Egypt Country Report by UMS International

16-30 June, 2018

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Algeria…..…..…........DZD 215 Bahrain….......................BHD 1

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Egypt……............…...... EGP 18 Iraq……...…..…...... IQD 3200

Jordan....….........….......JOD 2 Kuwait….......…......KWD 0.75

Lebanon..............LBP 4000 Libya…........................LYD 3.5

Oman…….................…..OMR 1 Qatar……….................…QR 10

Saudi Arabia.........…SAR 10 Syria............................SYP 200

UAE...…....…..…........…AED 10 Yemen…..................YER 600

13/06/2018 14:37

THE WORLD’S CITI. IT’S WHEREVER YOU ARE.

Some call them optimists. The founders. The builders. The producers. The doers. Making good the many challenges of our times. We call them progress makers. And we’ve made it our job to believe in their ideas. Be they multinationals wanting to invest in Egypt or Egyptian companies looking to expand into markets around the world. Wherever they come together to create or build something, we’re there to help make it real.

citi.com/progress

12/06/2018 17:35

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SPECIAL REPORT: EGYPT

With economic reforms starting to reap dividends, investor confidence is returning to Egypt

EGYPT POWERS AHEAD W

ith a government committed to following through with tough economic reforms and a population approaching 100 million people, Egypt is widely viewed as one of the Middle East and North Africa’s key markets to watch. The country appears to have fully shaken off the confidence-sapping events that followed the 2011 revolution, in large part due to the government of Abdel Fattah el-Sisi following

an IMF-backed programme of economic reforms. Recent economic figures certainly back this up. Real GDP growth has strengthened over the past four consecutive quarters, climbing to 5.3 percent year-on-year in the second quarter of 2018, according to figures quoted in a report from Emirates NBD. “We expect that the expansion will remain robust, forecasting an annual 5.2 percent this year, and 5.5 percent

in 2018/19, compared to an average of just 3.3 percent over the previous seven years,” stated Daniel Marc Richards, MENA Economist at Emirates NBD. “The country’s IMF-sponsored reform programme is progressing as planned, and with much of the shortterm pain now in the base, Egypt is set to reap the reward.” Richards added that the budget outlined for fiscal 2018/19 showed a commitment by the Egyptian government to economic reform and steady

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reduction of the budget deficit. However, he added that this process will be slow. Emirates NBD forecasted that the shortfall would be equivalent to 8.5 percent of GDP, compared to a projected 9.5 percent this year. The re-election in late March of President Abdel-Fattah El-Sisi for a second term, albeit with little opposition, confirmed the country’s path of economic reform. As Emirates NBD pointed out in its report, the economic reforms were wide-ranging, consisting of the floatation of the Egyptian pound in 2016 in addition to subsidy cuts, tax rises and the removal of capital controls. While these measures re-energised foreign investment and helped Egypt win a $12 billion IMF loan, they also sent inflation soaring above 30 percent in 2017.

However, the government has no doubt taken comfort in recent data that shows inflationary pressure easing. Indeed, the annual inflation rate in urban parts of Egypt in May rose at its slowest pace in more than two years, giving the central bank some breathing room ahead of fuel subsidy cuts expected within weeks. Consumer prices were 11.4 percent higher, according to the state-run statistics agency, CAPMAS. Prices rose 0.2 percent month-on-month, compared with 1.5 percent in April, as food and beverage costs, the largest single component in the price basket, fell 0.3 percent. The annual rate is now near the bottom of the central bank’s target range of 13 percent (+/-3 percentage points). The bank’s monetary policy committee is scheduled to meet toward the end of the month to discuss interest rates. Core inflation, the gauge measured by the central bank, was 11.09 percent in May, slowing from 11.62 percent the previous month to the lowest level since April 2016. The reforms certainly have backing from financial institutions in the country, who appear upbeat about the impact of the policies and their effects. Angus Blair, COO of Pharos Holding, a Cairo-based investment bank, believes the changes taking place in Egypt should allow for the overall expansion in the financial services sector “in breadth and depth over many years”. This expansion of the financial services includes private equity, microfinance, insurance and funding for mergers and acquisitions, as well as trading in the stock market, according to Blair. “Stock market volumes have increased over the last year and we expect them to continue to do so, helped by the government’s IPO programme to sell down stakes in state-owned enterprises, as well as other new listings.” Blair adds that while the overall reform programme has allowed for a backdrop to help transform business sentiment, more needs to be done to boost the private sector’s growth prospects further. “As a result of the reforms, many sectors offer good growth, although I remain most bullish about the consumer sector which is buoyed by strong consumer market liquidity, as well as Egypt’s demographics,” he says. “I am optimistic about the future since Egypt’s de-

