Will foreign investment strengthen Egypt's industrial sector?

 

Industry is front and centre of Egypt’s economic growth and diversification policies. The government aims to increase high-technology exports in this sector, as well as increase the value added by manufacturing as a percent of GDP. Several factors make industry attractive to foreign investors, including the country’s location between key markets in Africa, Europe and Asia; relatively low-cost labour; and a number of new infrastructure projects. To enhance output and investment in industry, Egypt continues to implement favourable policies, including for the development of industrial zones and special economic zones (SEZs). However, the Covid-19 pandemic has affected the sector, with dampened demand in several segments and lockdowns affecting some areas of production.

Reforms

The Egyptian government has focused its development plans on strengthening and positioning the country as an industrial and manufacturing centre by leveraging its geographic location, as well as relatively affordable labour and operation costs. However, progress towards this end has faced headwinds in the years after the implementation of a 2016 economic reform programme that was implemented under an agreement with the IMF in exchange for a three-year, $12bn loan (see Economy chapter). Included in the reform was a value-added tax (VAT), originally set at 13% in 2016 and raised to 14% the following year. However, in May 2020 the Cabinet agreed to waive penalties and interest charged on late payments of VAT, among other taxes, in response to the Covid-19 pandemic.

While macroeconomic performance has been positive in terms of overall employment and growth, a devalued currency, subsidy cuts and new taxes have presented an ongoing challenge for industry players. The economic reform plan also featured a liberalisation of the exchange rate, which led to a devaluation of the Egyptian currency by close to 50%. “Subsidy cuts have been challenging for industry, as they push up production costs,” Bilal Chaabi, managing director of automotive and industrial battery manufacturer Chloride, told OBG. “However, the long-term benefits of rationalising consumer behaviour will be positive, particularly for sectors related to alternative energy.”

Egypt’s energy supplies and pricing have impacted industrial segments in different ways. In petrochemicals, for example, there has been increased investment in export potential with the country’s move towards self-sufficiency in gas. Developing the petrochemicals industry is part of an effort to add value to oil and gas production, with petrochemicals comprising 3% of GDP and 12% of industrial production in 2018.

The government’s reduction of natural gas prices in March 2020 to help minimise the economic impact of the Covid-19 pandemic eased costs for steelmakers, but competition from cheap imports has dampened demand for Egyptian steel. In 2019 the government placed a 25% duty on steel rebar imports and a 16% tariff on iron billets, which led local steel rolling mills to suspend production to protest at the more expensive raw materials. Competition from imports, coupled with falling domestic demand, has lowered steel prices.

The cement industry has also experienced challenges in oversupply and low market demand, which were an issue since before the currency devaluation. While in theory currency devaluation should positively influence export potential, the cement sector was not able to benefit given high production costs. According to an August 2019 report by investment bank Pharos Holding, demand for cement would have to increase by 47% in order for the segment’s prospects to improve – otherwise, several companies representing up to 6m tonnes of cement would be pushed out.

Oversight

The sector is overseen by the Ministry of Trade and Industry (MoTI), which works to create an environment conducive to sustainable industrial growth based on competitiveness, diversity, innovation and job creation. Led by Nevin Gamea, it also promotes exports and seeks to increase local production. Another important entity is the General Authority for Investment and Free Zones, which is affiliated with the Ministry of Investment and International Cooperation and operates as a one-stop shop for foreign investors entering the Egyptian market. It supports international operators aiming to establish partnerships with local companies.

Also involved is the Industrial Development Authority (IDA), which was established by presidential decree in 2005. Working under the umbrella of the MoTI, the IDA is the authority responsible for executing policies. It also focuses on developing and allocating industrial land, attracting investment, setting policies necessary for the development of industrial zones and simplifying industrial licensing procedures.

Performance

According to Bank Audi’s “Egypt Economic Report 2020”, Egypt’s industry displayed a subdued performance in FY 2019/20 due to a challenging operating environment. The value of the manufacturing sector expanded by 2.8% over the fiscal year, down from 4.8% in FY 2018/19. Meanwhile, petroleum refining grew by 2.2% in FY 2019/20 compared to 4.1% the previous fiscal year. Overall, manufacturing contributed 16.4% of GDP, down from 16.7% over the same period.

