Egypt’s financial account recorded $8.5bn in the fiscal year (FY) 2018/19, down from $22.1bn in FY 2017/18, dropping 61%, according to the Central Bank of Egypt (CBE).
This huge decline was mainly driven by deterioration of several types of investments in Egypt, whether portfolio, foreign direct investments (FDI), and others, while these investments are increasing abroad.
Portfolio investments in Egypt declined by 65% to $4.2bn in FY 2018/19, compared to $12.04bn in FY 2017/18. While portfolio investments abroad increased to $96m FY 2018/19 against $20m in FY 2017/18.
Moreover, FDI in Egypt declined by 24% to $5,9bn in FY 2018/19, compared to $7,7bn in FY 2017/18. While direct investment abroad increased by 38% to $374m in FY 2018/19, from $271m in FY 2017/18.
Investment banks attributed this decline in Egypt’s FDI to local and global reasons.
Radwa El-Swaify, head of research at Pharos Holding, told Daily News Egypt that FDI in Egypt has been ranging between $7-8bn annually. This figure is not bad at the time of economic reform, especially that it began to show its effects on the ground, and most of the country’s economic indicators have improved.
During economic reforms, FDI takes some time to recover after the reforms’ implementation, unlike hot money.
El-Swaify believes that the recent decisions made by the CBE to reduce interest rates and control inflation rates are very positive and will contribute to stimulating more investments into the country, whether foreign or domestic. They will also help the recovery of local demand which in return would encourage more investments. On the other hand, lower interest rates mean lower cost of capital and inflation rates, and higher local purchasing power and consumption, she added.
Since the beginning of 2019, the CBE’s Monetary Policy Committee (MPC) has cut interest rates by 650 points, reaching 13.25% and 14.25% on overnight deposit and lending rates, respectively.
Moreover, El-Swaify stated that the most sectors that will witness an increase in foreign investments are consumption sectors, especially education and health, based on the behaviour of consumers in Egypt.
She thinks the current economic situation in Egypt is positive, and the country will see more FDIs in the second half of 2020.
As for the private sector in Egypt, El-Swaify said it’s trying to recover from the effects of the 2016 floatation, diversify its products, and gradually increase prices to increase profitability.
As for local industry, El-Swaify highlighted the unequal competition of foreign companies with the local private sector, as foreign firms enjoy lower manufacturing costs, which prompted local investors to call for reducing gas prices for factories, and the government responded positively, but they demanded more cuts.
Moreover, Aliaa Mamdouh, director of macro and strategy at Beltone Financial, told Daily News Egypt during the MENA Macro-Strategy Conference that Egypt has one of the highest growth rates, supported by national mega projects and the economic reform programme implemented in cooperation with the International Monetary Fund.
She added that consumer spending levels are still weak, but will regain their strength soon. In addition, the liquidity in banks will start to get out after interest rate cuts which would encourage domestic and foreign investments.
Mamdouh believes that capital expenditure (CapEx) will start to recover and emerge strongly again in the second half of FY 2020/21 because it depends on demand, noting that most factories are now operating at only 80% of their capacity.
However, Mamdouh ruled out that FDI in Egypt will fully recover next year, but it will see a slight increase because the local industry has not improved enough and it’s centralised in the energy and gas exploration, which will gradually decrease.
She added that the decline of FDI was not the problem of Egypt only, but the whole region was affected over the past two years because investment in debt instruments have been more attractive, supported by high interest rates in the emerging markets since 2017.
As for the private sector, Mamdouh said mega projects did not hinder the development, but there is a slowdown in the recovery of the private sector because it was waiting for interest rates to fall from the previous levels at the time of floatation and also the recovery of demand and consumer spending. Mamdouh believes the recovery in the private sector can be seen at the beginning of FY 2020/21.
She added that the mega projects in the previous period was a mandatory and essential factor to protect the economy from recession and create employment opportunities until the private sector recovers.
During her speech at the opening session of the Africa Investment Forum 2019, Minister of Investment and International Cooperation Sahar Nasr stressed that this year saw launching more than 154 projects in the areas of infrastructure, transport, renewable energy, agriculture, and human resources.
She pointed out that despite the decline in FDI globally by 13% compared to the previous year, Africa was the highest continent in terms of FDI inflows, seeing an increase of about 11%.
Nasr noted that over the past two days, several workshops have been held between African economic officials to develop a unified vision to promote investments, support industry, and increase trade exchange.
“We agreed to adopt a programme that puts Africa on the global investment map,” the minister said.
Nasr added that Africa has many opportunities that were translated into an increase in growth rates in many countries of the continent according to the IMF as six of the 10 fastest growing economies in the world were in Africa. “This gives us optimism and determination to continue our efforts towards development,” she added.
Egypt climbed six places to rank 19th on the World Bank’s Doing Business Index 2020.
According to international reports, Egypt leads many indicators and it has advanced 15 places in the Global Competitiveness Report 2019 of the World Economic Forum. Egypt also ranked among the five fastest growing economies on the Harvard Index. Moreover, Egypt had the largest share of FDI in Africa in 1H 2019, estimated at $3.6bn, according to Trends Monitor Report released by the United Nations Conference on Trade and Development (UNCTAD).
Nasr concluded that political and economic stability has had a significant impact on the country’s risk index issued by the Organisation for Economic Co-operation and Development (OECD) to advance Egypt to the Green Zone. This reflected on considering Egypt as one of the most attractive African countries for investment in 2019 for the second consecutive year.