Egypt: Building blocks

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Even amidst the ongoing unrest in Cairo and a sliding benchmark index, Egypt’s medium-term economic outlook has begun to offer improved prospects, particularly in light of increased activity in key industries. Recent strong demand, particularly for housing, along with growing infrastructure needs, is set to see a medium-term recovery in Egypt’s construction sector. While a slowdown in 2011 hindered progress and has negatively impacted capital flows, work is continuing on existing projects and major deals continue to be signed.

Construction has been an important economic driver for Egypt in recent years, helping it pull through the international financial crisis and its after effects in 2009 and 2010. Demand has come from a number of different areas: public spending on infrastructure, housing construction to tackle Egypt’s supply shortages, investment in modern retail, office, hotel and leisure facilities.

The sector has suffered a setback due to social unrest in 2011 and the subsequent political uncertainty, which has hampered GDP growth just as it was picking up. International investors, many of whom are seeking clarity on the government’s economic policy, appear to be holding back from new commitments in Egypt until a new government is fully formed.

While the increased levels of political risk have had a dampening effect on investor interest and the country’s fiscal position – leading to a struggling capital market and missed T-bill targets –many developers and contractors are working through their existing order book and deals continue to be made.

In October, for example, Qatari Diar, which is owned by the Qatar Investment Authority (QIA), the Gulf state’s sovereign wealth fund, announced projects worth more than $540m in Egypt. Greece-based Consolidated Contractors Company (CCC) will be constructing Qatari Diar’s $464.3m Nile Corniche development in Cairo and a $79.5m resort project in the Sinai Peninsula city of Sharm el Sheikh.

The Nile Corniche development will be located on a 9360-sq-metre site in the capital, with a five-star hotel, luxury apartments, and retail, office and leisure space. Diar has pledged to source 70% of the materials for both projects from Egyptian suppliers, providing a welcome boost for local manufacturers.

Developers such as Qatari Diar are betting on the country’s economic and demographic fundamentals, which – with a large population, increased consumption and improving urban infrastructure – guarantee a positive medium- and long-term outlook, and expectations are that once Egypt’s political direction is clearer, investment will pick up strongly again.

While GDP growth in fiscal year 2010/11, which ran from July 1, 2010 to June 30, 2011, is expected to be 2%, down from the 7% seen in the years before the global economic crisis, growth in 2011/12 is expected to still be respectable, given the global economic climate and the effects of Egypt’s domestic unrest and uncertainty.

In recent years, the construction sector’s attention has increasingly turned to tackling Egypt’s huge housing gap. Relocation by existing households, particularly among the upwardly-mobile middle classes, and replacement of a considerable amount of unsuitable housing stock, is driving the need for new residential property.

Other segments, including office and retail, will certainly also need to be served as companies grow and incomes rise but hotel and leisure is proving to be of particular interest as Egypt develops its tourism sector – expected to grow by an average of 5.6% in the coming decade – and focuses on attracting more high-spending visitors. Similarly, economic and population growth will require continued spending on infrastructure, from roads and airports to power stations and sewerage. At the end of 2010, investment bank EFG Hermes forecast that Egypt would need $45bn of infrastructure investment over the following five years.

The government is being urged to help restore the construction sector’s momentum through infrastructure development schemes, particularly using public-private partnerships (PPPs). The government launched the PPP Central Unit to oversee large-scale public tendering and to encourage private participation in the delivery of public goods and services.

While the unit made limited concrete progress at first, legal changes in 2009 streamlined the PPP process and the first project was launched – the construction of the New Cairo wastewater treatment plant. The unit has more than a dozen projects worth billions of dollars in the pipeline, though many are currently on hold due to the delicate political situation.

Pushing forward with PPPs makes sense for the government and the private sector alike, as the model allows the state to free up resources to focus on other areas – including housing and welfare – and businesses to gain valuable and potentially very profitable contracts.

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