Business Today, Egypt, June 2005
By tying a free-trade agreement to the outcome of Egypt’s ongoing political reform campaign, Washington is ramping up the pressure. Can the Nazif Government set up an infrastructure that will make strong business ties indispensable regardless of the political atmosphere.
By Amr Gamal
Last month, images of Prime Minister Nazif at the White House and on the Sunday morning talk show Meet the Press as well as shots of First Lady Laura Bush standing by the Giza pyramids brought diplomatic relations between Egypt and the United States into especially sharp focus.
Nazif made his appearances during the first-ever diplomatic trip by an Egyptian Prime Minister to the US, while First Lady Laura Bush passed through Egypt on a regional tour after attending the World Economic Forum conference in Jordan. In light of the month’s major domestic news event, the passage of a constitutional amendment mandating multi-candidate presidential election this fall, the exchange of dignitaries indicates the US is placing more hope in - and pressure on - the political reform process as it nears major landmarks.
In January, President Bush made note of Egypt in his State of the Union address, announcing, “ the great and proud nation of Egypt, which showed the way toward peace in the Middle East, can now show the way toward democracy in the Middle East.” Soon after, President Hosni Mubarak canceled his traditional spring visit to the United States amid increasing American pressure (including a direct snub from Secretary of State Condoleezza Rice) over the arrest of El-Ghad party leader Ayman Nour, whom the American media has dubbed “one of Egypt’s leading reformers.”
After Bush received Nazif in the presidential residence, he signaled that the political reforms currently underway in Egypt could smooth the way for a long-awaited Free Trade Agreement (FTA) between the two nations. Nazif later said that he “got really a very good feeling” about the prospects of improved trade relations.
Mrs. Bush, although not in Egypt as an official government spokesperson, nevertheless made time to comment on the constitutional referendum. Here to promote gender equality and education, her remark that President Mubarak was “bold and wise” in opening up the election process kept the heat on - the Bush administration is watching and judging the legitimacy of every move.
Now more than ever, the balance between political relations and economic progress is crucial in the relationship between the two countries. Because last year’s cabinet shake-up and this year’s proposed political reforms point toward long-term stability, more and more American companies are beginning to wake up to the business potential in Arab countries, and are slowly but surely making their way to this area.
The United States has been one of Egypt’s major economic partners for nearly a century: While the US is second behind the United Kingdom among investors in Egypt, it is Egypt’s largest bi-lateral trading partner. Approximately two-thirds of the US’ investment remains in the oil and gas sector. Wheat also plays a major role in US-Egypt business relations, as Egypt is the world’s chief importer of American wheat.
And naturally, since Egypt negotiated peace with Israel starting in 1978, it is also a chief importer of US economic aid under the terms of the Camp David accords.
For the year 2003, economic aid to Egypt amounted to $615 million; while the amount of aid allotted to Egypt per year is actually $815 million, the United States Congress takes $200 million and places it in the USAID commodity import program, which allows for Egyptian firms to receive US dollars at fixed exchange rates, as well as different forms of credit terms, which in turn supports Egyptian companies in importing manufactured commodities from the US.
The amount of aid coming in from the US over the past 27 years has been staggering. Every year, Egypt is dependent on the aid for the country to function. From the years 19752002, Egypt received $7.07 billion for commodity imports, $6.03 billion for physical infrastructure, $4.86 billion for basic services, $3.9 billion in food aid and $3.75 billion in cash transfers and technical assistance. (USAID’s budget for Egypt will be cut annually until it hits $400 million in 2009, down from $615 million in 2003, under a new philosophy of “from aid to trade.”)
According to the US Commercial Service Egypt Country Commercial Guide, FY 2004, trade with the US accounts for approximately 20% of Egypt’s imports and 1015% of its exports. The report also states that while trade still remains high, over the past two years Egyptian imports from the US have decreased, going from almost $3.56 billion in 2001, to $2.6 billion in 2002 before recovering to $3.1 billion in 2004. Egypt, while decidedly on the short end of the scale, exported $1.3 billion in goods and services to the United States in 2004.
Top exports are typically textiles and oil, although iron and steel zoomed to second place last year at $253 million.
Laws of attraction
While interest in Cairo in developing US-Egypt free trade has remained intense, much sought-after Foreign Direct Investment (FDI) over past years has been more elusive. Whether because of red tape, bureaucracy, taxes or an unclear system of law, companies have been slow to invest. Reform-minded Prime Minister Ahmed Nazif and his cabinet are addressing these concerns, but the process is a slow one.
“I think recently [the investment environment] has become much, much better,” says Hisham Fahmy, executive director of the American Chamber of Commerce. “I think there’s a better understanding of what Egypt’s going to do, of what it has done. So, I think on a relative basis, it’s very good.”
