Country Profile:
Egypt
Egypt
For centuries Egypt has been a link between Western and Islamic cultures, and to this day, the capital Cairo, known as Um Al Dunya – The Mother of the World – remains a cultural centre in the region. Fed its influential history, Egypt’s pivotal role in Middle East and African politics remains unchanged. Growing economic importance will further enhance the country’s international weight.
ISBN: 978-1-902339-10-8
ISSN (Online): 1759-9415
ISSN (Print): 1759-9407
TABLE OF CONTENTS
COUNTRY PROFILE
This section provides an overview of the country, its population, languages, natural resources, geography, climate, religion and history.
POLITICS
With its large population, history and culture, Egypt is a leader in the Arab world. The current government is headed by Prime Minister Ahmed Nazif, who was appointed by President Hosni Mubarak in 2004 with a brief to liberalise the nation’s economy. That brief was reconfirmed in 2005 when Mubarak won his fifth term in office on a mandate of continued liberalisation. The government has been awarded notable praise in its efforts thus far, having been nominated as most improved economy in terms of ease of doing business by the World Bank in 2008. Much of Nazif’s task involves dismantling the remnants of Nasser’s “Arab socialism”, which still defines a large part of Egypt’s economic structure. A significant portion of Egypt’s population (as high as 20% by some estimates) survives on less than $2 a day, and continues to depend on the state to subsidise basic necessities such as bread and fuel. These subsidies not only place a considerable burden on the state budget, but they also encourage corruption and profiteering. Bread shortages in the first half of the year led to social unrest, prompting the government to take immediate and concerted action to alleviate a potential crisis. The prospect for continued progress in the economy remains strong. Two issues on the horizon have the potential to affect this progress: an internal struggle of over the succession of President Mubarak and renewed labour unrest.
This chapter provides interviews with Prime Minister Ahmed Nazif; Romano Prodi, former Prime Minister of Italy; Dominic Asquith, UK ambassador to Egypt; and Naguib Sawiris, Chairman and CEO Orascom Telecom, while Susan C. Schwab, US Trade Representative, provides a viewpoint on the importance of free trade and US-Egypt cooperation.
ECONOMY
The Egyptian economy has been gaining thanks to the wide-ranging reforms that the country began implementing in 2004 and the subsequent awakening of domestic demand long depressed due to decades of sluggish growth. Foreign direct investment (FDI) inflows reflect extremely positively on global investment sentiment in Egypt, approaching $20bn in July 2007 to July 2008 government fiscal year. Egypt’s primary economic strength stems from its diversity in comparison with the rest of the region, as the country’s economy is founded on a diverse base. Of the fiscal year’s GDP of LE856bn ($158bn), hydrocarbons extractions constitute 17%; manufacturing, 17%; agriculture nearly 17%; wholesale and retail trade, 11%; construction and real estate, 7%; financial and telecommunications services, 7%; and externally oriented sources, such as the Suez Canal and tourism, 4% each. The challenge for Egypt is to create jobs and eradicate poverty and the government is working to implement reforms, in part through an overhaul of the public education system. It is yet to be seen what the effects of the financial crisis will be on the Egyptian economy, but there are hopes that the slowdown will eventually reduce the pressure on commodities, thereby easing inflation, but only to a greater extent than it will dampen demand for Egyptian exports.
This chapter provides interviews with Rachid Mohamed Rachid, Minister of Trade and Industry; Mahmoud Mohieldin, Minister of Investment; Omar Mohanna, President, American Chamber of Commerce in Egypt; and Hernando de Soto, President, Institute for Liberty and Democracy.
BANKING
Since 2003 the most significant reform achieved by the state in terms of the everyday operation of the Egyptian economy has been the complete overhaul of the banking system. After a disastrous crash at the end of the 1990s that left Egyptian banks with more than LE40bn ($7.38bn) in non-performing loans, the government launched a two-tier programme to make a healthy financial system the bedrock for economic uplift. The first measure reduced the number of Egyptian commercial banks 31% from 61 to 42 by requiring banks to increase their minimum paid-up capital to LE500m ($92.3m) from LE100m ($18.5m) and maintain Basel II-required 10% in risk-weighted capital adequacy. The second step encouraged privatisation, reducing the public sector banking market share of sector assets from 70% to less than 50%. Fundamentally, Egypt remains an underbanked and underleveraged society. The 300 top-tier corporations and top 5% of Egyptians have their banking needs addressed, although niche products may allow some banks to steal market share. But the real growth in the next five years will be in the middle class and medium-sized companies on the verge of using full debt and deposit services. As the global credit crisis and incipient recession deepened towards the end of 2008, its impact on Egypt was therefore a mixed picture. On the one hand, the crisis has hit foreign investments in Egyptian banking hard, especially for publically listed institutions, which when combined with lower demand for credit at export-orientated industries will slow development. However, high liquidity has actually turned out to be a boon, especially for those newly acquired public banks that are still restructuring, as their risk-weighted assets to capital remains firmly within safe levels compared to the rest of the developed worlds.
