A View From Cairo: The Case for Investing in Egypt
Global Emerging Markets (GEMs)



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Crossing the Kasr el Nil Bridge that spans the Nile in central Cairo at eleven o’clock at night is like walking down 42nd Street in New York at rush hour, only more crowded. Cairo is the real city that never sleeps, and never more so than the current month of Ramadan, when Muslims refrain from eating, drinking, and smoking from dawn to dusk and then pass the nighttime hours eating, smoking the shisha water pipe, and relaxing with friends and family. The streets are thronged: families having picnics on tiny patches of grass beside roaring four-lane roads; older men in serious conversation, smoking and playing backgammon in sidewalk cafes; groups of adolescent boys roaming around looking for adventure; and courting couples sitting chastely on park benches or standing together on bridges, whispering to each other and watching the lights of Cairo reflected on the water.

It’s not easy to get work done during Ramadan. People who may have snatched a couple of hours of sleep after the pre-dawn sohour meal roll into the office late. Government workers get off at two in the afternoon, and in the private sector everyone is gone well before five, in order to make it home in Cairo’s fiendish traffic in time for the iftar meal to break the fast at sundown. In Egypt, a land of heavy smokers, nicotine deprivation makes people absent-minded and forgetful, unable to focus on the task at hand.

Without meaning to, I have found myself on working visits to the Middle East at Ramadan three years running: last year in Cairo and the year before in Ramallah, on the West Bank. I’ve been coming to the region for more than 20 years, and first started visiting Egypt about eight years ago. The changes during that short time have been amazing.

Egypt has one of the world’s oldest bureaucracies, which dates back to the time of the Pharaohs. Only India and China can rival it for longevity. It has defeated the best efforts of the Greeks, the Romans, the Ottoman Turks, the French, the British, the Soviets, and the Americans to transform it, and instead has sucked in and Egyptianized them. The first time I visited Cairo, in 2001, I spent nearly an hour wandering around the downtown area looking for the offices of the investment promotion agency. I had the address, I was on the right street, but I had to go down a small alley into a courtyard surrounded by grimy buildings, where finally I saw a small sign to indicate the place. Up several flights of stone stairs worn down by the soles of a hundred years of bureaucrats and into the offices, where people lay sleeping at their desks or eating melon seeds and reading the newspaper. In order to get basic investment statistics, I was told, I would have to write a letter to the Chairman of the agency, who might respond within a week or so.

That was eight years ago. More recently, a Cabinet Minister told me that when his ministry moved from downtown into new quarters in Heliopolis, he took about a fifth of his staff with him and left the others in the old location, where they could while away their days drinking tea until they reached retirement, as long as they didn’t interfere with the real work at hand. It was a typical Egyptian solution. You can’t fire anybody, so you just keep them out of the way and get on with it. It’s impossible to fight or change the bureaucracy, at least in the short term, so people devise clever work-arounds. They’re not perfect, but generally they work.

This morning I visited a government client I had worked for last year, recommending changes to the procedures for getting factory building permits and industrial licenses. Since then, almost all of my recommendations have been implemented. I take no great credit for this – most of my suggestions were fairly obvious – but it says a lot about drive and initiative, qualities that not everyone associates with Egyptians. In typical fashion, they had proposed changes to legislation, but who knows how long that might take. So in the interim they have applied makeshift remedies, which are good enough for now.

To Westerners, this uncertainty and ambiguity can be maddening, though I believe it was an American who came up with the phrase “close enough for government work.” India has justly received a lot of praise for its liberal economic reforms, but to my mind Egypt’s achievements are even greater. India remains one of the most protectionist countries on earth. Egypt used to be in that same league, but since 2004 it has reduced its average import duty from more than 30% to less than 7%. Egypt has also removed most currency restrictions. In recent years the World Bank’s annual Doing Business report, which ranks 180 countries on ease of doing business, has named Egypt a top reformer, while the European Union recently ranked Egypt as the best country in the Arab world in which to do business.

Governments everywhere, especially in developing countries, talk about promoting the private sector, but few of them seem to have a clue what the private sector is all about and what businesses need for government to do and not do to allow them to flourish. The Egyptian government gets it. Technocrats have been appointed to high positions in key ministries and agencies, and there seem to be quite a few capable people at middle management level, on whom successful execution depends. The government is building roads and power plants and other core infrastructure, leaving private investors to get on with everything else.

Over the past week I have made several visits to 6th October, a new city about 20 miles from downtown Cairo, established in 1979. For the first 15 years not much happened. But since the mid-90s the population has grown to more than half a million and the place has thousands of apartment blocks and houses under construction, which are almost certain to be occupied fast. It’s not hard to imagine that the government’s prediction of a population of more than three million will be fulfilled ahead of schedule. These people are attracted by the ability to buy more house for the money than in Cairo itself, but the huge industrial zones are also an attraction. Mercedes and GM, and scores of other multinationals have built factories there. The older industrial parks are already full, but five new ones, covering about five square miles, are being developed under a new, more liberal “investment zones” regime, and the zone developers have already sold 80% of the building sites. The Mayor of 6 October intends for the entire city eventually to become an “investment zone.”

The other night I was invited to a corporate iftar event in a luxury hotel in another new city development called New Cairo. Driving into town at dusk was a spooky experience: the streetlights had come on, and we drove along miles of empty streets past countless thousands of semi-finished houses and apartment buildings and empty bank buildings, and office centers, before coming across a massive hotel, all glass and gleaming light and shiny SUVs pulling up in front. I can’t imagine moving to New Cairo, but I wouldn’t bet against there being half a million people living here in the next 10 years or less. These developments strike me as more sustainable, and more soundly based on an underlying real economy, than the now-crashing Dubai property market. People are still investing, building, and buying here, which in the Emirates they are not.

Corruption is still rife, and political reform is drastically needed. President Mubarak, in power since 1981, is 81 years old, and no one quite knows who or what kind of system will replace him. There are high hopes for a shift to democracy, but no certainty this will happen. Regardless of what happens politically, I don’t see Egypt, which has been shedding more than 50 years of Soviet-inspired economic policies at a fast clip, reversing its reforms.

The fundamentals for the most part look right. These include a domestic market of 80 million people, expected to grow to 100 million by 2025, a stable currency and sound macroeconomic policies (moderate inflation and acceptable budget deficits), and . preferential market access agreements with the United States, the European Union, the Arab countries, and a large number of countries in sub-Saharan Africa.  The Cairo and Alexandria Stock Exchange (CASE) is the second largest on the continent, after Johannesburg. Several times in recent years the CASE has been the star performer among world stock markets.

It’s not easy for Americans to gain direct investment exposure to Egypt. Egypt is one of 25 countries in the MSCI Emerging Markets Index, so its companies are part of most diversified and regional emerging markets funds, but there are no Egypt-focused funds traded on U.S. exchanges. The CASE has plans to launch an ETF based on the CASE 30 index, but this will not be directly available to individual investors in the U.S.

Though no U.S.-traded ETFs or mutual funds offer a pure Egypt play, several provide substantial exposure to the CASE, including: Claymore/BNY Mellon Frontier Markets (FRN), 15%; Market Vectors Africa Index (AFK), 14%; Powershares MENA Frontier Countries Portfolio (PRMNA). 22%; and T Rowe Price Africa and Middle East Mutual Fund (TRAMX), 10%.

Disclosure: AFK, TRAMX

Posted 09-08-2009 12:23 PM by Charles Krakoff