issuers to gain access to deep international capital markets and have flexible funding options, increase share valuation and liquidity, diversify and broaden their shareholder base, prepare for future acquisitions, express the international commitment of their company, and heighten the profile for their products and services,” he said.
Salem noted that investors can invest in more than 1,900 sponsored depositary receipts from 73 countries. By doing so, they receive a number of benefits. DRs offer quotes and dividends in US dollars, use international standards of clearing and settlement, circumvent countries’ foreign investment restrictions and offer improved access to information in English. “International equities are a good way to diversify your portfolio and DRs are a great way to access the international equity market,” he affirmed.
Following the session, a luncheon was held with guest speaker Nabil Fahmy, ambassador of Egypt to the US, who spoke of the great opportunities for Egyptian-US economic cooperation.
The final session of the conference, which discussed qualifying industrial zones, was moderated by Hamed Fahmy, managing director of Allied Corporation – Egypt and AmCham Egypt’s vice president for membership. The panelists included Tom Haugen, president of the Li & Fung Group; Bassem Sultan, managing director of Egyptian International Company for Knitting & Dyeing; and Wael Olama, managing director of Egyptian Spinning & Weaving Company. Ali Awni, head of the Ministry of Trade & Industry’s QIZ unit, spoke on opportunities for sourcing and investments.
Awni began by defining the QIZs as geographically-designated industrial areas in Egypt selected by the Egyptian government and approved by the US government. Factories located within those areas are granted quota- and duty-free access to the US market provided they comply with rules of origin stipulated in the agreement, such as the minimum 11.7-percent Israeli content requirement. Awni then outlined the mission of the government’s QIZ unit, which is to enable the successful implementation of the QIZ protocol. “The unit serves as the implementation arm for the Egyptian side of the QIZ Joint Committee. It works with all stakeholders to achieve our mission and includes the administrative branch, the QIZ information center, matchmaking branch, investments branch, as well as IT support and decision support, which provides information and analysis to support policy and executive decision-making,” he explained.
Awni highlighted key QIZ statistics and noted that as of Q4 2005 the number of QIZ exporters was 93, the total value of QIZ exports was $34.4 million and the total value of QIZ Israeli imports was $288.5 million. “There are positive indications of even more success in the future,” he said, “including expansion in capacity of all major players, major buyers exploring sourcing options from Egypt’s QIZs and an increase in FDI in textiles/apparel.”
On the issue of textiles and apparel, Awni noted that the sector is a main area of focus for industrial upgrading in Egypt due to its competitive advantage and job creation capabilities. Efforts to develop the sector aim to increase the base of exporters, promote backward integration and implement reforms that will greatly benefit the general business climate. However, he noted that the QIZs not only benefit textiles and apparel industries, but other industries as well including footwear, leather products, food and beverages and glassware.
In closing, Awni outlined a number of reasons why investors should be interested in investing in Egypt’s QIZs, such as the competitive advantages of operating from Egypt; low costs of labor, utilities and land; access to markets through trade agreements; the strong industrial base; new reforms with focus on the apparel/textile industry; and duty-free access to the US market, the largest consumer market in the world.
Media coverage of the conference and its message was carried on major international news networks such as Bloomberg, CNN and MSNBC. It was also broadcast on the Orbit and Star World satellite television networks, reaching millions of subscribers. In addition, hundreds of US and international publications carried interviews and conference highlights. |