mographic structure means that it will put pressure on all the government’s decision makers to do the right thing and make the right reforms to grow the economy as fast as possible.” After some years of volatility and the devaluation of the Egyptian pound in November 2016, which reset the Egypt investment risk matrix for the better, investors have been looking for companies offering a sustainable recovery in earnings and some smaller companies which have the potential to turnaround. The challenges for investors include the need to be more discerning than they were in the past and there is scope to improve transparency still further, even though Egypt is

“I am optimistic about the future since Egypt’s demographic structure means that it will put pressure on all the government’s decision makers to do the right thing and make the right reforms” – Angus Blair

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one of the most transparent markets in the region, according to Blair. This has certainly helped to boost investment from around the world, including the Middle East where the UAE has been increasing its investments in the country. Jamal Saif Al Jarwan, SecretaryGeneral of the UAE International Investors Council (UAEIIC), describes Egypt is an emerging market and “a very important partner” for the UAE, with a growing volume of bilateral investments between the countries. “A good number of the UAE national companies have made a significant investment into the Egyptian economy,” he says. Emirati investment in Egypt has already crossed the $6.5 billion mark, according to figures quoted by Al Jarwan. He points out that five UAE banks are currently operating in Egypt with extensive coverage – Abu Dhabi Islamic Bank alone has more than 70 branches in Egypt. Meanwhile, three Egyptian banks are in the UAE. “Nearly 900 UAE companies operate in Egypt and UAE nationals provide vital investment in several Egyptian sectors. Egyptians invested $826 million, excluding investment in real estate, in the UAE and many Egyptians work in the UAE,” Al Jarwan says. The level of investment is likely to increase, with the investment climate in Egypt continuing to improve. “With the new foreign investment law passed recently that regulates foreign investment in Egypt, we see positive signs in the investment climate,” Jarwan adds. A number of UAE businesses have invested in Egypt, including Emaar Properties, Majid Al Futtaim, Emirates, Etihad, Air Arabia, Etisalat, DP World, Dubai Investments and Emirates Petroleum to name just a few, according to UAEIIC. Many other companies are planning to invest in Egypt in the coming years, the organisation adds. “Overall, we as UAEIIC are optimistic about the Egyptian economy and its prospects. We are witnessing good reform in the laws and regulations and committed leadership on various levels at the government level

to speed up the execution of these reforms,” Al Jarwan says. “The world has confidence in the Egyptian economy now due to the increasingly stable socioeconomic situation in the country. The World Bank continues to fund the government spending plan which is a very good sign for investors. Plus the central bank has secured a good level of hard currency in the country.” Yet there remain some factors that, if not addressed, could continue to stymy growth in Egypt, and one of those factors is financial inclusion. Mohammed Assem, Country Manager, Egypt, Mastercard, is optimistic about the country’s growing potential, especially if a greater proportion of the population can be brought into the formal financial sector. “Recent World Bank reports found that Egypt has the potential to bring over 44 million adults into the formal financial sector,” Assem says. Moreover, 85% of the population lacks access to formal banking. Due to this, the mobile phone has become the method of choice for making payments and managing money – a trend supported by the Central Bank of Egypt, which recently issued strict mobile payment regulations to guarantee safety and security for Egyptian users, according to Assem. This has perhaps helped pave the way for a new generation of fintechs. Assem adds that digitisation presents a huge opportunity to drive sustainable and diversified economic development in the country, and fintech companies can be a driving force of this change. “In addition to the potential of generating significant financial returns, fintech companies can also help the economy become more inclusive and less cash-based, both of which are important objectives along the economic development journey,” he says. The rise of fintechs, messaging apps and regulation technology in Egypt and other developing countries are generating “the next wave” of services, according to Assem. “Technology-led systems offer greater access, lowering costs, improving usage, and creating better service delivery for consumers,” he says.

