IMF loan does not mean return of foreign investment, experts say

Egypt's leaders continued negotiations with an IMF delegation for a US$4.8 billion loan this week, sorting out the details of a large-scale economic reform program aimed at reducing the country's growing deficit.

The loan, which has been hailed as the country's best and last hope to bring back foreign investment, is meant to help ease the government's fiscal crisis, in addition to functioning as a stamp of approval for the country as a safe place for investment.

But should a concrete plan and timetable emerge next week, after the past year and a half of on-and-off negotiations, economists say that does not mean a return of foreign money.

In a series of interviews, experts told Egypt Independent that transparent economic and legislative measures are more important than the IMF loan in bringing back foreign investment.

Egypt saw a large influx of foreign capital between 2004 and 2008, under Prime Minister Ahmed Nazif. During this time, growth rates stood between 4.1 to 7.2 percent, with approximately $13.2 billion in foreign direct investment.

But the global financial crisis in 2008 significantly decreased the flow of foreign investment, and following the popular uprising in early 2011, it slowed to a trickle.

Egypt's growth rates have dipped to 2 percent, while current foreign investments are estimated to be roughly $2.1 billion.

Search for stability

During the past two years, foreign investors have decided to opt for safer markets. Middle Eastern countries not touched by popular uprisings such as Morocco and Algeria have seen an increase in foreign investments, according to a report by the World Bank's Multilateral Investment Guarantee Agency.

Monett Doss, research manager at Prime Holding, said that the Egyptian government just does not have its act together enough to lure investors back.

"The lack of any clear features to investment laws and regulations after the revolution, the vagueness of the rules of the game, has driven investors to seek stable countries with more transparency," she said.  

In addition to not attracting new capital, the country has also suffered from investors and business divesting or pulling operations out of Egypt. Many have sold US-dollar-denominated Egyptian T-bills, a demonstration of little confidence in the country's recovery.

"Most of the outflow in the T-bills was due to speculation about a doom political scenario in Egypt," said Samer Atallah, economics professor at the American University in Cairo.

Investment outflows stood at 80 percent of inflows in 2012.  In the three years prior to 2011, outflows ranged between 25 and 40 percent of inflows.

If this trend were to continue, Egypt could soon be faced with negative foreign investment numbers. This already happened in mid-2012, when the country had net FDI outflows of $418 million.

A source in the Central Bank's research department told Egypt Independent that the disbandment of several projects in the oil and gas sector was the cause of 2012's outflow.

Wael Zeyada, head of research at EFG-Hermes, concurred with the source's statement.

"Most investments across the board have been dropping due to the turbulent economic and political conditions," he said. "Even the stickiest investments, as those of the oil and gas, have been no exception. This could account for the majority of the decline in American FDI's."

He said the 65 percent drop in American investments over the past year does not bode well. So far, European investments have compensated for the drop, with a 50 percent in 2012.

According to figures from the Central Bank, 60 percent of all foreign investments in Egypt are bound to the energy sector; of those, the European Union holds 80 percent. The countries with the largest amounts of foreign investments were the UK and Belgium, investing $5.8 billion and $2 billion, respectively.

Fostering growth

Experts argue that the nature of the foreign investments will be just as important as the amount in helping Egypt's economy recover. To achieve this, they say, the country will have to lure investors from varied industries who have a more direct impact on the economy by creating jobs.

Atallah said that even when foreign investment was at its peak in Egypt, most of it was in the energy sector, which typically does not create much employment growth.

"The energy sector is not a labor intensive sector," he said. "It doesn't create a substantial amount of jobs. It's basically an extractive sector."

Greenfield investments, on the contrary, occur when multinational firms invest to build factories and operational facilities from the ground up, creating long-term job prospects and advancing the country's human capital.

According to the CBE's economic report, roughly 30 percent of foreign investments could either be classified as greenfield or paid-in capital in 2012. Of these greenfield investors, most were from Arab countries.

Egypt needs to clarify its long-term policies if it wants more long-term investments, economists say.

"We lack industrial development policies that direct strategic investments to important sectors in the economy that create jobs, have high economic value, increase global exports and reduce the need to import," Attalah said. "We lack a clear vision of where we see the economy in five to 10 years from now."

Investors have said they want to see a commitment from the government for a short, medium and long-term plan. It would be naïve to think the IMF's approval of such a plan would satisfy investors, Attalah said.

"Statements of Masood Ahmed, the regional director of the IMF, do not guarantee that investments would come immediately after the loan is sealed," he said. "A lot of international and domestic factors come into play."

In today's global economy, investors can afford to be selective. Widespread issues with bureaucracy and corruption lower Egypt's comparative advantage, in comparison to countries like China or Turkey.

"Even if the loan attracts investors, they will appeal more to treasury bills or the energy sector, not the investments that create strong industrial base," Attalah said.

Doss agreed. She said the loan should only be utilized if it's part of a plan, not the plan itself. In the latter case, the loan would only be a burden.

If the loan's stipulations, such as lowering energy subsidies, are countered with productive policies and strides in making the legal and bureaucratic system more efficient, then she said investors will come.

"Otherwise, the loan can have disastrous effects on FDIs," she said.

Recent court rulings against foreign companies, she said, such as that against the Sukari gold mine, could only drive more investors away.

"When there are transparent, consistent laws for foreign investors, only then will investments return," she said.

Zeyada proposed that the Egyptian government should reconcile all foreign investor issues to resolve previous cases deemed as corrupt. He suggested that Egypt adopt legislation like that of South Africa after its own revolution, which offered a path for reconciliation.  

"That effectively means there is a more structured approach to deal with problems," he said.

To retain sufficient growth levels, according to Zeyada, Egypt needs between $5 and 7 billion annually, over and above the oil and gas sector.

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