Promoting confidence: Foreign investment continues in spite of political uncertainties

Traditionally regarded as one of the largest destinations for foreign direct investment (FDI) in Africa, Egypt ranks alongside markets like South Africa and Nigeria. Indeed, the country is particularly attractive to foreign manufacturers for its export-friendly location, as well as a range of trade agreements it has in place, and its low labour costs.

Although FDI levels have fallen heavily since the 2011 revolution, several foreign companies have committed to high-profile new investments. In addition, low valuations against the backdrop of economic and political instability represent a potential opportunity for foreign companies, ahead of a number of developments in the pipeline that could boost foreign investor confidence in the long term.

NEW INVESTORS: Although Western countries have traditionally been the most prominent investors in the country, manufacturing is seeing major investment interest from large Asian and emerging markets such as South Korea, India, Turkey and Iran.

FDI inflows into Egypt had already been declining ahead of the 2011 revolution, against the backdrop of the international financial crisis, from $11.6bn in 2007 to $6.4bn in 2010, according to figures from the United Nations Conference on Trade and Development (UNCTAD); however, they subsequently fell much more steeply against the backdrop of political and economic turmoil, to just $483m in 2011. In the first half of 2012, FDI made a significant recovery, to $2.5bn, and then-President Mohammed Morsi in October 2012 said that in the course of trips abroad in the first three months following his election in June 2012 the country had secured $20bn worth of agreements for FDI. However in February 2013, Ashraf Al Araby, then minister for planning, said that foreign investment in the first half of the 2012/13 financial year (the last six months of 2012) was close to zero, following a statement from the central bank that FDI was down 94.1% in the first quarter of the financial year. Despite the drop in FDI, foreign firms – including some major multinationals – continue to invest in the country and in manufacturing in particular, attracted by factors such as low labour costs and a large local market.

“The country is like no other. It has a great geographical location for trading, and 72 of the countries it trades with are done without duty fees, including the US,” Tunç Özkan, chairman of Polaris Parks, a developer of industrial parks, told OBG. An association agreement with the EU, for example, provides for the elimination of tariffs on industrial goods and the Qualified Industrial Zone (QIZ) scheme allows for duty-free export to the US under certain conditions. Overall, the country has 115 international investment agreements in place with other nations, of which 100 are bilateral investment treaties, boosting its attractiveness as an investment destination. This ranks it first in North Africa.

ELECTRONICS: One of the foreign firms investing in Egypt to have attracted the most attention in the country in recent times is South Korean electronics major Samsung, which in February 2012 announced to local media plans to establish new manufacturing facilities in Egypt – its first in the region – with a phase one investment of around LE1.8bn ($257.9m).

The long-term manufacturing fundamentals of the country are robust, Duke Park, managing director of Samsung Egypt told OBG. “Egypt is a strategically located place to serve Middle East, Africa and Europe,” said Park, explaining the attraction of the country as an investment destination. “It also has a lot of skilled workers, though we will need to provide extensive training,” he told OBG.

EMERGING SOURCE MARKETS: Developing countries, in particular several BRIC nations as well as Turkey, are emerging as important investors in Egyptian industry and manufacturing. Prominent among them is India, especially in plastics and packaging. In March 2013, Egypt’s then-minister of investment, Osama Saleh, announced during a visit to India that Egypt had secured up to $400m of investment from two companies in the South Asian nation. The first of these was a planned investment from chemicals firm Sanmar of up to $300m to double capacity at its PVC factory in Port Said, in which it has already invested around $1bn and which is aimed at serving both the domestic and Turkish markets; the firm also signed a memorandum of understanding to establish a plastics parks for small and medium-sized enterprises. Samar, which is one of more than 350 Indian firms that are currently active in Egypt, already has facilities in Port Said and Suez.

The second was a $100m investment from Egyptian-Indian Polyester to expand capacity at its $160m, 420,000-tonnes-per-annum PET resin plant in Ain Sokhna, the construction of which began in June 2011 and was due to enter into production in July 2013. The company is 70%-owned by India’s Dhunseri Petrochem and Tea, while the Egyptian Petrochemicals Holding owns a 23% stake in the firm.

UPCOMING PLANTS: Indian packaging firm U-Flex is also expanding its capacities in Egypt, with around $135m of capacity-expansion projects in the pipeline at its factory in 6th October City. In July 2012 Emami, an Indian manufacturer of fast-moving consumer goods in the personal and health care segment announced plans to open a plant in Egypt, though in February 2013 the firm said it was “going slow” and reviewing the project in light of the political and economic situation in the country.

India is not the only emerging market with ambitious investment plans for Egypt. In February 2012 the Iran Garment Company said it had received approval for $5bn of investments in a variety of ventures including a car assembly plant, flour mills and a liquefied petroleum gas cylinder factory. Relations between Iran and Egypt were poor under the Hosni Mubarak regime and have improved somewhat since the revolution, though they remain challenging, and the events of summer 2013 may affect plans.

TURKISH ENTERPRISE: Turkish firms are also important investors in Egypt, with some 290 active in the country, particularly in the textiles sector. Some Turkish textiles firms have withdrawn from the country as a result of post-revolution difficulties; however, others are stepping up their activities. In December 2012 the Eroğlu Group announced plans to invest a further $300m in Egypt, on top of the $150m it spent establishing its activities in the country. Under the plan the firm intends to open an additional factory in the republic and to raise its staff numbers from 7000 to 10,000 by 2014. The company’s chairman of the board Nurettin Eroğlu told Turkish press that the company preferred to invest in Egypt and several other countries over Turkey because of large differences in labour and energy costs.

The company is also looking at the Egyptian domestic market for sales, with plans to expand its network of retail outlets to the country. Textiles is not the only sector Turkish firms are looking at; for example, in September 2012 media reported that a Turkish firm was considering building a cement plant in the Sinai peninsula, possibly taking advantage of coal reserves at Al Magahara in the north of the region for energy supply. Finally, Egypt is seeking investment from Russia. In the course of a visit by then-President Morsi to the country in April 2013, Russia agreed to conduct a study regarding the upgrading of furnaces at a steel mill in Egypt. In addition, the government said Russian firms were also looking at investment in phosphorous mining in the country, and suggested that Russia could be involved in the reopening of the Nasr car manufacturing plant.

IMPROVING ENVIRONMENT: Developments in the pipeline may improve the attractiveness of Egypt to foreign investors, helping FDI levels to recover to past levels. In December 2011 the EU adopted negotiating directives for “deep and comprehensive free trade agreements” with Egypt and three other countries in the region; while focused on trade, the agreements will also strengthen protections for European investors in the country. In addition, resumption of talks with the IMF regarding a loan initially offered after the 2011 revolution may improve investor confidence. The holding of postponed parliamentary elections – due to take place in October 2013 – would also remove a key source of uncertainty.

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The Report: Egypt 2013

Industry & Retail chapter from The Report: Egypt 2013

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