“Nearly 900 UAE companies operate in Egypt and UAE nationals provide vital investment in several Egyptian sectors.”

– Jamal Saif Al Jarwan

“Recent World Bank reports found that Egypt has the potential to bring over 44 million adults into the formal financial sector”

– Mohammed Assem

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Corporate Banking View Mohamed Abdel Kader, Managing Director, Country Treasurer and Markets head at Citi Egypt, offers his insights into the development and potential of Egypt’s economy.

gypt is a key market for Citi, which has been in the country since 1975. And some 42 years after setting up in the country, the bank has every reason to be optimistic. Mohamed Abdel Kader, Managing Director, Country Treasurer and Markets Head at Citi Egypt, says that Egypt is one of the major markets for Citi and remains a key market, with major potential for growth. The company has three branches in Egypt following the sale of its retail banking and cards businesses at the end of 2015. Citi’s main focus in Egypt is on expanding the services it offers to Egyptian corporations, banks and public sector clients as well as continuing to service its multi-national clients with operations in Egypt. Citi is also a large player on the global investment front, including capital market activities taking place in Egypt and the custody business, for which it has one of the largest practices in the country. In line with other commentators, Abdel Kader sees confidence returning to the market especially with the reforms that have been taking place in line with the IMF since around 2016. “There have been some bold decisions taken since then in order to reform the economy. With the IMF programme over the past 18 months the government has been focusing on macro-economic factors,” he says. Indeed, Egypt has made tough decisions regarding energy subsidies on fuel and electricity as well as decisions taken on removing subsidies from some of the other utilities. But the landmark decision was to float the Egyptian pound in November 2016. “Through that they ended one of the last major issues that investors were looking at,” Abdel Kader says. “Now it is really one market with no Foreign Exchange backlogs, trade activities happening, business as usual, so these are quite positive developments on the macro level.” Revenues from individual sectors have also improved significantly with tourism a prime example. Tourism was bolstered by the decision by 15 countries to approve Egypt as a tourist destination and remove travel bans. Tourism revenues for 2018 are expected to be more than double compared to 2017, with $4-5 billion incremental flows according to Abdel Kader. Surging remittances from Egyptian expats are also helping to give the economy a shot in the arm. Abdel Kader points out that 2018 was a record year for Egyptians working abroad with remittances expected to exceed $20 billion for the year compared to an average of about $17 billion earlier. “Real foreign currency economic resources

are starting to come back to Egypt for the first time since the revolution in 2011,” Abdel Kader says. There have been some short-term drawbacks however, including inflationary pressure caused by the subsidy reductions. But the population appears to be weathering the price increases, and the economy will likely benefit in the longer term as the budget deficit declines. “We can see that the budget deficit is moving in the right direction. When the reforms started, the budget deficit was around 12.5 percent, while this year it will be about 10.2 percent after being adjusted following the last wage increases. Overall there are many improvements on different macro fronts.” In terms of the environment for inward capital market investment in Egypt, Abdel Kader says that the opportunity is already clear. “The opportunity is already there and it started immediately after the free floating of the currency in 2016. We immediately started to see the carry trade of Egypt growing. It attracted around $21 billion since November 2016,” he says. Furthermore, the equity markets are also providing “great value” and banking sector stock in particular is performing well, according to Abdel Kader. “The banking sector is giving great value in the market and the Commercial International Bank is the major contributor to the index, in general banks are doing well,” he says. The energy sector is also on a more sure footing compared a couple of years ago. Major arrears have been paid off in the oil and gas sector and the industry is “moving in the right direction”, Abdel Kader says. A large proportion of foreign direct investment coming into Egypt is for the oil and gas industry, and the renewables industry – led by solar – is also seeing an increase in investment. While Egypt’s economy is certainly gathering pace, certain challenges persist, although even here the government is working on fixes and improvements, according to Abdel Kader. The Ministry of Investment has also established a dedicated Investor Service Center to help investors bring funds into the country without confusion about rules and regulations.

