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Tue 2 Nov 2010 03:44 PM

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For Egypt investors, growth trumps political risks

Economists say growth prospects drawing in FDI to Arab state, despite fears over political instability and soaring inflation

For Egypt investors, growth trumps political risks
Foreign direct investment into Egypt dipped 16 percent in 2009/10 to $6.8bn
For Egypt investors, growth trumps political risks
In Egypt, securing basic staples is a politically sensitive issue. A significant number of the state’s 78 million population depend on subsidised bread.

Sprightly economic growth is keeping foreign investors upbeat on Egypt, outweighing uncertainty over the future leadership and concerns that soaring food prices could cause unrest.

Inflows of foreign cash to stocks and treasury bills seem to be holding firm before a parliamentary vote this month and a presidential poll next year, although a currency wobble suggests the central bank may be building reserves as a precaution.

No one doubts President Hosni Mubarak's ruling party will dominate both races, but the polls are being watched to see how much space is given to the opposition and, more crucially, whether the 82-year-old president seeks another term.

If he does not, there is no obvious successor.

Stock and money markets may face some political headwinds in the weeks and months ahead, but a gloomy global outlook makes Egypt's 5.1 percent growth in 2009/10 and official forecasts for six percent this financial year too attractive for many to ignore.

The head of the Egyptian Exchange, Khaled Serry Sayam, told a recent investment summit that foreign investors were still net buyers of Egyptian stocks.

Investors face red tape and ropey infrastructure but benefit from being next to Europe and a middle class that is spending more and cheap labour in the country of 78 million, helping draw investment in export-related industries and consumer products.

"The growth story is intact from my point of view," said Sebastien Henin, a vice-president at The National Investor in Abu Dhabi, which manages $120m across the region.

Egyptian listed companies were undervalued, trading at nine times their average expected earnings compared to 11 times for emerging markets as a whole, he said.

Reflecting the confidence, Sweden's Electrolux this month agreed in principle to buy Olympic Group, the biggest appliance maker in the Middle East and North Africa.

"That is a possible sign of change in that the consumer market in Egypt is taken seriously and secondly they will be able to use Egypt as a manufacturing base to export from," Angus Blair, head of research at investment bank Beltone Financial, said.

Foreign direct investment dipped 16 percent in 2009/10 to $6.8bn, but analysts mainly blame a global retreat from emerging markets, not concerns about Egypt, for that fall.

Direct investors with their longer term view seem likely to look beyond the political uncertainty, confident there will be no U-turn in the trend of economic liberalisation implemented since 2004 even if the pace slows in any political transition.

"Portfolio investments can be far more volatile. For sure, if the newsflow is poor in coming months due to these elections, if we have a kind of verbal war between candidates ... probably we could have some volatility on the market," Henin said.

Net foreign holdings of Egyptian T-bills soared to $8.3bn in April from $530.4m in December last year, then rose to $9.2bn in mid-October until a market sell-off, according to Ministry of Finance data cited by JP Morgan

JP Morgan blamed the recent T-bill sell-off for a sudden drop in the Egypt's pound in past weeks, after months of stability.

Some analysts said the central bank may have let it slip to help exporters but may also be gathering more dollars to defend the currency against pre-election volatility if needed.

Beltone's Blair said the weakness was unusual given emerging market currencies were in demand. He said the slide might be driven by Egyptians, who are so accustomed to three decades of Mubarak's rule that the prospect of any change is unnerving.

"I think [the pound's fall] is from domestic pressure, not external pressure, as many global investors actually like the overall economic picture in Egypt," he said.

Mubarak, in power since 1981, has not said if he will run for office again. Officials suggest he will if he can. But rumours about his health have recurred since he had surgery in March, even though he has now returned to a full work schedule.

If he does not run, many believe his son Gamal, 46, could be next or a candidate with military experience.

John Sfakianakis, MENA region chief economist for Credit Agricole, said price rises not politics may be a bigger worry.

"If people...don't have money to buy food, that is a far more serious issue than purely the issue of succession, political discord and the November elections," he said.

Inflation has remained stubbornly above 10 percent but food prices have risen a dizzying 22 percent, hurting the poor most in a country where, according to the United Nations, about 20 percent of the population live on less than $1 a day.

Price rises and subsidised bread shortages in 2008 led to clashes with police. Determined to stop a repeat, the government was swift to reassure Egyptians that bread supplies would not be affected by the latest global wheat price spike. It also raced to refill its stores after a drought hit its Russian supplier.

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