With the boom over the past few years in Egypt’s economy, foreign direct investment (FDI) has become a fixation for many businessmen and economists alike who see it as a critical component of economic growth.
However, the slowdown that has come to afflict the global economy during the second half of 2008 has complicated the situation. FDI is among the indicators expected to see a drop.
In the context of this slowdown, FDI has proven to be a point of vulnerability for the Egyptian economy, which was otherwise expected to weather the storm better than most economies.
The current economic crisis also strikes a blow at Egypt’s attempts to encourage foreign investment as many of its ambitious economic reform policies have been put temporarily on hold, reported Finance Minister Youssef Boutros Ghali in an interview with Daily News Egypt earlier this year.
Experts also warn that not all incoming foreign capital is formally reported as FDI, so that the impact of the economic slowdown on foreign investment may be felt in ways other than simply the formal, government-issued FDI figures.
FDI for fiscal year 2007-2008 was a robust $13 billion, though most experts expect the number to trail off in the coming years. On Dec. 21, Central Bank Governor Farouk El-Okdah announced that FDI fell 44 percent in the first quarter of the current 2008/09 fiscal year to $1.65 billion compared to $2.96 billion in the same period a year earlier.
EFG-Hermes, in particular, has a particularly bearish outlook for the coming months and years.
Our expectation is that FDI will fall quite sharply, argued Simon Kitchen, an economist at the investment bank.
Kitchen noted that he expects the figure to fall dramatically, perhaps to as low as $7 billion for this fiscal year.
More troubling, perhaps, is the firm’s expectation that FDI will continue to take a beating over the longer term.
Kitchen argued that FDI for fiscal year 2009-2010 might drop to as low as $6 billion.
You have tighter credit conditions throughout the world, he noted, explaining the causes for ongoing decrease in FDI.
One of the particular causes for hurt in FDI has been the hit that the Gulf economies have taken in recent months because of the global credit crisis, the burst of the real estate bubble and plummeting price of oil.
Roughly one-third of all FDI in Egypt comes from Arab states, reported Kitchen, mostly the GCC.
The Gulf does have a lot of money, but companies there are feeling the same pressures as everyone else, he said.
The dramatic rise in FDI over the past two and a half years, argued Kitchen, is somewhat misleading in how it points to interest in investing in the Egyptian economy.
The reason, he said, is that several foreign mega-deals have thrown off the picture.
You have seen a couple of large transactions, he noted. “These sort of large transactions sort of distort the picture.
In addition to firms like EFG portending a 50 percent decline in FDI over the coming years, a considerable amount of investment that enters Egypt from abroad but is never formally recorded as FDI is likely to take a hit on the Egyptian economy.
You have official FDI data but you have other capital flows coming in from the Gulf, said Kitchen.
Remittances, noted Kitchen, are a critical staple in the Egyptian economy. Egyptian pursuing more lucrative careers in the Gulf typically send home a portion of their income, which, in turn, often gets recycled back into the Egyptian economy.
Remittances were $8.4 billion for fiscal year 2007-2008, and though Kitchen believes that remittances will continue to rise this year, he expects a 15 percent drop – around $1 billion – over the coming years.
“These [remittances] are not strictly capital flows according to balance of payments convention, said Kitchen, “but some of these remittances support investment, particularly in real estate.
Kitchen stressed that he expected real estate, in particular, to suffer as a result of a decline in remittances.
There are several bright spots, though, for the future of FDI in Egypt.
Egypt is going to be one of the few countries that will show positive growth next year, said Kitchen.
This may offer evidence to foreign countries that Egypt is likely to weather the storm better than most. In line with that, Egypt may rise on the list of countries offering attractive investment opportunities.
Kitchen also noted that Egypt, with its cheap cost of labor, may become more appealing for struggling companies in developed countries that are looking to cut labor costs. If current economic conditions hold it may be a long couple of years for those hoping for a continued influx of foreign investment. A sea-change, though, and a recognition by foreign investors of the benefits of investing in Egypt during tough times may pay dividends down the road.