By Raghda Helal
Egypt Director at the European Bank for Reconstruction and Development (EBRD) Philip ter Woort gave an interview with Daily News Egypt to discuss investment projects, the current economic situation in Egypt, and discuss future financing plans.
What sectors does the EBRD focus on in Egypt, and how many projects are currently financed by the bank?
The bank has been investing in Egypt since the end of 2012, and I am very pleased to say that. Despite the challenges that Egypt faced last year, the bank had a successful performance during the two years, and to date, EBRD has committed to 15 projects, with total investments of approximately €565m [$713m] through these projects.
The bank has been able to invest in a wider range of sectors in the country, as we have concluded projects in the agribusiness sector, transport, property, banking, and in the manufacturing and services sector. We have also concluded three projects in the essential energy sector.
What is the status of the EBRD’s project with the ENR [Egyptian National Railways]?
The loan of €126m [$159m] for the Egyptian National Railways was signed in May 2014 to finance six new trains under a pioneering “supply and maintenance” structure, where the supplier of the trains remains responsible for the maintenance over a minimum period. The locomotives and trains financed by EBRD are supposed to be used between Cairo and Alexandria, which is very crowded, so there was a clear need to increase capacity and availability. In addition, the new trains are also expected to provide higher energy efficiencies which will benefit the Egyptian people.
An important support component of this loan is to help the Egyptian National Railways to improve their corporate governance standards, so the loan will not only support the purchase of new railway wagons, but will also to improve the transparency of Egyptian railways.
Which power projects has EBRD financed in Egypt?
The total debt finance by the EBRD in this important project has been €139m [$175m] for the financing of the conversion of two existing open cycle power plants to combined cycle power plants in the Delta in West Damietta and in El-Shabab. The project will help increase the installed capacity of the plants by 50% to 2,250MW, and improve the efficiency of each plant by over 50%. The loan was signed at the beginning of this year and we hope that, once installed, it will contribute to an improvement of the power supply in the country. The bank stands ready to look at new power generating projects, in particular private sector sponsored renewable projects now the government has agreed on the feed-in tariffs recently.
What is the bank’s position regarding big national projects like the Suez Canal expansion and infrastructure projects?
The Suez Canal project itself, of course, is now fully funded by the Egyptian people through the recent fundraising which collected EGP 60bn within a two week period, which was impressive. Regarding the Suez Canal Corridor, we expect that there will be several investment opportunities to look at, but at this stage it’s still too early to announce any projects that will be financed by the bank. The government has commissioned a consultancy firm who is tasked to provide within the coming six months an overview of the possible investment projects related to the corridor.
In this context, we have recently participated in an initial meeting together with other financiers and donors with the appointed consultant firm, during which we provided our suggestions as well as the kind of projects where we think EBRD can add value. We are ready to consider engaging in government-supported projects on the basis that these fit EBRD’s transition mandate. We are in particular interested in supporting infra projects which have strong private sector engagement, like for instance PPP projects.
Our focus on private sector engagement should be seen in the context of why EBRD was asked three years ago by its shareholders to expand its regional mandate to the South East Mediterranean region (SEMED). One of the main reasons for this request was the bank’s strong track record in promoting and supporting private sector development and the perceived need for such a support in SEMED, including in government-generated infra projects with strong private sector involvement.
What is the status of the expansion plans EBRD announced last year in Egypt, Morocco, and Jordan?
EBRD is historically a regional bank with regional mandates initially focused on Central and Eastern Europe, and central Asia. A few years ago the regional mandate of the bank was expanded to Mongolia and more recently, in 2009, to Turkey. The expansion into the SEMED region is the most recent extension to the bank’s regional mandate and at this moment the bank is active in four SEMED countries: Egypt, Tunisia, Morocco, and Jordan.
The bank has been successful when expanding into new countries, be it Mongolia or Turkey where it is now a major investor with annual investments in excess €1bn [$1.3bn]. The major challenge is now to do the same in the SEMED region which of course has its similarities but also differences concerning the working environment for EBRD compared to its traditional countries – culturally and historically.
We are very pleased that so far the results in the SEMED region are developing positively with a total recorded investment by the bank in the four SEMED countries of around €1.2bn [$1.5bn] since 2012.
Which other sectors in Egypt is EBRD planning to invest in, and what are the percentages of total investments since 2012?
The other sectors the bank has invested in are in the property sector, banking, regional private equity funds, as well as a wastewater treatment project.
The sector percentages of EBRD’s projects signed since it started investing in Egypt ranges from 25% in the power sector, 22% in transport, 17% in the agri-sector, 11% in natural resources, 8% in property, and about 6-7% of the total invested volume linked to the manufacturing and services and the financial sectors. We also concluded a number of regional private equity transactions and our first water and wastewater project.
These numbers show that EBRD, within a relative short period of time since it started investing in Egypt, has been able to provide finance support to a wide range of sectors in the Egyptian economy.
What is your assessment of the economic situation in Egypt?
We see that the economic activity in 2014 is slowly picking up, mainly driven by consumption. Encouragingly, investment picked up in the first quarter of the year, the first positive growth seen in six quarters.
