The Report: Egypt 2014

Economy

With the elections over, Egypt’s economy is showing signs of an incipient recovery. After three years of stagnation the IMF anticipates GDP growth will reach 3.5% by 2015, although much of this may be making up for lost time. The new government has outlined an ambitious vision for the future development of the country, and taken the first steps towards solving a structural fiscal deficit. However, Egypt’s economy remains in a fragile state, and the reform that is essential to its long-term recovery is a challenging prospect for any government. The magnitude of this task is readily discernible in the nation’s balance sheet. While a process of fiscal reform had reduced Egypt’s budget deficit to 6.8% by the 2007/08 fiscal year, the political unrest that began in 2011 reversed the contraction, and by 2012/13 the nation was running a deficit of 13.7%. Egypt’s improving political situation, however, has brought with it a new sense of optimism about the economy. The potential for economic recovery over the coming year is real, but much depends on the new government’s ability to cement the putative stability achieved in 2014 and carry out its process of wholesale economic reform.

This chapter contains interviews with Hany Kadry Dimian, Minister of Finance; Anis Aclimandos, Chairman, American Chamber of Commerce in Egypt; Hassan Fahmy, Chairman, General Authority for Investment and Free Zones; and Ahmed Heikal, Chairman and Founder, Qalaa Holdings.

Banking

Despite a challenging economic backdrop, Egypt’s banks have succeeded in growing their assets and maintaining profitability over the past year. Their solid performance has been facilitated by a process of reform that began a decade ago. The banking network comprised 3651 branches in 2013, an increase of 41 branches over the previous year, which resulted in a density of 22,900 people per banking unit. Egypt’s banking sector has shown its ability to thrive even in turbulent times by posting a growth in activity over the past year, while maintaining profitability. Over the next year it is likely that the question of regulatory compliance will continue to occupy banks’ management across the sector as the central bank presses on with the Basel III Accord.

This chapter contains an interview with Hisham Ezz Al Arab, Chairman and Managing Director, Commercial International Bank.

Capital Markets

After a downturn in the wake of the 2011 revolution, the Egyptian Exchange (EGX) has staged an impressive recovery. Having dealt effectively with the fallout from the broader economic uncertainty, the management of the EGX has now turned its attention to deepening the market and widening its investor base. The EGX is relatively diverse compared to its regional peers, with the largest sector in 2013 being construction and materials (21.37%), followed by telecoms (15.7%), banking (14.3%) and financial services (7.29%), among several other significant sectors. Since 2010 investors have also had the option to direct their capital to a range of small- and mid-cap firms that are listed on a separate board, the Nile Stock Exchange (NILEX). The sub-market has a lower capital requirement of $7.1m and more flexible financial history and disclosure rules. While ratings agencies take a more favourable view of the nation’s economic prospects, significant structural reforms are still necessary to stabilise Egypt’s economy in the longer term.

This chapter contains interviews with Mohamed Omran, CEO, Egyptian Exchange (EGX) and Hussein Choucri, Chairman and Managing Director, HC Securities & Investment.

Insurance

The three years since the 2011 revolution have proven to be profitable for most of Egypt’s insurers, making it one of the few sectors to overcome the country’s economic malaise. Insurance companies collected LE13bn ($1.85bn) in premiums in the 2012/13 financial year, an increase of 18% from LE11bn ($1.56bn) in 2011/12. However, by most measures, Egypt’s insurance market remains small relative to those in the developed world and state players continue to dominate the arena. Although the insurance sector has fared better than most others in the turmoil that has engulfed Egypt, and has even seen its profits rise, industry players are hoping a period of greater stability will yield even better results and help to stimulate growth, expansion and profitability.

This chapter contains interviews with Sherif Samy, Chairman, Egyptian Financial Supervisory Authority (EFSA) and Abdel Raouf Kotb, Chairman, Insurance Federation of Egypt.

Energy & Utilities

The extraction of oil and gas has long played a central role in the Egyptian economy, accounting for 15.3% of the country’s GDP in the 2013/14 financial year. With exploration in the North African nation dating back to the 1880s, the government has a long history of working with private firms to develop and manage its resources. Over the course of 2014 Egypt’s energy sector has seen some welcome developments. The announcement of a debt-repayment programme for funds owed to international oil companies (IOCs) has restored confidence in the upstream segment and brought pledges of increased investment from larger operators such as the UK’s BP. In the meantime, exploration for new resources continues. However, considerable challenges remain to be overcome, and the power outages that Egyptian individuals and businesses faced in 2014 are likely to remain a part of daily life for some time to come.