This chapter provides an interview with Tom Aaker, CEO, Standard Chartered Bank, Qatar and North Africa.
CAPITAL MARKETS
After a blockbuster 2007 calendar year for the Egyptian Exchange (EGC), the merged and rebranded Cairo and Alexandria Stock Exchange, capital-market experts are in disagreement as to the exact cause of the 2008 decrease in prices. As of July, market capitalisation was down to LE813bn ($150bn), from LE897bn ($165.6bn) the previous year and by the end of August, the CASE 30 index was around 25% lower than at the beginning of the year. However, despite some slowdowns in earnings growth, fundamentals remain strong across the exchange. Luckily for Egyptian companies, the global credit crisis does not threaten the appetite of generally underleveraged Egyptian society. Privately-initiated enterprises have become the most dynamic forces on the exchange and new listings have come from companies in diverse sectors, such as GB Auto, a manufacturer and distributor, and El Sewedy Cables, which manufactures electrical transmission technology. Talaat Moustafa Group Holding, Egypt’s largest private real estate developer, held the largest IPO in Egyptian history in November 2007, with applicants oversubscribing the LE715m ($132m) issue 41 times. The market’s correlation to global equity slowdowns, while negative in the short run, is a sign that Egypt is becoming more and more a standard component of Western institutional portfolios.
This chapter provides interviews with Maged Shawky, Chairman, Egyptian Stock Exchange, and Mohamed Taymour, Chairman, Pharos Holding. The chapter provides share analyses by Pharos Holding on Telecom Egypt, Orascom Telecom Holding, Commercial International Bank, Palm Hills Developments, Orascom Construction Industries and El Sewedy Cables.
INSURANCE
The retailoring of the legislative framework governing Egypt’s insurance sector in May has made 2008 a particularly significant year for the local business. Raising the capital requirements for market entry and obliging local players to separate their life and non-life practices bode well for the future health of the sector and competition. Yet, Egypt’s insurance market remains underdeveloped, with insurance penetration at 0.95% of GDP for fiscal year 2006/07. Although Egypt’s GDP per capita is low at $1484, the business has great growth potential. The market’s 21 private and public insurers are consequently looking for new, underdeveloped and underutilised segments of the market through which to expand. While players seek to increase their penetration, the Insurance Federation of Egypt is now doing its best to raise public awareness among potential customers. The organisation has embarked on a $2m advertising campaign, targeting individuals and small businesses for life and non-life products in order to increase growth and harness the full potential of the Egyptian market. Liberalisation is expected to continue as new legislation is introduced and public sector companies are restructured and eventually passed to private hands.
This chapter provides an interview with Tim Shields, Vice-Chairman and Managing Director, AIG Egypt.
TRANSPORT
Most Egyptians continue to depend heavily on subsidised public transportation and the transport sector lures 13% of total investment in the country. A series of development projects in rail, metro and maritime transportation show that the government is serious about transforming local infrastructure. The government’s plan is to bring in the private sector as a source of revenue, expertise, quality assurance and efficient and proper management of transportation and logistical projects. The projects include upgrades to improve safety and efficiency, as well as expansion plans to help de-congest some of the country’s crowded transit routes. The private sector is being brought in for its focus on being an owner and regulator in these projects. Egypt expects investments in transport projects to reach $8.6bn within the next three years, but crucial to the success of the government’s overall vision will be effective management.
This chapter provides interviews with Mohamed Lotfi Mansour, Minister of Transport, and Corne Hulst, GM, DP World Sokhna.
