Egypt-GCC business ties grow as political bonds flourish

Political aid has helped Cairo to stabilise reserves and cut foreign currency shortages and is promoting a new wave of Gulf investment.

Egypt’s economy has benefited from a warming of relations with the UAE, Saudi Arabia and Kuwait, but Cairo still faces difficult decision to ensure a long-term recovery, officials and economists say.

Visits between government officials from Egypt and the three GCC nations have grown steadily since they extended billions of dollars of support to prop up Egypt’s ailing economy during a time of political upheaval.

The aid has helped Cairo to stabilise reserves and cut foreign-currency shortages, and in turn helped to boost the flagging Egyptian pound.

The government assistance is also starting to be bolstered by business investment.

This month, the UAE construction company Arabtec won a Dh147 billion contract to build homes in Egypt over the next five years. Emaar Misr, the Egyptian unit of the Dubai developer Emaar Properties, announced last month it would spend more than Dh3bn on a residential and commercial scheme in Cairo. The Dubai-based retail group Majid Al Futtaim plans to establish several shopping malls in the Egypt.

“Saudi Arabia, UAE and Kuwait seem to be very positive on Egypt and have already transferred large amounts of money,” said George Abed, the director and senior counsellor for Africa and the Middle East at the Institute of International Finance, a global organisation representing financial services companies.

“The private sector in these three GCC countries is following the official transfers to begin to look at opportunities for investment, and Egypt has enormous opportunities for investment once it maintains stability.”

But the political and business capital also carries risk. Some observers question whether the GCC’s money is a temporary bandage across wider wounds in the Egyptian economy.

Subsidies on food and energy remain one of the biggest drains on public funds. Energy subsidies cost the government US$17bn a year (Dh62.4bn), taking up 20 per cent of the budget.

Neveen El Shafei, Egypt’s assistant minister of investment, said there was an “urgent” need to reform subsidies.

“As I see from some of the issues being put on the priority list at cabinet meetings, these issues will be dealt with in a more direct way,” she said during a visit to Dubai this month. “For the economy to continue on an upturn we have to deal with a number of issues, not just short-term temporary measures.”

Reform to subsidies as well as increasing some taxes were key conditions laid down by the IMF for a $4.8bn loan under discussion until last year. But such reforms have become less pressing as the GCC money has flowed in, including $6bn from the UAE. Officials are also well aware that raising energy prices could provoke unrest in a country where street protests have helped to remove two presidents in three years.

“Even if a slow pick-up in growth is possible in 2014, we still think that a new government will have to think more comprehensively about economic policy at some point,” wrote Farouk Soussa, Citigroup’s chief economist in the Middle East, in a recent report. “In particular, the root cause of many economic problems remains the fiscal deficit, which has been widening steadily since 2008 and looks set to remain firmly in double digits in 2014.”

For GCC companies investing in Egypt, there are also risks. The UAE-based developer Damac Properties was among several foreign investors ensnared in 2011 in a dispute over a land contract reached when Egypt’s long-time president Hosni Mubarak was in power. Such cases have been settled but the government is seeking to strengthen investment laws to help protect investors’ rights and make land more easily available for business projects.

“What we need is to restore confidence among Egyptian investors and then everything will come back, including FDI,” said Mona Zulficar, the chairwoman of the Egyptian investment bank EFG-Hermes. “Restoring confidence is extremely important so we do not allow litigation to stand in the way.”