This chapter contains interviews with Sherif Ismail, Minister of Petroleum and Mineral Resources; Ross Clarkson, CEO, TransGlobe; and Ibrahim Sarhan, Chairman, e-finance.

Industry & Retail

The manufacturing industry is a central part of Egypt’s economic engine, producing goods for the huge domestic market and for export across the world. Manufacturing industries accounted for 15.6% of GDP in the fiscal year 2013 (July 2012-June 2013). The sector was affected by the difficult post-revolution period, but as of 2014 the outlook seemed more positive. The sector’s recovery has been supported by a more favourable global economic climate, as well as by a return to greater stability following the presidential elections in early 2014. While the domestic market is the primary focus for many investors, Egypt’s relatively low costs, decades of experience in many sectors and skills base all make it an attractive location for production for export. Egypt has benefitted from particularly strong trade ties with Europe and the Middle East, but is now also turning its attention to Africa and Asia. Egypt’s retail market has continued to expand despite the economic and political challenges of the past few years, though consumer spending patterns have shifted in some areas towards lower-cost goods. Household retail spending was worth about $90.3bn in 2013, according to the General Authority for Investment and Free Zones, and is expected to keep rising at a steady clip over the next few years. Modern retail outlets are taking an increasing share of the market, benefitting from an expansion in dedicated commercial space, although traditional retailers – and indeed the informal sector – will continue to account for a large portion of Egyptians’ spending.

This chapter contains interviews with Mounir Fakhry Abdel Nour, Minister of Industry; Raouf Ghabbour, Chairman and CEO, Ghabbour Auto; Mark Duffelen, Regional General Manager, Xerox Middle East and Africa; and Basil El Baz, Chairman and CEO, Carbon Holdings.

Transport

From a collection of ideas to cut the number of commuters in Egypt who use their cars to go to work, to multibillion-dollar plans to speed up ships using the Suez Canal; from establishing giant logistics depots to mastermind food supplies to the country, the region and maybe further afield as well, to the futuristic notion of having a two-tier train service with a 350-km per hour train travelling over the top of regular services, there is an urgency to the many plans to get the country on the move. The scale and breadth of transport improvement schemes announced and planned in 2014 is impressive. The country’s finances are being brought back into order, restoring confidence to the markets and the international financial institutions on which Egypt will ultimately need to rely in order to pay for these programmes.

This chapter contains an interview with Mohab Mameesh, Chairman, Suez Canal Authority (SCA).

Telecoms & IT

The Egyptian telecoms sector is one of the most dynamic parts of the country’s economy, having weathered the economic slowdown over the past few years. Following the approval of a new universal licence in September 2014, the sector is set to see significant changes: a new mobile operator will be launched by legacy telco Telecom Egypt, the fixed-line market will be opened to mobile companies, and, within a few years, 4G networks will be rolled out and new international gateway licences offered. The long-awaited green light to universal licences will trigger some of the most significant changes in the market’s recent history. With a large domestic market and a strong export-oriented sector, Egypt’s ICT industry is one of the economy’s leading magnets for investment. Internet use is growing rapidly but still has substantial scope to expand. Egypt is also one of the world’s top outsourcing and offshoring destinations, leveraging a skilled workforce, low costs, an advantageous location and strong government support. While there are still challenges, including limited fixed-line broadband networks and modest household demand, greater liberalisation of infrastructure ownership along with a concerted push by the government will help boost activity in the coming years.

This chapter contains a roundtable with Saeed Al Hamli, CEO, Etisalat Misr; Yves Gauthier, CEO, Mobinil; and Hatem Dowidar, Chairman, Vodafone Egypt.

Construction & Real Estate

Like many sectors in the country, construction has had more than its fair share of challenges in recent years. Yet in spite of the downside risks, the prospects for the building industry have not been brighter for decades. Continuation of new cities around Cairo, complete with offices and shopping malls, plans for 1m new affordable homes in the social housing segment, the expansion of the Suez Canal, the development of 75,000 sq km of land on either side of the canal for industry and myriad other infrastructure schemes are turning Egypt into a hive of activity. The ambitiousness underpinning the construction plans – as well as the country’s finances – is certainly impressive, but project delivery will be crucial in sustaining the momentum, particularly given the externalities, such as job creation, that the country’s construction sector provides. After a sharp decline in real estate activity in 2011, the market has bounced back and many companies should see full-year figures for 2014 return to pre-revolution levels. The residential market was the strongest-performing sector in Cairo in the third quarter of 2014, with sales recovering ahead of rents in most locations as confidence returns. Going forward, the type and balance of future developments will almost certainly change to better meet the needs of a greater number of Egyptians. The 1m-home housing project could well see its completion date slip in face of the practicalities of producing so many units in an atmosphere where there is huge pressure on resources. Even so, with so many programmes being pushed by the government in all sectors of the economy, in a decade Egypt could look a very different country than that on display today.