TOURISM
Tourism remains a mainstay of the Egyptian economy, employing more than one-tenth of the population and bringing foreign revenues into the country. The sector is one of the largest contributors to the economy, with the World Travel and Tourism Council’s broader set of figures valuing it at $18.2bn, equivalent to 16.3% of GDP. The same estimates posit that it employs 2.8m people and has an annual growth rate of 5%. Official figures place total tourist arrivals for 2007 at 11.1m, which represents year-on-year growth of 20%, up from 5.8% the previous year. Most of this growth has come from the Russian market, which now accounts for the biggest share of arrivals, with an estimated 1.5m tourists, or 13.5% of the total. The market is divided into two key segments: cultural tourism and so-called sunshine tourism. New and increasing investment from wealthy Gulf neighbours is beginning to transform previously undeveloped areas of the Red Sea and the Mediterranean coast. Also, niche markets, such as adventure and health tourism, offer opportunities for development. The sector does, however, face growing challenges: quality of service, cost and how best to preserve its historic legacy. While future prosperity looks promising, the government must balance rapid development with sustainability.
This chapter provides an interview with Zoheir Garranah, Minister of Tourism, while Koïchiro Matsuura, Director-General, UNESCO, provides a viewpoint on balancing tourism growth with cultural and archaeological heritage.
ENERGY
As energy consumption in Egypt has grown, the government has had to devise a way to satisfy local demand and ensure security of supplies. Oil and gas currently meet 95% of energy needs, but the government is working towards reducing oil dependence in favour of natural gas. Natural gas production increased by more than 30% between 1999 and 2007. The government is pressing ahead to increase natural gas production by 5% per annum until 2020 and is aiming for 120trn cu feet (tcf) of proven reserves by 2010. The government will also continue to reduce subsidies on energy prices until 2010 in order to lower the burden on state coffers. A new exploration drive will continue as the government seeks not only to increase proven reserves of oil and gas but also to extract fossil fuels using the most effective and efficient technologies available in order to prolong the life of newly discovered reserves. The government will also work to increase renewable power generation at home – albeit somewhat slowly, judging by the recent pace – while placing particular emphasis on wind power.
This chapter provides interviews with Jean-François Cirelli, Vice-Chairman and President, GDF SUEZ; Mohamed El Mahdi, President and CEO, Siemens Egypt; and Mohammad A Al Howqal, Chief Operating Officer, Kuwait Energy.
CONSTRUCTION AND REAL ESTATE
The nation’s construction sector continued to enjoy strong growth in 2008, with domestic demand from real estate developers remaining firm, coupled with demand from new infrastructure projects in the transport sector. Growth for the sector as a whole was approximately 14.9% in the first half of 2007, an increase of over two percentage points compared with growth of 12.6% in the same period over the previous year. Construction accounted for 7% of GDP in 2006/07. Egypt has a massive unmet housing demand ranging across all sections of the market, which even at the current unprecedented rate of construction remains difficult to meet. Estimates suggest that the shortfall is as much as 6m units. The government has announced a number of initiatives to meet housing needs, with 305,000 new units anticipated for 2007/08 and a plan for 1.3m units to come online by 2011. Builders generally believed that the current up-cycle would last until that year, but price volatility in major inputs such as cement and steel has led to speculation about how long the growth cycle can be sustained.
The real estate sector is growing at 7% in real terms and now contributes 8.6% of the nation’s GDP. The sector employs around 11% of the country’s workforce and accounts for between 5 and 6% of investments. Both supply and demand remain strong and new building licences are growing at 42% a year. However, as the class-A market is moving gradually into oversupply developers are increasingly modifying their plans to meet the neglected class-B market. The purchasing power of this segment is growing rapidly thanks to improved access to credit and the strong economy. Gulf developers are also beginning to look beyond residential real estate to new opportunities in the commercial and hospitality sectors.
This chapter provides interviews with Hassan Badrawi, Project Development Director, Orascom Construction Industries; Ahmed Ezz, Chairman and Managing Director, Ezz Steel; Yasseen Mansour, Chairman and CEO, Palm Hills Developments; and Sameh Muhtadi, CEO, Emaar Misr.