Dr. James Joy, commercial counselor in the United States Embassy in Cairo, sees getting more American companies interested in Egypt as a several-step challenge.
“We are still trying very, very hard to get more American companies to focus on this part of the world,” says Joy, “and there are a number of reasons why that is difficult. For one thing, a lot of American companies do not look at the Middle East at all, saying that there is too much instability and that makes business too complicated. Others note that things in Asia are booming, China is booming, India is booming and [businesses] can’t concentrate on everything, so they are going to focus on those countries. And then the third problem that we have is that most of the countries in the Middle East have relatively small economies, so we’re not talking about a big volume in the way of exports and imports with the United States.”
In an effort to encourage companies to start businesses in the region, the US launched a program known as the Access Eastern Mediterranean Program, which is designed to promote awareness about doing business in the region, particularly in seven markets: Egypt, Jordan, Lebanon, Turkey, Israel, West Bank/Gaza and Morocco. Through the Access Eastern Mediterranean Program website (->[www.buyusa.gov/easternmed]), companies can connect with specialists who promote the companies’ products to contacts in their target markets, and advertise at trade shows and on the AEM website itself.
“The Access Eastern Mediterranean Program focused on Egypt, of course, as one of the biggest countries in this region, but we combined Egypt with Turkey, Jordan, Lebanon and now Morocco to get the attention we wanted,” Joy says. “The idea was to get a lot of companies to pay attention to the good prospects in this part of the world. [This has been] reasonably successful. In the first year, we had 50 American companies sign up. They were in five different industry sectors, and we thought that was pretty good. This year we had a lot of interest the same way. Hundreds of companies have participated in conference calls and a fair number of companies are signing up for the promotion.”
Despite increasing general interest in the region, embassy officials are working to change a different monolithic view - that the region as a whole is too volatile. They say Egypt needs to distinguish its advantages in comparison to other markets.
“The staff here at the American Embassy have been trying very hard to go back to the United States and the American business community and say that while there is instability in the Middle East, not all countries in the region are the same,” says Joy. “You need to look at these countries individually; we don’t have big instability problems here in Egypt, it’s not Iraq and it’s not Saudi Arabia.”
On the president’s initiative
Whenever Egyptian-American relations are discussed, whether political or economic, a key component of the discussion is the Bush administration’s Middle East Partnership Initiative (MEPI), established on December 12, 2002 to promote reform. Although political reform may be the goal of the initiative, economic changes are also a major means to that end.
According to MEPI’s mission statement, the initiative’s economic pillar focuses on trade competitiveness, FDI and business development, especially of small- and medium-sized enterprises.
“Congress has allocated approximately $300 million to us - roughly a hundred million dollars a year - for programs supporting these initiatives,” says Peter Mulrean, MEPI’s regional director. “What we do is we respond to opportunities and to requests for assistance from the region. We take the term ‘partnership,’ of Middle East Partnership Initiative seriously, but the partnership is not just with governments. We see this as a broad partnership - sometimes with governments, but also with business in the region, universities, civil society - a partnership with the people of the Middle Eastern region.”
When first introduced, MEPI was rejected by the majority of the population as an imposition of ideals by the United States. Today, Mulrean believes there has been a shift in public opinion.
“We also don’t think we need to ‘impose’ anything, because more and more we are getting calls. Our phone is ringing,” says Mulrean. “There are people trying to do things in the region, whether it’s on education or in the political sphere or economic sphere. People are trying to move. People are willing to work with us and we are extending a hand to those who are interested in taking it.”
The political angle is obviously the most sensitive of the four pillars within MEPI (economic, political, education and women). As far as the economic angle is concerned, the reforms that have taken place in Egypt have potential investors and businessmen in the US believing that Egypt is on the right track.
“I think these steps were very important Egypt has a very interesting market - it’s a big country. It has a key position in the region. So businesses are playing off all sorts of different interests,” says Mulrean. “I would not want to say businesses ignored the changes. Not at all. I think they see it is a very positive sign. At the same time, they hope this positive sign is going to lead to further positive steps to make Egypt a really competitive place to do international business.”
A free-trade agreement would not only help attract new businesses, but would also increase existing exporters’ competitiveness with regional neighbors. While Jordan, Morocco and the United Arab Emirates (UAE) have all signed FTAs that have given them an advantage in US markets, the introduction of the qualified industrial zones (QIZs) has given at least a segment of textile sector a similar chance.
The nation produces some of the best long-staple cotton in the world for export, where it is developed into fine clothing and home fashions, and actually imports lower-quality Indian cotton for domestic consumption. Under the QIZ deal between the US, Egypt and Israel signed December 15, 2004, Egyptian companies registered with the joint QIZ committee can export goods to the US without tariffs, provided they use 11.7% Israeli components. Egyptian businesses are scheduled to begin exporting ready-made cloth tax-free to the United States in August.
