Financial Times
Investment: Uncertainty casts a cloud over FDI
By Abeer Allam
The initial optimism surrounding the Middle East’s popular uprisings, sparked by political corruption and unemployment, has given way to mounting concerns over the political and legal uncertainty that has stymied foreign investment, at least in the short term.
Cash-rich Gulf investors, who flocked to Egypt and other parts of north Africa during the recent oil boom, are opting to invest at home and to wait until the political situation is clearer.
More
ON THIS STORY
- Overview Need for funds is at its greatest
- Restructuring Debt maturity puts experience to the test
- Sharia compliance Banks hit by a shortage of products
- Stock exchanges Imbalances keep Gulf region on the sidelines
- Bonds Saudi issuance is important signal to companies
IN ARAB WORLD: BANKING & FINANCE
- Stock markets Egypt defies the odds
- Sovereign wealth funds Attention turns to the home front
- Islamic banking Impressive growth underscores success
- Private banking Wealthy go in search of better protection
The drop in investment in north African states has been exacerbated by the unfolding eurozone crisis, which has resulted in an increased international cost of borrowing, restrictive credit rules and a liquidity crunch.
This has affected investment in countries such as Egypt, Tunisia, Morocco and Libya, where European foreign direct investment is a main component of the gross FDI, according to the business and financial services practice for Frost & Sullivan.
As Egyptians voted last week in the first presidential election since a popular revolt ended the 30-year rule of Hosni Mubarak last year, foreign investors are closely watching the outcome which will shape the political and the economic agenda of the most populous Arab nation.
Egypt posted FDI outflows of $482.7m in 2011, compared with inflows of $6.4bn a year earlier.
Leading presidential candidates, including former regime officials Ahmed Shafiq and Amr Moussa, and Islamists Abdel Moneim Aboul Fotouh and Mohamed Morsi, say they favour a free-market economy and will work towards attracting foreign investment.
But Mr Aboul Fotouh’s suggestions to cut energy subsidies by half to energy-intensive industries, and reassess FDI on the basis of technology transfer rather than job generation, has made some investors wary.
“The problem is lack of visibility, investors will not take the risk,” says Sébastien Hénin, portfolio manager at the National Investor (TNI). “They also want to rely on having cheap energy to export competitive goods but it will be more challenging to get such advantage.”
Foreign investors and analysts are less concerned about electing a Muslim Brotherhood candidate because they believe he will work well with the Islamist-dominated parliament.
Still, the vague nature of the future relations between the army and the president, or the role of the presidential authorities in writing the constitution, add to the confusion.
The Egyptian economy has been hit by a drop in tourism as well as the lack of decision making by officials afraid of being accused of corruption, analysts say.
Allocating land for projects, for instance, has all but stopped because land has been the centre of corruption cases in the post-Mubarak era, economists say.
Foreign investors complain that, while elections have provided a glimmer of hope, a rising sentiment of populism and the absence of clear labour and taxation laws, has cast shadows over investment decisions.
“The risk of tax code uncertainty puts me off anything in Egypt in the short term,” says an important Gulf investor.
“The labour-intensive investments will carry a lot of risk in new Egypt. The advantages of Egypt are the big market and cheap labour. If I have a problem with laws on how to hire workers and compensate them, it wipes the advantage away.”
Since former Mr Mubarak stepped down as president on February 11 last year, the country has been facing strikes in both the public and private sectors.
Workers have pressed for salary increases and a change of management.
“I do not expect the presidential election will alleviate the problem for anyone,” says one foreign investor. “Workers get away with anything now, but without any accountability.”
Foreign investment is critical to job creation to stem an unemployment rate that hit 12.6 per cent in the first quarter of 2012. About 3.4m working age people are unemployed, or 62,000 more than in the fourth quarter of last year, according to the government.
“In general, there are investors who did not lose hope in Egypt because the fundamentals are still the same,” says Mohamed Abu Basha, an economist at EFG-Hermes, the regional investment bank.
“But that does not mean it is going to happen soon. Morocco may emerge as the winner of uncertainly in the Middle East. It is more stable and predictable than Egypt.’’
Analysts and investors note that Tunisia has clear taxation and labour laws and could be attractive to investors. But the small size of the market could prove a deterrent.
Libya’s chaotic transition and Algeria’s nationalist policies, which prompted the government to cancel or renegotiate contracts with foreigners, has made many investors wary.
“Algeria can afford it now, but it will face unemployment and housing issues in the future; the same issues that we have seen in the Arab countries that revolted,” says Mr Abu Basha.
.