TELECOMS & IT
The combined information and communications technology (ICT) sector was valued in the first quarter of 2008 at LE9.61bn ($1.77bn), equivalent to 3.6% of GDP, up from 3.3%, or LE7.56bn ($1.4bn), in the first quarter of 2007. The revenue growth in the telecoms sector is now an impressive 20.7% a year. In recent years a major overhaul in attitudes and practices has seen the sector liberalised from within and increasingly open up to new investment from the outside. Inward investment into the combined IT and telecoms sector now accounts for between 15% and 20% of the nation’s impressive GDP growth, which is estimated to be between 7% and 8%. The entry of Gulf-based operator Etisalat to the mobile market as a third operator has helped make the country one of the most competitive pre-paid pricing environments in the world, while new technologies such as 3G and triple-play are providing additional levels of choice to the Egyptian consumer. The government has been increasingly focusing on encouraging its potential as an outsourcing centre by developing the regulatory framework and infrastructure necessary to compete globally. The biggest growth area for the telecoms sector in the next three to five years will be in internet connectivity. Data services are currently at the same stage in the market as mobile telecoms were five years ago, with massive growth anticipated as connection prices continue to fall. Data services offer greater profit margins than traditional voice services in Egypt, and the challenge will be to persuade customers who share ADSL subscriptions to subscribe to individual accounts.
As the most populous Arab country, and with around 58% of its population below the age of 25, Egypt has long held the potential to become the region’s driving force in IT – both as a consumer and a producer. The country has the chief role in the production of Arabic-language media, making it a natural leader for the development of Arabic e-content. Meanwhile, Egypt’s increasingly large and competitive graduate workforce provides a ready pool of potential employees in the business and knowledge process outsources sectors. Despite these strong demographic advantages, the Egyptian sector has laboured somewhat, falling behind smaller and more responsive neighbours such as the UAE, Jordan and Tunisia. In the past five years, however, the government has renewed its efforts to encourage growth and the fruits of that labour are beginning to show. The IT accounted for 3.6% of GDP in the first half of 2007. The reduction in the cost of internet connectivity has seen the country’s internet penetration rate reach 10.5%, or 8.62m people and subscriptions are currently growing at a rate of 20,000 per month.
This chapter provides interviews with Tarek Kamel, Minister of Communications and IT; Adel Danish, Chairman and CEO, Xceed; and Akil Beshir, Chairman and CEO, Telecom Egypt. The chapter also includes a roundtable with Alex Shalaby, Chairman, Mobinil; Richard Daly, CEO, Vodafone; and Saleh Al Abdooli, Managing Director and CEO, Etisalat.
INDUSTRY
The Egyptian industrial sector has been transformed from an arena traditionally dominated by large inefficient state enterprises cushioned from competition by government regulations into one that can compete globally. Free market reforms have been widely praised, although the sector still faces challenges due to reductions in subsides and volatile world energy prices. The sector has had upwards trends in both export levels and inward investment flows and currently accounts for around 17% of GDP, with some 26,000 formally registered industrial establishments employing 2.4m workers, while around 1.5m workers are employed in the informal sector. In addition to the traditional industrial sectors, such as clothing, textiles, furniture, paper and pharmaceuticals, the government has targeted six areas for special attention where it is believed Egypt has a major competitive advantage. These areas are engineering machinery and equipment, labour-intensive consumer electronics, automotive components, life sciences, biotechnology and handicrafts. The main challenges to the development strategy are cumbersome: an inflated bureaucracy that hinders investment, the need for more high-skilled workers in the local workforce, the uncertain cost of energy and the lingering effects of the credit crisis. Additionally, the liberalisation of the banking sector is one factor cited as crucial for boosting investment. Despite these hurdles, Egypt is well placed to take advantage over the Far East as the cost of shipping goods over great distances continues to rise. A sharp reversal of the long-distance outsourcing of the past decade has been anticipated, as investors look to relocate manufacturing operations closer to their primary markets. Egypt lies just a few hours by boat from many major European markets and also has almost identical business hours. These could be increasingly important factors to Egypt in the coming years.
This chapter provides an interview with Ahmed El Sewedy, CEO, El Sewedy Cables.
