Is it time to invest in the Egyptian market, or will the current local and international political and social instability hinder more investments to come?
In his first speech after the parliament elections, President Hosni Mubarak introduced plans to boost the investment environment, raise the annual growth rate and create 700,000 jobs in 2011.
Egypt’s economy grew by around 7% in each of the three years before the global economic crisis. Growth then slipped to 4.7% in 2008-09, and rose to 5.1% in 2009-10. Finance Minister Youssef Boutros Ghali on 13 December forecast growth of 7% in 2011-12 and 8-8.5% thereafter.
However, political stability, and most notably, the 2011 presidential elections, is considered important elements in determining the investment atmosphere locally. As for the international element, the Sudan split and the rising tension between Iran and Israel play also a very critical role.
“Most of the recent incidents emerging nowadays locally or even within the region lead to one definite way,” said Ibrahim Zahran, former chairman of Khalda Petroleum Company and member of the National Specialised Councils.
“The unbalanced atmosphere always results in the investor to withdraw his money from the market. For example, when Yemen had unstable society, which was undergoing constant disruptive violence in its south, the Canadian investor took away his funds from the market. Hence, it is believed that the capital is always coward,” he explained.
Tens of thousands of Egyptians who protested on the 25th of January, inspired by the revolt that toppled Tunisia’s President Zine El Abidine Ben Ali, they caused social and political instability locally. People thronged the streets in the form of large-scale protests that authoritarian Egypt has not seen in decades. Security forces and police broke up a rally in Cairo early on that day, firing tear gas and wading into the crowd with batons.
“I do not believe that we have been living in a stable society for thirty years, since the beginning of President Mubarak’s helm, but it can be better described as a political deadlock,” Zahran believed.
“The demonstrations occurred on the 25th of January emphasized that there is no stability within the social level. Hence, there is a question imposing itself: will the investor continue in his march towards more investments?”
“In normal conditions, within Egypt, the foreign financier just invests within minimalistic conditions whether they were stimulations or encouraging situations. Thus, there is an essential need for a marginal field technology in the coming period,” Zahran added.
“In general, I believe that, taking such circumstances into consideration, 2011 will have a negative impact on the Egyptian petroleum sector. For instance, our imports from natural gas and petroleum condensates will increase,” he concluded.
Moreover, an official source, who preferred to be anonymous, believes that the current unstable Egyptian scene will also affect badly the investing process and alike Zahran, he believed that the “capital is coward”.
On the other hand, regarding the impact of such unstable atmosphere on the long run, Rashid Mohamed Rashid, Minister of Trade and Industry, expressed his fearful in the second day of demonstrations.
“I am afraid of the impact the “anger” demonstrations on the investment climate in Egypt, since the stability of the region is an essential factor to attract foreign investment,” Rashid expressed.
From his side, Eng. Aziz Effat, Ex Assistant Chairman for Exploration and Board Member, Agiba Petroleum Co and Deputy GM. PetroSA Egypt, told Egypt Oil and Gas that the demonstrations will of course affect the investments in the Egyptian oil and gas field.
“The investors may sell their shares for Egyptian companies or even will not renew their investments if they began to lose their revenues,” Effat stated.
It was known that after the first day of the demonstration, the Egyptian stock market was down by 6.24% for the first day in consequently the market was suspended until “stability returns”; it lost LE25 billion while in the second day it was down by 14%.
“Awing to the demonstrations occurred on the 25th of January, the Egyptian stock market was badly affected and accordingly the petroleum sector may also be affected,” Effat said.
On the other hand, the anonymous source believes that the Sudan split will also play a significant role in reshaping the Egyptian petroleum sector.
“After the Sudanese split, the new-born Sudanese south country will have the due attention and attract fresh investments as a result of being a rich-oil country,” the official source told Egypt Oil & Gas.
“Awing to the increasing grabbed attention on the south Sudanese country, the Egyptian petroleum sector may as a result have a negative impact,” the source added.
He explained that the new oil-rich country will attract new investments especially from USA and Europe in addition to the existed Chinese role in the petroleum field. Consequently, due to the competitiveness in the global market and especially in the African region, the stream of investments into the Egyptian market will be affected because of the emerging of such fresh market.
From his part, Effat also shed light on the existence of Israel in the south of Sudan and urged that Egypt should have an equal influence in order to ensure the domestic water future of the country and even to enjoy a piece of the petroleum cake. Besides, he also agreed on the predicted affect from such split on the Egyptian market.
“The Sudan split will affect on the investing atmosphere in Egypt in general and the petroleum sector in particular,” Effat said.
“Our Southern borders became unstable because of the split and this will affect in our stable circumstances which is essential for investing.
“Moreover, the new-born country which is considered rich with oil will certainly attract new investments which accordingly not in favour of Egypt which was instead on the spot,” he added.
What’s more is that it is considered the path of the Egyptian water from the River Nile which is one of the elements of stability in Egypt and with any prejudice in our share, the future will be mysterious. So, for him, we should have a role within the southern Sudan whether it was for water projects or oil investments.
Alternatively, Zahran predict that the status-quo nowadays in Sudan will also affect on the Sudanese market itself and not only in the Egyptian market.
“In Sudan, transforming a barrel of crude oil from the south to the Sudanese port in north costs $6. While after the Sudanese split everything will suffer disorder. I know a petroleum company operating in five concessions in Sudan and it nowadays produces nothing due to the unpredictable future of their production,” Zahran assumed.
As an energy expert, Zahran believes that the dispute between Iran and Israel will turn to be positive during 2011. Meanwhile, it is known that Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), ranks among the world’s top three holders of both proven oil and natural gas reserves.
“Iran holds the world’s second-largest natural gas reserves. Consequently, its gas
is crucially needed in Europe and in the Far East. Hence, their optimal hope is focused on the makeup between USA and Iran since their strategic interest lies on Iran’s natural possessions regardless its ability to possess a nuclear weapon,” Zahran emphasized.
Regarding the pending presidential election in the last quarter of 2011, Effat believes that the political path remains unclear and the investor carefully study the status quo in order to preserve his capital in the market.
Yet, Mubarak’s refusal to announce whether he will extend his nearly three decades in power or to designate a successor has fuelled concerns that a succession crisis eventually could lead to political violence and instability not seen since the 1952 revolution that abolished the monarchy and established a republic. Such an outcome could spell disaster for the government’s attempts to attract more foreign direct investment and increase tourism revenues, a lifeline of the Egyptian economy.
Moreover, experts witnessed that the investors became shy away from major investment projects until a clearer picture on the succession question appears. Besides the question of succession, some note that the exclusion of the opposition from the November parliamentary poll through a rigged electoral process might lead to the radicalization of this opposition, which in turn threatens stability.
This uncertainty could worsen prospects for foreign investment needed to kick-start domestic investment and diversify growth away from consumption.
“If the investor felt that the market is safe and stable, he will invest more to gain more revenues and vice versa,” Effat concluded.
By Ahmed Morsy