Egypt has become, after South Africa, the largest market for foreign direct investment (FDI) on the African continent. Though the total capital inflow may be low by global standards, it is on the rise and the trend is tipped to continue for the foreseeable future.
From a mere $700 million in the 2000/01 financial year, FDI rose to $6.1 billion for the year ending June 30, representing just under 5.8% of GDP. With a further $8 billion expected to enter the Egyptian market from overseas in the current financial year, South Africa could see itself relegated to second place as the continent’s premier FDI destination.
While at least some of the sharp rise in FDI can be put down to the increasing pace of the government’s privatization program, a well that will one day dry up, this is not the only factor in Egypt becoming a favored destination for investors.
The government of Prime Minister Ahmed Nazif has passed a raft of legislation since coming to office in 2004 aimed at streamlining investment procedures, opening up the economy and instilling confidence. Though the process is nowhere near complete, which the government acknowledges, the increase in FDI indicates that overseas investors are taking notice.
Just as significant as the pro-investment stance of the government has been the shift away from Egypt’s energy sector, that traditional magnet for foreign investment in the country. This reflects both a broadening of the economy’s base and recognition that there will come a time when the long time mainstay of energy will be exhausted.
Steady rise
In the last financial year, overseas investments in Egypt’s petroleum sector accounted for 30% of all FDI, down from 65.1% the previous year. By contrast, FDI in non-petroleum sectors of the economy topped $4.28 billion in the 2005/06 financial year, a year on year rise of some 214%. Better still for Egypt was the fact that a full 54.78% of these investments came in the form of newly established companies or capital issue increases in existing operations.
Almost as positive for the long-term outlook was the relatively low level of FDI represented by the sales of companies and productive assets to foreign investors, which came in at 905.7 million or 14.82% of the annualized total. Given that this figure included receipts from the privatization process, it is clear that foreign capital is being attracted to Egypt not by some fire sale of state-owned enterprises, but by the potential that the country possesses.
Interestingly, one other component, the 2005/06 FDI figures for investment in real estate, remained steady at just 0.42% of the total. While much of the overseas investment in neighboring countries is being driven by capital inflow into the property market, with the member states of the Gulf Cooperation Council (GCC) being the largest single source, Egypt is obviously going down a different path – that of business investment.
Another change in the complexion of FDI in Egypt is where these funds are coming from. While both the Middle East and Europe remain significant investors in the country’s economy, both Egypt’s government and the burgeoning private sector have been actively looking further afield in the search for foreign capital.
With the opening of its markets to investment, and with the advantages the country possesses in terms of location, sitting astride trades routes to Europe, Africa and the Middle East, Egypt has been promoting itself as the ideal destination for investors from Asia, with China being the most recent target.
In September, a deal was struck that will see a joint Sino-Egyptian factory established to cater for the textile, footwear and pharmaceutical industries. The same month, Citic Group, China’s biggest state-run company, announced it was to invest $800 million in an aluminum smelter in Egypt. The two countries also agreed to boost bilateral trade to $5 billion in the coming years, bringing it to the same level that Egypt currently enjoys with the US.