In December 2019 the Central Agency for Public Mobilisation and Statistics estimated that industrial production – excluding the extraction and refinement of crude oil – reached LE168.4bn ($10.37bn) in the first quarter of the year, slightly down from LE168.5bn ($10.38bn) the first quarter of 2018. The segments that comprised the largest portion of output were food products (22.7%); fuel coal and oil products (21.7%); and steel, iron, precious metals and metal casting (17%). Textiles and textile processing is another important segment, the production value of which fell from LE5.9bn ($363.6m) to LE5.6bn ($345.1m) over the same period. However, the production value of pharmaceutical, chemical, medical and medicinal plant products rose from LE9.5bn ($585.5m) to LE9.8bn ($604m).

Exports

Despite expectations that exports would increase following the devaluation of the pound, the projected gains were to an extent offset by the higher prices of imported production inputs, such as the raw materials and intermediate goods upon which the country’s producers heavily rely. In the first quarter of FY 2019/20 the value of merchandise exports increased by 4.9% to $7.1bn, mostly due to a 17.8% rise in non-oil exports, according to the Central Bank of Egypt (CBE). Of the merchandise exported, 39% was finished goods; 34.9% was fuel, mineral oils and products; 17.5% was semi-finished goods; and 8.6% were raw materials. The US, the UAE, Italy, the UK, India, Saudi Arabia and Malta were the main purchasers of the merchandise, and together accounted for 50.6% of exports.

Egyptian exports tend to be low in value added and concentrated in the gas sector, according to the “Egypt Economic Monitor” report published by the World Bank in July 2019. The country’s export potential has been further stalled by a limited production range focused on sectors where energy prices have traditionally been subsidised, such as chemicals and base metals. Egypt is also competitive in goods for which global demand has fallen in recent years, including tobacco, cotton and fertilisers. On the other hand, Egypt stands to benefit from the exportation of more goods in which it has a comparative advantage, including textiles, carpets, fabrics, garments and chemicals.

The government has taken several steps to enhance the export landscape. In June 2019 the MoTI announced it would allocate LE6bn ($369.8m) a year starting in FY 2019/20 for export subsidies. Managed by the Export Subsidies Fund, LE2.4bn ($147.9m) will be disbursed as cash payments to exporters, while the remaining amount will be split evenly, with LE1.8bn ($110.9m) going towards tax breaks and payment cuts for financial debts owed by exporters to the Ministry of Finance, and LE1.8bn ($110.9m) going towards developing the country’s export infrastructure, including developing facilities and promoting Egyptian exports abroad.

Continental Trade

Geopolitical challenges in neighbouring Arab countries have also posed a challenge to Egyptian manufacturing and exports. The sector traditionally relied on markets such as Libya and Sudan, which together purchased close to half of food exports. Egypt has turned to the rest of Africa, where it has plans to launch 10 logistics centres to diversify its reliance on these markets.

Industrialists hope to take advantage of the African Continental Free Trade Area (AfCFTA) agreement that was signed in 2018 to help reach export goals. For example, the Egyptian cotton industry stands to benefit from rules of origin requiring products to be manufactured with a certain level of African inputs, as outlined in the AfCFTA. Moreover, Egypt’s garment industry can save on costs by importing raw materials from sources closer to home, as opposed to from Asian markets. “If properly leveraged, the AfCFTA could be an opportunity for Egypt to strengthen its manufacturing base,” Ahmed El Guindy, CEO and managing director of aluminium and glass producer AluNile, told OBG. “Reaching industry’s full potential will require effective implementation on the ground and a regulatory framework that encourages manufacturing and exports.”

Several hurdles remain to boosting exports to the rest of Africa, including high shipping costs and competition from other established players such as Turkey and China. “Egypt’s growing trade agreements are a strong step towards strengthening the export business. However, there are a number of other important factors to consider, such as how effectively they are implemented,” Chaabi told OBG. To address this, in May 2019 Egypt launched a new maritime navigation route to facilitate trade to the rest of the continent. The line connects East African and landlocked countries including Ethiopia, South Sudan, Uganda, Rwanda and Burundi to the Suez governorate through Ain Sokhna on the western shore of the Red Sea.

Investment

Part of Egypt’s industrial growth plan includes spurring both domestic and foreign investment. As outlined in the Industry and Trade Development Strategy 2016-20, the government hopes to reach a targeted industrial growth rate of 8%. While as of 2019 it was short of this goal, the government has introduced several reforms and initiatives towards this end, including economic free zones, legislation and reformed industrial land procedures.