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Renewables POWER UP Government support and surging demand for energy bode well for renewables in Egypt

Three renewable energy experts provide their insights into the Egyptian renewables market. Mohamed Jameel Al Ramahi, CEO, Masdar, Dr. Manar Al Moneef, President and CEO, Renewable Energy, GE MENA and Turkey, and Daniel Calderon, cofounder and CEO of Alcazar Energy, discuss trends and opportunities in the market. How is the market for renewable energy in Egypt? Al Ramahi: As the most populated country in the Arab world and the third most populated country in Africa, Egypt represents a significant power market. Economic expansion driven by the government’s reforms is also responsible for the country’s increasing power demand. To offset Egypt’s heavy reliance on gas-fired power generation, the renewables sector has been earmarked for major growth, with the International Renewable Energy Agency (IRENA) observing that Egypt hopes to install 7.2 gigawatts (GW) of wind power and 3.5GW of solar power by 2027. Crucially, Egypt is making steady progress in delivering on these targets, as illustrated by Bloomberg’s own Climatescope report, which shows that the country’s attractiveness for clean energy investment jumped 23 places to 19th out of 71 countries in 2017. Al Moneef: Egypt has tremendous potential across renewable energy, especially in wind, hydro, and solar power. These significant renewable resources, combined with our breakthrough technologies, will help to bring the cost of renewable energy down.

The demand for power is growing exponentially in Egypt; Renewables will support energy production significantly in the coming years in Egypt. Calderon: The government has made Egypt a destination of choice for renewable energy developers and investors in the region. The conditions are only expected to improve as the track record develops, generating greater competition which will in turn drive down the cost of electricity produced from renewable energy. How has the government assisted the industry? Calderon: The government has actively taken into consideration the requirements of all stakeholders resulting in the successful solar FIT (feed-in tariff) programme which has resulted in a comprehensive and robust contractual framework and enabling legislation. Al Ramahi: Setting clear renewable energy targets, introducing policies that incentivise clean energy investment, and providing ready access to the best locations for solar and wind development are three of the most important responsibilities of governments in developing a country’s renewable energy sector. Egypt is taking proactive action on all three fronts, as the high level of investor interest in the 1.8GW Benban solar park demonstrates. As we saw with the introduction of feed-in tariffs in 2014, Egypt has made important regulatory changes to open up its power sector to competition and foreign investment, and to put the necessary decision-making processes in place. It is now moving towards public bids for clean power projects through

auctions, a further sign of the growing maturity of Egypt’s renewables sector. Promoting new projects based on the independent power producers (IPP) model is a sound strategy to address Egypt’s power demand challenge through public-private partnerships, an area in which Masdar has proven competitive strengths. Which forms of renewable and alternative energy are leading the way? Al Moneef: As Egypt has sought to diversify its renewable energy mix, there has been significant focus on wind and solar. As prices have dropped tremendously, with solar dropping 60 percent and wind dropping 50 percent over the past four years, record LCOEs have been achieved for wind and solar, making the cost of renewable energy on par or cheaper than traditional fossil fuel in many parts of the world. GE is consistently focused on developing new technology with higher AEP and lower LCOE in order to meet customers’ needs to deliver clean, competitive power. With the strong wind resources and rapid decline in technology prices, solar has moved faster in Egypt than wind power; we do, however, see a strong market for both going forward. What are the challenges facing renewable energy in Egypt? Al Ramahi: Keeping up with electricity demand, which is growing at around 6 percent per year, is obviously a significant challenge. Much of Egypt’s power infrastructure also requires modernisation. In addition, energy subsidies are a burden on public finances and historically a disincentive for renewables investment. Concerted action is nevertheless being taken, with the government pledging to eliminate electricity subsidies by 2021.

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