This chapter contains interviews with Osama Bishai, CEO, Orascom Construction Industries and Iyad Malas, CEO, Majid Al Futtaim Holding.

Tourism

Tourism has long been an integral and major contributor to Egypt’s economy – reaching 11.3% of GDP in 2010 – as well as a ready source of foreign currency. Nevertheless, the 14.7m international visitors seen in 2010 had decreased by more than a third to 9.1m by 2013. Almost as worrying was Egypt’s 85th position among global tourism destinations ranked by the World Economic Forum. Yet, the Ministry of Tourism’s switch in emphasis to regional source markets paid off to such a degree that by mid-2014 it was forecasting 2m Arab visitors by the end of the year and an overall rise to 9.5m tourists despite a discouraging start. Continued stability is clearly key. The speed with which confidence returns to Egypt’s foreign source markets is impossible to predict. Retaining slightly over 9m tourists a year, even in the worst days, is perhaps a remarkable achievement and in any case a big base on which to build.

Agriculture

A major employer and contributor to GDP and export earnings, Egypt’s agriculture sector thrives despite limitations imposed by geography. The country has been one of the breadbaskets of a range of great empires, and the fertile Nile Delta is one of the region’s most important agricultural areas. Agriculture, forestry and fishing generated 14.5% of GDP in 2013, making it the third-largest contributor behind extractive industries and manufacturing. The agriculture sector grew by 3% in the fiscal year 2013 (July-June), edging very slightly up from 2.9% in 2012, according to Bank Audi. The bank expects a similar figure for the 2014 fiscal year, once data are in, following 2.9% growth in the early months. Egypt will continue to balance agricultural production for its large, growing population, and export-oriented output, like citrus, that is an important earner of foreign currency and attracts foreign investment. Investors should see growing opportunities in Egypt’s moves to boost output by increasing desert cultivation and yields, alongside efforts to consolidate and improve infrastructure.

This chapter contains an interview with Adel El Beltagy, Minister of Agriculture and Land Reclamation.

Media & Advertising

Egyptian media caters to a population of nearly 90m individuals, more than 60m of which are over the age of 15. However, given high rates of illiteracy and wealth disparity, industry players must adapt to a diverse audience. The industry is able to extend far beyond the country’s borders to tap into a broader base of more than 300m readers, viewers and listeners across the Arabic-speaking world with its books, magazines, films, radio and television programmes. Egypt’s advertising sector benefits from strong, long-term fundamentals, although the political turbulence of the past three years has been challenging. However, with a new presidential administration in place and greater stability in the economic environment, the sector could see a rebound in the coming months as firms begin to increase spending once again.

Health & Education

The largest country in the Arab world, Egypt has well-established medical facilities. However, the health sector faces significant challenges in caring for a rapidly growing population using a system hampered by structural weaknesses. In its 2014 constitution, the Egyptian government pledged to devote 3% of GDP to health care. With pressing matters of security and political stability facing the next government, health care workers are not anticipating radical reforms immediately. Yet the consensus is that reforms must come in the medium term to improve standards and services, reduce inefficiencies and inequality, and prepare the system for the pressures involved in dealing with a rapidly growing population. The education system in Egypt currently faces many challenges as it seeks to improve and better prepare the country’s young people to join the workforce. One of the biggest component groups of Egypt’s jobless are graduates, who account for 33% of the total. Optimism was sparked by the new constitution, which came into force in January 2014. Article 238 stipulates that education must receive expenditure to the value of at least 4% of GDP each year. Yet increasing funding cannot be the only solution; the reform of curricula, implementation of technology and improvement in teaching are all also urgent requirements.

This chapter contains interviews with Hamed Sherif, Chairman, Misr International Hospital and Mahmoud Abo El Nasr, Minister of Education.

Tax

In conjunction with Deloitte, OBG explores the taxation system, examining Egypt’s investor-friendly environment.

Legal Framework

OBG introduces the reader to the different aspects of the legal system in Egypt, in partnership with Helmy, Hamza & Partners.

This chapter includes a viewpoint from Mohamad Talaat, Co-Managing Partner, Helmy, Hamza & Partners.

The Guide

This section includes information on hotels, government and other listings, alongside useful tips for visitors on topics like currency, visas, language, communications, dress, business hours and electricity.

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