The steps taken to improve the textile sector have been greeted with relief. January of 2004 saw Egypt reduce the tariffs imposed upon textiles and apparel from 40% to 35% for home textiles, to 22% for fabric and to 12% for yarn.
“Everybody knows of the [new] quota system as of last January. This brings in new dynamics to the world of trade and textile,” says Mohamed Kassem, chairman of the World Trading Co. and vice chairman of the Egyptian Exporters Association. “The other issue is the introduction of the QIZ program. Those two elements are affecting the dynamics of the situation, and it’s not clear yet how it’s going to play [out].”
The Jordanian textile industry, which started operating under the QIZ program in 2002, has made remarkable gains. By 2002, Jordanian textile exports had increased more than tenfold to over JD 300 million (about LE 2.7 billion) per year. Another effect, particularly relevant to Egypt, was the employment boost: Jordan’s QIZ employs almost 40,000 people, of whom more than half are Jordanian. (For an in-depth article on Jordan’s QIZ experience, see the December 2004 cover story, “QIZ & Tell.”)
The business community has also been proactive in dispelling myths about Egypt’s business atmosphere and promoting favorable policies among the highest levels of US government.
Hisham Fahmy organized the American Chamber of Commerce’s annual lobbying expedition to the US, referred to as a ‘doorknock,’ on March 7th-11th. During the visit, 36 delegates, including Fahmy, explained to the media, administration staffers and Capitol Hill the changes and reform taking place in Egypt.
“We’re businesspeople and we tell a business story when we go,” says Fahmy. “We meet people in Congress, House and Senate, people in the administration. We meet think tanks, the media, the IMF, the World Bank and so on. So it’s basically just a spreading of the word of what’s happening in Egypt, what’s new in reforms and so on and so forth.”
Expeditions such as these give businessmen within Egypt the chance to lobby even harder for an FTA by promoting the reforms Egypt has been making since the new cabinet took over.
“This year it was basically saying what’s happening with the new cabinet, what the new reforms [are] and so on,” says Fahmy. “[Also] talking about things like the QIZ and still pushing for a free-trade agreement.”
New real estate is a crucial commodity for American businesses, which are increasingly moving their operations away from the city center to suburbs and satellite cities. New legislation, combined with major new housing and office space projects, most notably in the New Cairo area, will also change expat demographics around Cairo.
Ahmed Nazif”s cabinet, according to Sherif Roubi, head of research at Coldwell Banker Egypt, has helped accelerate the process by focusing and improving upon already established laws.
“They are trying to make things happen with regard to the already existing laws,” says Roubi. “We all agree, and we all feel, that the new cabinet is moving [positively] in all directions, and it will help the real estate sector.”
One of these laws is Law No. 230/1996, which allows foreigners to purchase housing in Egypt. Roubi believes the new government’s role should be to push these laws to the forefront in order to see the real estate sector benefit.
“The market regarding expats and foreigners, the free-hold [legal ownership and control of a property for an unlimited amount of time] market, is relatively thin. Foreigners and expats are focused on the rental market, the lease-hold market,” says Roubi. “A law such as Law 230 can allow foreigners and expats to start to buy property, so demand will increase on the free-hold market.”
With office buildings springing up all over Cairo, companies have options when searching for the best deal and best location, but by convention, they are more oriented to temporary solutions.
According to Roubi, “when you talk about office buildings, multi-nationals or not, they are not very keen on owning buildings. They are more into leasing buildings, or renting buildings. So as an industry trend, people rent buildings. It applies to Americans, Europeans, Egyptians - everybody.”
When it reaches full implementation, the Mortgage Law (Law No. 148/2001) may change the prevailing practice Roubi refers to the terms presented in the nascent mortgage system, including subsidized rates, as being key.
“The mortgage law will increase the business of Coldwell Banker, along with other real estate firms in Egypt, by increasing transactions,” says Roubi. “More people will be able to buy. More people will be selling property.”
The government and USAID are sponsoring a program to train credit managers in banks to be better able to evaluate mortgage candidates, which they hope will increase lender confidence and spread the use of home finance.
Egypt’s reliance on tourism revenue to balance international payments cannot be understated. In 2004 alone, the country received $6.6 billion in foreign currency from around 8 million visitors, up from 6 million in 2003. However, the industry has had more than its share of trouble in the last year. The bombing in Taba, along with the recent attacks within the capital, have people a little more hesitant than usual about visiting the country, though tourism operators aren’t seeing the drop off they did after the Luxor attacks in 1997 (see “Brave New World,” p. 56).
While Americans visit in much smaller numbers than Europeans because of distance and culture-bred concerns about security, American businesses are profiting from the tourism recovery.