MEDIA & ADVERTISING
In recent years the Egyptian government has attempted to open up the traditionally state-dominated media to investment from private companies, with the notable success of the 6th of October Media City, a business centre for the private media sector. Meanwhile, more and more Egyptians are plugging into the internet. The growth of private enterprise, along with the integration of the internet, has created challenges for the Egyptian government. There were multiple high-profile censorship cases and stricter punishments enforced against contravening journalists in 2008. Egypt has been heavily criticised for its treatment of the media, but in relative terms journalists have enjoyed unprecedented press freedom in recent years, with local independent outlets freely covering issues ranging from food riots to infringements on human rights. The country now has 17 dailies and 30 weekly news publications, but there is low readership due to limited literacy and a perception among Egyptians that newspapers are an unreliable source of information. The government controls around 80% of print media. Television is by far the most popular form of media in Egypt today, with more than 260 free-to-air satellite channels available. The number is expected to grow with media free zones in Jordan, Dubai and Egypt serving as a catalyst for both new channels and the integration of existing channels in Egypt and the wider region. Although progress is being made, development of certain areas of the media will remain stunted for the time being. Egypt continues to be a centre for film production within the region and the success of the Media Free Zone has given further evidence that major international satellite broadcasters see opportunities for growth in the Egyptian market.
This chapter provides an interview with Rania Al Malky, Chief Editor, Daily News Egypt.
AGRICULTURE
Egypt’s agricultural sector has expanded impressively over recent decades. Annual average growth reached 2.6% for the sector as a whole during the 1980s, increasing to 3.4% in the 1990s and 3.97% in the 2005/06 fiscal year. Sector-wide investments increased from $70m in 1982 to $1.8bn in 2007. The sector accounts for 17% of GDP and 20% of all exports, providing an important source of foreign-exchange earnings. Agriculture also employs about 30% of Egypt’s total labour force and reclamation plans are expected to generate another 440,000 jobs by 2011. The government aims to realise growth of 4.1% per year in agricultural output. The largest output in 2005/06 was grain, followed by vegetables, fruits, fibres and oil grains. Even given recent successes, Egypt’s farmers and agricultural labourers have recently had to cope with rising production costs due to increases in the price of fertiliser and energy prices. The government has made efforts to offset these price increases such as doubling the price paid to Egyptian farmers for wheat and corn and increasing bread subsidies. Water concerns and local and global good security will continue to preoccupy the Egyptian government.
This chapter provides interviews with Amin Ahmed Abaza, Minister of Agriculture and Land Reclamation; and Tarek Zakaria Tawfik, Managing Director, Farm Frites.
HEALTH AND EDUCATION
The Ministry of Health and Population (MOHP) has consistently been the recipient of the Egyptian government’s biggest budgetary expansion in the past decade and the country has made great strides in providing its citizens with easy access to health care through its extensive network of health facilities. The majority of communicable diseases are well controlled, as the country has reached and sustained high immunisation rates. However, the increasing population is straining the public health care infrastructure and rising rates of non-communicable diseases and volatile energy and food costs are placing greater fiscal constraints on the government’s ability to increase health care spending. Faced with these challenges, the government has enlisted the help of the private sector to restructure health care in Egypt, bringing in a new insurance scheme that will broaden the coverage of health care across the country. Meanwhile, growing wealth and the rise in non-communicable diseases are increasing the demand for private health care, with the highest levels of investment in the private sector seen in recent years.
Egypt has made significant strides in the past two decades in terms of education, but the government is reforming public education to give individual institutions more autonomy and to encourage greater participation from the private sector to help increase capacity and improve standards. The government is particularly interested in better preparing Egyptian graduates for the modern workplace. To achieve these goals, the government has created the National Educational Strategic plan for the period of 2008-2012 and has increased the education budget by 12% in 2007/08. Despite efforts, just 20% of 15-year-old children were still enrolled in formal educational institutions in 2008, with most leaving due to poverty or cultural reasons such as ambivalence towards female education in rural areas. While attitudes towards issues such as private sector participation are changing fast within the government, the restructuring process that the government is implementing will take time, so significant change is expected to be seen over the course of the next decade rather than the next few years.
In this chapter Tarek Khalil, Acting President, Nile University, provides a viewpoint on education reform.
THE BUSINESS GUIDE
In conjunction with Deloitte Saleh, Barsoum & Abdel Aziz, OBG explores the taxation system, examining the environment for investors. The accountancy section provides a viewpoint from Kamel Saleh, managing partner, Deloitte Saleh, Barsoum & Abdel Aziz.
OBG also introduces the reader to the different aspects of the legal system in Egypt, in partnership with Helmy, Hamza & Partners, Baker & McKenzie. The legal coverage provides a viewpoint with Mohamad Talaat, Partner, Helmy, Hamza & Partners, Baker & McKenzie.
THE GUIDE
This section includes hotel, government and other listings, alongside useful tips for visitors on topics like currency, visas, language, communications, dress, business hours and electricity.
