One of the main concerns during these times of financial turmoil is how to keep foreign direct investment (FDI) flowing into Egypt. A main propellant of economic growth in recent years, FDI has already declined in the face of the credit crunch.
But the most recent debate has been more about financing as opposed to attracting FDI.
The issue of local banks extending credit to foreign companies operating in Egypt has recently sparked controversy in local media, with many saying that FDI should bring money into the country instead of taking money from local financial institutions. Experts, however, agree that the pros of financing investment projects outweigh the cons.
The National Bank of Egypt recently gave $54 million to a Chinese company that provides drilling rigs used by oil companies. It was also reported that American companies working in the energy sector were given loans by a number of local banks.
As the health of the banking sector is a cornerstone in Egypt’s economic structure, the growing concern about giving credit to foreign investors should be addressed, especially since banks may be more encouraged to lend to foreign entities in order to keep up FDI levels.
FDI in the first half of fiscal year 2008/09 reached $4.0 billion, which means it will take a lot to top the numbers for fiscal year 2007/08, which came in at $13.2 billion.
In February, Beltone forecast net FDI in Egypt to total $7 billion in the current fiscal year and $5 billion the following year, while EFG-Hermes expects $7 billion and $6 billion, respectively.
“Even though it’s not necessity to be a national company to get credit from Egyptian banks, the profits of Egyptian-owned projects financed by Egyptian banks will stay in Egypt, said Ahmed Kora, former CEO of Al Watany Bank of Egypt.
“Fears over declining FDI should not be the determining factor in our [credit] policy, he added, “and the economy as a whole thrives when other policies are well implemented, such as trade and competitiveness policies.
He noted that Egypt should focus on promoting tourism and stabilizing its trade policies. “Lets keep an eye on Turkey and see how the cost per night [at hotels] is much cheaper and how this affects the whole economy; or how [Turkey] has maintained a stable trade policy for years.
“Egypt needs to have at lease five years of stable policies in investment, taxation, tariffs and trade – and, more importantly, a stable political scene.
Nabil Hashaad, a banking expert who has 21 years of experience in the sector locally and internationally, said, “Every country in the world needs foreign investment to fill the gap between savings and the needed funding need for investments to meet the targeted growth rate.
“When foreign investors come to invest they bring technical experience, broader vision of the international market, and some needed liquidity to run the project, Hashaad told Daily News Egypt in a phone interview.
“At the same time, these investors need more credit to run their projects because no company in the world has sufficient self-financing.
Credit should be granted to projects with a sound feasibility study and a good credit history on part of the investor, he said.
“I never heard about categorizing the debtor according to their nationalities, said Hashaad, “it’s ether a good credible investor that has sound feasibility studies or not.
He also said that the Central Bank allows banks to invest in foreign countries, so it’s even “more justifiable to finance foreign investors working in the local market – at least they create jobs and their production counts towards our GDP.
Meanwhile, Alia El-Mahdi, dean of the economics and political sciences faculty at Cairo University, warned: “We should welcome foreign investors without giving them special privileges over Egyptian investors, simply because the net profits of foreign investors go abroad while those of local investors remain in the local market.
The fact that the banking sector has remained solid amid the global crisis is good news, and with healthy liquidity and low loan-to-deposit ratios, experts say it may not be that worrying to help fund local projects by foreign investors.