CAIRO: “Egypt’s economy managed to pull through the global economic crisis with only minor bruises,” says the latest Oxford Business Group (OBG) annual country report on Egypt.
The report says that Egypt’s banking sector remains “solid”, and that, generally, the economy has managed to avoid any “major” imbalances, with real GDP growth attaining 4.7 percent during the 2008/9 fiscal year.
The Report: Egypt 2010, which covers a wide array of sectors that impact business in Egypt, provides a guide for potential investors, offering interviews with ministers and top business figures, such as Prime Minister Ahmed Nazif, Minister of Finance Youssef Boutros-Ghali and Minister of Investment Mahmoud Mohieldin, as well as analyses based on the extensive research.
Egyptian banking beats the bite
Egypt’s economic health has inexorably allowed the country’s banking sector to maintain a firm position, owing to its low debt levels and balance sheets based on firm fundamentals, OBG explains.
These sound fundamentals were further aided by the Central Bank of Egypt (CBE), which took “specific actions” to support banks during the global financial crisis.
The report explains that between February and September 2009, the CBE lowered interest rates a total of six times, which witnessed a decrease of the deposit rate from 11.5 percent to 8.25 percent and the overnight lending rate from 13.5 percent to 9.75 percent.
Egyptian banks’ proclivity to eschew taking on, what was eventually termed, ‘toxic’ securities, which have been singled out as the main culprit that sent global financial institutions spiraling south, has been, according to OBG, another factor in Egypt’s ability to weather the financial storm that has engulfed the globe.
OBG explained that this reticence is partly attributable to the CBE’s decision to delay the introduction of investments, such as credit default swaps, derivatives, and mortgage-backed securities.
The sector’s resilience notwithstanding, OBG suggests that these same restrictions that ensured Egypt’s strong position in banking may now be an obstacle to future growth in the sector.
Retail banking remains quite low at 9 percent of GDP in contrast to neighboring countries, which together are as high as 24 percent of GDP. Egyptians, the report explains, prefer to stash their money away in property or gold.
A second major obstacle is the prevalence of a cash-minded culture. Yet it is increasingly being challenged, Mohamed Kafati, vice-chairman and CEO of Banque du Caire, explains in the report.
“We’re working on tapping into this market, by opening up new branches all over the country,” Kafati told OBG.
Microfinance, a newly developing sub-sector within banking, blipped on OBG’s radar, especially, as it explains, since Citadel Capital created a microfinance arm in 2009, thereby lending an “important vote of confidence” to a novel financial model in the emerging economy.
OBG cited a recent study conducted by the Microfinance Information Exchange, a Washington DC based non-profit organization, and Sanabel, a Cario-based non-profit network of Arab microfinance companies. The results of the study were published in 2009, based on the participation of 13 microfinance banks in Egypt, with a total loan portfolio $116.8 between them in 2008. The results demonstrated that between 2007 and 2009, 75 percent of microfinance credit went to women in Egypt versus 71 percent in the region.
The study lauded Egypt’s microfinance sector for its self-sufficiency, making it an “attractive prospect” for investors.
Despite the optimistic overtones, the OBG report singles out several areas for improvement: Microfinance Institutions (MFIs) lack access to transactional services, support and commercial finance.
In addition, a “robust” legal framework is called for which will be addressed in the near future by a microfinance law, which is currently set to be reviewed by the Egyptian parliament.
Once the law enters into force, it will seek to augment growth of the sector, by opening the sector to more companies, attracting more funds, increasing professionalism through training, amongst others.
Capital markets makeover
The EGX30, which leaped 46 percent between January and November 2009, underwent an “overhaul”, the report explains. It dropped its old name, the Cairo and Alexandria Stock Exchange (CASE 30) and added several new firms to the index.
EGX30 authorities, in hopes of facilitating comparison with other markets in the world, started calculating the main index in both Egyptian pounds and US dollars.
A major regulatory institutional change transpired in July 2009 through the establishment of the Egyptian Financial Services Authority (EFSA), which was the result of a consolidation of the Capital Markets Authority and several other authorities of the non-banking financial services.
Hazem El-Wissimy, the advisor to the EFSA chairman on strategy and market development, told OBG, “Creating a single regulator harmonizes the regulatory regime … which can create synergies.”
Regional ambitions
Thanks to the creation of the Industrial Development Strategy (IDS) under the auspices of the Ministry of Trade and Industry, Egypt hopes to be a regional industrial center by 2025, OBG explains in its report.
The IDS has placed “specialized investment zones” as one of its centerpieces toward achieving its regional ambitions, the report adds. Within this program, the government provides infrastructure, utilities, technical and economic advice and incentives such as tax exemptions and unrestricted movement of capital to companies that are willing to set up shop in one of these zones.
Furthermore, the report says, Egypt boasts 60 industrial zones, to which, much like the investment zones, the government provides with infrastructure, utilities and low rental rates.
To maximize the resources of and stimulate foreign interest in investment and industrial zones, an investment regime came to fruition in 2007, which sought to cluster the various zones by sector and “encourage private investors to develop and manage the zones themselves,” the report states.
The strategy seems to be paying dividends, as China, a major investment partner, already has 950 companies operating — which are worth about $300 million — in Egypt’s free zones.
While FDI in greenfield investments declined by $2 billion during the 2008/9 fiscal year, which had been averaging $10 billion in previous years, Mahmoud Moheildin, Minister of Investment, and other government authorities told OBG that they predict that Egypt will recapture the $10 billion figure for FDI in 2009/10, with a particular government focus on driving greenfield investments.
