-8.2% in FDI: Where does the money of cautious investors go in Egypt?

While Egypt is targeting a 6%-economic growth rate in fiscal year 2020, the country is struggling in attracting and sustaining strong foreign direct investment (FDI) inflows.

Previously, Minister of Investment and International Cooperation Sahar Nasr announced that FDI will reach around $8 billion by 2019/2020, regardless of global economy slowdown and trade tensions. However, the numbers today do not seem promising.

Although the 2019 World Investment Report ranked Egypt as the top host of FDI inflows in Africa with $6.8 billion in 2018, the amount records an 8.2% drop from the previous year ($7.4 billion).

FDI is still beneath the state’s annual $10 billion-target, despite promising macroeconomic indicators after the economic reform program and amendments to the New Investment Law. So why are investors still cautious about pumping their money into Egypt and what are they actually investing in?

Capitalizing on existing businesses instead of building new ones
High cost and low consumer spending are two of the main factors causing wariness amongst investors. Coupled with inconsistency in policy making, the equation leads to a negative result.

“Foreign investors are usually scared off if there is constant fluctuation in policy making and if economic decisions are taken randomly. What they look for is how a business environment is enabled and if institutional reform is promising for their investments,” founding partner at Acumen Consulting Inji Borai tells Business Forward.

The FDI entering Egypt is not looking to establish new businesses, but rather work with existing ones.

Borai explains that post-revolution, Egypt is being perceived as risky. Therefore, foreigners feel safer putting their investments in already established factories and companies, instead of building them from scratch, as they used to.

Foreign investments that took place between 2015 and 2017 were acquisitions of existing businesses, such as Kellogg’s buying Temmy’s and Abraaj Group investing in Cleopatra Hospitals, according to Borai.

Concentration of FDI on oil
Based on the World Bank’s economic monitor report entitled “From floating to thriving: Taking Egypt’s exports to new levels,” FDI was skewed to the oil and gas sector.

Chairman of Rasmala Egypt Asset Management Ahmed Abou El-Saad echoed the argument at a seminar last month, saying that around 80% of foreign investments focus on oil and gas projects.

Although falling interest and inflation rates are crucial to attracting more investments, non-oil FDI is not expected to recover until the economic program is 5-10 years old, Allen Sandeep research director at Naeem Brokerage told Enterprise.

According to a commentary by the Tahrir Institute for Middle East Policy (TIMEP), Egypt needs FDI that is labor-intensive and relies on local production and experience rather than on importing equipment and labor expertise.

Leveraging different sectors to boost FDI
Financial and market experts agree that focusing on non-oil sectors is key to recovering FDI. Borai believes that although the tourism ministry is doing a good job at a macro level, unconventional types of tourism need to be introduced to pave the way to global exposure.

“The one sector that should be getting major investments though is the off-shoring industry in Egypt – the tech sector. We are letting India dominate that sector globally while we have the resources and talent to do so,” she adds.

The food industry could also largely contribute to FDI inflows, if it were better branded. “The promotion and marketing of local cheese, mango and guava, for instance, will make Egypt stand out in the global market and could turn the country into an export hub for certain food products.”

So is it all gloom?
Last week, the World Bank forecast an increase of up to 3% in FDI flows from the total gross domestic product (GDP) by 2021. Additionally, the Ministry of Planning’s medium-term of sustainable development is working on achieving FDIs worth $20 billion in 2021/2022. This includes developing non-oil exports at an average annual growth rate of around 13% to reach $35 billion, while reducing imports to $45 billion by 2022.

Although Egypt lacks investment inflows, the country’s current FDI is enough to cover the deficit by around 25%, according to Abou El-Saad.

“Our foreign reserves reached $44 billion in the past few months, a new record that resulted from the Central Bank of Egypt’s (CBE) decision to cover foreign liabilities on the investment front. Egypt’s investment portfolio climbed from $10 billion to $17 billion,” he explained.

However, ensuring the sustainability of FDIs remains crucial.

“A multinational company investing in a certain sector will improve the capabilities of the sector’s local manufacturers, enabling them to practice what they learned and linking local capacity to foreign investors,” Borai elaborates. “This practice will allow local manufacturers to export in case the multinational company decides to exit the Egyptian market. This is how FDIs become sustainable.”

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