In 2019 investment inflows to Egypt increased by 5% to $8.5bn, retaining its position as Africa’s largest foreign direct investment (FDI) recipient. Between July and September 2020 FDI inflows measured in at $4.2bn. Similarly to past trends, investment was concentrated in the oil sector (55.4%), followed by services (23%), manufacturing (8.3%) construction (5.9%) and agriculture (0.2%). “Growth in Egypt outside of oil and gas has been driven by government projects over the past few years, whether they be initiatives to build power plants, factories, or water and transport infrastructure,” Thore Lohmann, country head of ThyssenKrupp Egypt, told OBG. “As government projects taper off, the private sector will need to increase investment in industry and manufacturing to fill the gap.”

Regulations

In recent years Egypt has made regulatory changes with an eye to attract investment from both home and abroad. Investment Law No. 72 was implemented in May 2017 to attract investment through tax incentives, the reduction of bureaucracy and other measures. In August 2019 four article amendments to the law were approved by Parliament. A key change allowed existing investment projects to utilise incentives in the original law to expand their operations.

In June 2019 the citizenship laws were amended with foreign investors in mind. Instead of the previous regulation requiring foreigners to reside in the country for 10 years before applying for citizenship, the new amendment expanded the path to citizenship to include the purchase of a state-owned property valued at a minimum of $500,000, or an investment or partnership in an investment project of the same value. It also opened up citizenship to investors who contribute in US dollars to a special CBE account, with an option to retrieve the amount in pounds after a specified period depending on the value of the investment. More recently, in February 2020 the IDA announced changes to the Industrial Permits Act that allow industrial investors to receive temporary licences for establishing their facilities until they complete their paperwork, provided the decision is published in the Official Gazette.

Industrial Zones

In 2015 President Abdel Fattah El Sisi issued a decree declaring the area around the Suez Canal to be a SEZ. The Suez Canal Economic Zone (SCZ one) spans 461 sq km and consists of six ports and four industrial zones. The project supports logistics, shipping and overall industrial development of the canal, including a key node to the north at East Port Said. “Other industrial zones in the region offer only part of the services we have for investors,” Shahira El Fiky, commercial director of East Port Said Development, told local press in February 2020. “What we offer is an integrated ecosystem that includes an in-house training facility, a medical facility, fire brigades and even a day-care centre. Other services such as help with recruitment, transportation and logistics are designed to ensure that manufacturers are focused on their work and investing in future growth.” What is more, the SCZ one announced in January 2020 that it was developing an investment arm to channel financing into projects along the canal.

While much of Egypt’s industrial development is taking place near the Suez Canal, plans are also under way to build up facilities throughout the country. In October 2019 the IDA published the electronic Industrial Investment Map of lots that were on offer to investors. The map featured 5.2m sq metres of industrial land divided into 2050 lots. The lands were located in 13 industrial zones throughout the country, including those in Sadat City in Menoufia, Qena, Ramadan City in Sharqiya governorate, Qantara Sharqiya in Ismailia, New Borg Al Arab in Alexandria, El Mahalla El Kubra in El Gharbiya and Matraha in Minya. According to the IDA, the lands offer 1510 opportunities in engineering, chemicals, textiles, metals, pharmaceuticals, food processing and mining. The second phase of the project was announced in January 2020, featuring 1705 industrial lots across 4.2m sq metres in 12 governorates.

The government is also looking to boost Upper Egypt’s industrial production in a bid to diversify the region’s economy. In November 2019 Magdi Ghazi, chairman of the IDA, told local press that nine industrial complexes would be built in eight Upper Egypt governates. The programme was announced within the framework of a partnership between the IDA and the German Corporation for International Cooperation that sought to enhance the investment climate, as well as develop and manage industrial zones.

Transport

In early 2019 Amr Shaat, deputy minister of transportation, announced the construction of Egypt’s first high-speed railway, facilitating access between Ain El Sokhna to New Alamein City. The project, which will transport both people and goods, is part of the country’s plans to improve its transport sector and connectivity with a wider view of facilitating industrial development. The Ministry of Transportation also announced a memorandum of understanding with European-based companies in September 2019 to develop a new container terminal at Damietta Port, a railway line, dry port and cargo distribution area. Officials hope that the project will attract foreign investment and expand the scope of potential export markets for Egyptian industry.

Outlook

Industry is set to be a key source of job creation throughout the country as the population expands and the government shifts to developing the manufacturing capacity of regions such as Upper Egypt. Although the sector will face challenges in the short term, especially in relation to input and energy costs, and disruptions related to the Covid-19 pandemic, a longer-term focus on infrastructure development is expected to soften the trend. Strengthened by foreign investment and state efforts, the industrial sector is likely to maintain an upwards trend in the medium term.

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The Report: Egypt 2020

Industry & Retail chapter from The Report: Egypt 2020

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