“We had a tremendous year in 2004, with about 8 million tourists coming to Egypt,” says Ulrich Huth, general manager of the Cairo Marriott Hotel and Casino. “It was an extremely good year in 2004 - we didn’t get any big cancellations when the incident in Taba occurred. 2005 started extremely well; we had the best January ever and a very good February, March and April. The first four months have been much better than last year in terms of occupancy and in terms of rates - in dollar terms. Revenues were not as good in term of Egyptian pounds, because the dollar was devaluated toward the pound.”
While the Cabinet has been seeing its changes taking effect in many sectors, including the tourism sector, Huth cites a return to normal procedures as the main reason for the recent boom. A significant amount of time has passed since September 11th and while the violence still rages on in Iraq, he says it has not drastically affected tourism in Egypt.
Although the Marriott is a US brand-name hotel, it has not been the target of boycotts by Egyptian residents. Huth points out that not all major American brands have been so lucky.
“Our hotel hasn’t been impacted. You see sometimes that Kentucky Fried Chicken or McDonald’s, which are actually pure Egyptian companies that are just paying royalty fees to McDonald’s, were targets of demonstrations by students,” says Huth. “ we enjoy very good business.”
Despite lingering inconveniences to Western tourists like a decaying transportation system and expensive alcohol, Huth says developments in global air travel and a sustained international image of stability and reform will make every location in the region more accessible and desirable for visitors.
“The future is here. I think Egypt will have a tremendous amount of visitors in the next five years,” says Huth. “We’re going to reach the 50 million mark much faster than anybody thinks in the government. Dubai is booming, Doha will be booming. So from the business point of view, this region is an attraction.”
With a gas-guzzling nation to keep moving, it is no surprise that roughly two-thirds of US overall investment coming in is in the oil and gas sector. Joy, of the American Embassy, explains that this is one source of income Egypt can take for granted - for the moment.
“Certainly, if you look at American investment in Egypt, [you will see that] two-thirds of American investment is going into the oil and gas sector. This is not investment in ‘footloose’ industries that could be virtually anywhere, it is investment that goes where the resources are and, thus, there is no choice,” says Joy.
Because of their technical expertise, American companies have cornered the market in service. “The American investment in [oil field] service companies counts for at least 90% of that subsector in the Egyptian market,” says Hisham Ismail, country manager, Halliburton Egypt. “As we all know, the three or four big service companies operating worldwide are all American. The newest, most advanced technology coming into the market is from the American side.”
An American education in Egypt is frequently viewed as available only to society’s elite. AMIDEAST Egypt, however, is devoted to promoting understanding and cooperation between people of the US and Egyptians of all classes and backgrounds. Steven Hanchey, country director for AMIDEAST, finds cause for optimism.
“I think the relationship is changing, as much because of the changing business climate in Egypt as because of the political events in the region,” says Hanchey. “Events outside of Egypt that we’re all aware of are having an impact on how Egyptians perceive the United States, and perhaps on how Americans view people who live in this region.”
One dynamic area of influence in recent years has been the introduction of American-inspired schooling systems. Many schools are offering American diploma sections along with their traditional IGCSE sections, a choice that has become more and more popular.
“There is an increasing trend toward American-style education in Egyptian schools. The American diploma is something that is in great demand in the secondary school market in Egypt,” says Hanchey. “American-style education does not necessarily promote a positive attitude toward the United States, but an open mind. American education is traditionally known for its encouragement of learning, and learning in a different way than Egyptian schools. It’s not as exam-oriented as it is process-oriented.”
AMIDEAST also bridges cultures through business and economic development. Through one of their programs, Egyptian entrepreneurs can train in the US, bringing back what they learned and putting it to good use in Egypt.
“[We] participate in a program that trains young business entrepreneurs in the US. We have participated in the recruitment and selection of young business leaders, both men and women, who have gone to San Diego, California to be trained there in entrepreneurship,” says Hanchey. “So we hope they come back with a better understanding of how American small businesses grow and can come back to Egypt and use their ideas here. It’s a kind of exchange too; we also hope that when they go to California or other places that they will be sent, they will bring some idea of entrepreneurship in Egypt to share with their American hosts as well.”
Making the grade
Recently, a few more Egyptian businesses have received a nod of approval from one of the premier American investment groups, Morgan Stanley. The firm has added seven new companies including EFG-Hermes, the Egyptian American Bank, Misr Beni Suef Cement, Olympic Group, Sinai Cement, Egyptian Financial & Industrial Company (EFIC) and Ezz Steel to its MSCI Emerging Markets Index. These additions bring the count for Egypt up to 17.
If the Nazif government’s new budget and reforms, combined with efforts within the cabinet to burnish the nation’s outward business image, convince more American companies to set up shop or at least attract cash investors, they’ll have a more solid reason for confidence than diplomatically worded praise. bt