At this year’s edition of the annual Euromoney Egypt Conference, ministers maintained a note of decided optimism despite the many admitted challenges facing the economy, both as a result of local and international factors.
“We are bullish that this economy will turn around and achieve growth,” said Finance Minister Ashraf Salman, who had earlier detailed a laundry list of issues that continue to hamper the process of doing business in the country and recovery in foreign investments.
While recent economic turbulence driven by a slowdown in China’s economy has reverberated worldwide and reached Egypt’s shores, the ministers were positive that this could actually translate into an opportunity to redirect the interest of investors to the domestic market.
“We are not separated from the global economy. We should plan for this global crash very well in order to transfer it into a big opportunity for the country,” Salman said. “Investors will start looking for hotspots and new markets to penetrate … There is an opportunity now to build partnerships so that they look to Egypt as an opportunity.” To do so, effort needs to be made to cut red tape, he added.
“It made us recall what happened in 2008. Egypt was a haven for investments. We attracted lots of investments in the period from 2008, 2009, 2010,” said Finance Minister Hany Kadry Dimian. “You find capital migrating between financial centers seeking opportunities … What we have been discussing in our economic group is how to make Egypt more opportune as a venue for investments.”
At the opening of this year’s conference, “Financing the Future,” conversations with the ministers of finance and investment were dominated by talks of reforms that have been carried out and others in the pipeline, namely when it comes to subsidies, taxes and future liberalization plans.
In his remarks, Dimian said, “We have achieved lot of successes in a period of a year and a half, giving us a lot of positive energy and a lot of determination, and we will continue to make reforms, despite all the challenges, whether internal [or with the] turbulences we see in emerging markets and price volatilities.”
The incoming parliament, due to convene before the end of the year, will also “make the work of the government easier,” he added.
Prospects of Italian firm Eni’s discovery of a “supergiant” gas field off the Mediterranean coast were an obvious highlight, namely due to the impact this could have on supplying enough energy to the industrial sector, which has been operating at a diminished capacity of 50-60 percent due to energy shortages over the past three years. The field is expected to yield 30 trillion cubic feet of lean gas, enough to satisfy the country’s natural gas demand for decades.
“We will continue to import gas,” Salman said, adding that “the recent exploration will be a referral to other international players in the sector,” signaling potential and hopefully luring investments into more exploration.
He attributed Eni’s lauded find to the fact that there has been more openness in the sector. “The number of contracts signed only in the past six months are as many as we have signed in the past three years,” Salman noted.
“The new explorations will not attack us with a Dutch disease, and will not stop us from continuing to implement the reforms that we need to. It will not slow us down,” Dimian added.
The Suez Canal development zone was also a focal point for the ministers, who are looking to promote the area as a global trade, logistics and industrial hub.
Although a Euromoney survey showed that about 46 percent of what was described as an “informed audience” did not understand the investment opportunities offered by the canal, Dimian insisted that “we explained, communicated and advertised for this. There is a top-notch master plan for this zone, people need to look more into the websites and request more one-on-one meetings to get educated about the business opportunities the canal is offering.”
“In order to see the opportunity in the Suez Canal development zone, you have to look at the problems in Egypt,” Salman said, listing a number of long-standing structural issues that continue to plague the process of doing business.
Among these are the very infrastructure that supports the industrial sector, the scarcity of industrial land, licensing procedures, permits, logistics and the ability to capitalize on Egypt’s strategic geographic location. Plans for developing the broader Suez Canal economic zone supposedly hold the solution to these issues, as the independent authority tasked with overseeing investments and developments in the area aims to facilitate permits, lay down a proper infrastructure, provide access to ports, change the way the bidding process over land is conducted and remove red tape, as well as give access to the local market and act as a gateway to international markets through the free zones and free trade agreements Egypt has with other markets.
“We’ve done the masterplan, changed the economic zones law and the authority for zoning and licensing has already begun operating,” Salman said.
With the six ports in the Suez Canal zone, the government is planning a joint venture with Singapore’s Port Authority to learn from their management experience. “To market a port, you need global connectivity,” Salman stressed.
Updating the audience on the progress of plans for a new administrative capital, Salman confirmed previously reported news that the non-binding memorandum of understanding signed with the Emirati company at the March Egypt Economic Development Conference (EEDC) did not translate into a binding contract.
“When it came to transferring this MoU into a legal commitment, we have different commercial aspects that we did not agree on. We did not reach a win-win situation,” he said.
“We are still committed to the capital city, as it is the natural progression of New Cairo,” Salman said. As a result of last week’s visit, Chinese companies appear to be heavily invested in plans for the new capital, which Salman says will take more than 20 years to complete, with phase one happening over seven years.
He pointed to the success of other agreements that came about during the EEDC, where legally binding contracts worth US$63 billion were signed, of which there is now an 87 percent success ratio, and all of which are expected to factor into the investments needed to spur economic growth.
According to Salman, to reach a 5-5.5 percent growth rate, Egypt needs to garner LE400 billion in domestic investments and at least US$10 billion in foreign direct investment.
Officials said the focus will be on labor-intensive projects, away from capital-intensive projects with foreign components, and that they are studying possibly setting a cap on government capital intensive projects with components from abroad.
Subsidies are one of the main areas of reform currently underway, two of the weightiest being energy and food subsidies, which Dimian said are expected to disappear over the coming five years.
“I can no longer say we have food subsidies,” he added. “What we have now is a cash-transfer system, and it is working quite well. People are getting better service and are more comfortable with the new system, and we stopped a lot of leakages that used to be there.”
Still, there is a need for social spending, which he said is “a matter of reallocating the residuals the economy is creating, from people with higher financial capacity to people with lower financial capacity.” This redistribution “puts a constraint on our expectations from the fiscal consolidation,” he noted.
The question of the value-added tax came up from executives of some of the biggest companies. Dimian said that this will be one of the last tax reforms to be implemented. “It is not a new tax. We already have a partially value-added tax that is being implemented,” he said. “This is not why I am not worried about completion, because it’s just one step in what we have been doing since 1993.”
He also explained that the government is working on “connecting the income tax and the sales tax with customs in a way that will give us better information and capacity on tax planning.”
Dimian added that there are plans to “go back to international capital markets [soon], but it’s a bit early to say the amount now.”
“We will introduce the sukuk [Islamic bonds] to broaden our base of financing, and we are working to consolidate our fiscal deficit,” Dimian added, referring to additions made to the regulatory framework governing securities that will allow for Islamic bonds.
Commenting on the controversial new civil service law, which has stirred the anger of public employees, Dimian said that while it is “challenging and subject to many arguments, we are going to continue to implement. Downsizing bureaucracy and the number of employees will not happen overnight.”