It is also important to note the important reforms the government has announced, such as decreasing energy subsidies and increasing the tax revenue base to address the high fiscal deficit of 12%. We expect the steps taken to generate in the long-term a more stable fiscal situation and economic basis, even though in the short-term those decisions might have inflationary side-effects.
We also observed that the balance of payment improved relative to last year due to the grant-support from the GCC [Gulf Cooperation Council] countries.
Overall, we see positive signs in the macroeconomic level parameters but at the same time many challenges remain, such as the relative high fiscal deficit, the low FDI [Foreign Direct Investment] inflows, and the tourism receipts which are recovering but are still well below the pre-2011 peak numbers. The short-term challenge facing Egypt is to strike a balance between putting its fiscal house in order on the one hand and to stimulate growth on the other hand.
A clear positive is that business sentiment has improved over the last few months since the election of President Al-Sisi which brought more stability. The hope is that this will further improve after the final step of the political road map, the parliamentary elections, is made.
How do you see the current investment environment in Egypt?
We are cautiously optimistic for a number of reasons. One, we see many foreign and local investors considering investments they have postponed since 2011 due to the political unrest in Egypt. These catch-up investments, I expect, will drive a significant part of the new investments we will be seeing going forward.
Secondly, there is confidence that the political stability will further improve with a newly-elected president in place and with the parliamentary elections expected before year-end.
Last but not least, the current forward-looking technocratic government has taken some important steps to start reforming the economy. The government is also supporting private sector development which adds to the confidence investors have in the future.
How do you see the banking sector’s performance in Egypt?
Egypt has a relatively large and very liquid banking system compared with other relatively low loan-to-deposit ratios of 45%-50%. The Egyptian banking system has remained resilient in the last few years thanks to major banking reforms in the 1990s and early 2000s that strengthened the banks’ supervision and regulations and recapitalised the system.
At the same time, the local banks have increasingly financed the budget deficit over the past two years and the current exposure of the sector to the sovereign is high. There are also concerns that because of this, the local banks lend less to SMEs [small and medium enterprises] than is desirable. This is a focus area where EBRD will try to provide support with our partner banks through dedicated SME debt products.
Are there any imminent loans with the National Bank of Egypt or any other banks?
We are in continuous discussions with many Egyptian commercial banks about providing a wide range of financial support from trade finance support to SME loans and to equity investments, where appropriate.
We are also in discussion with the National Bank of Egypt to increase our existing SME loan, and regarding a dedicated “Women in Business” SMEs loan, and a Sustainable Energy Finance Facility which is to be used to finance energy efficiency improvements projects for SMEs. We believe there will be a high demand for this product in view of the energy reforms announced recently by the government.
What about other loans with other local banks in Egypt?
We have signed a trade finance facility loan by €14m [$17.7m] with Barclays to support trade between Egypt and outside countries and we have also signed with NBE a similar trade finance facility of €38m [$48m]. We are actively in discussions with many other Egyptian banks about providing support through a wide range of financial products coupled with technical support and we believe that, with the economy recovering, we will see an increased interest in these products.
Why do local banks get finance from EBRD even if they have more liquidity?
The interest from local banks to receive a loan by EBRD is driven by two main reasons; first EBRD fills the longer term funding needs of some of the banks which can contribute to a more stable funding basis. Secondly, EBRD does not only provide finance support but it also contributes to a skill transfer, either directly or through specific, often donor funded technical support. An energy efficiency finance facility is an example where the EBRD has dedicated energy efficiency specialists who will support Egyptian energy efficiency projects.
What is your assessment of the “Egypt Economic Forum” next February that aims to increase FDI to Egypt?
I think it is a good initiative as it contributes to putting Egypt back on the radar screen of, in particular, international investors. The planned announcement of specific projects at the conference will also generate renewed interest by investors in the many opportunities Egypt has to offer.
At the same time, for many investors the improvement of the political stability, continued reforms and improvement of the overall business climate are the main criteria to consider investing in Egypt and these are longer-term processes.
Dr Alaa al-Hadidi, a spokesman at the Egyptian Council of Ministers, said last year that Egypt is a candidate to become a “country of operations” in the EBRD, and can therefore access banking services and loans in areas of different development, such as infrastructure, energy, agriculture, and finance financial institutions to contribute to the capital projects and provide guarantees.
What is the progress of this statement?
When EBRD expanded into SEMED in 2012, Egypt, Jordan, Tunisia, and Morocco were given a special status allowing the EBRD to start investing immediately. Subsequently, Jordan, Tunisia, and Morocco have formally become EBRD countries of operation, whilst this process is still underway for Egypt. However, the most relevant point is that, despite this, EBRD is financing projects in Egypt, as we have done over the last two years, with the aim to improve the lives of the Egyptian people. The bank is monitoring the situation in Egypt and the decision of Egypt to become a country of operation will be decided by the shareholders of the bank.
In your opinion, how do you see the SMEs sector in Egypt?
The SMEs sector in Egypt is the backbone of the Egyptian economy, in terms of the percentage share of GDP, as well as in terms of employment and employment generation capabilities. For EBRD the SME sector is therefore an important focus area to increase the access to finance by SMEs. EBRD has a strong Small Business Support team in Cairo who have already facilitated direct technical assistance to over 175 Egyptian SMEs.
What is the total EBRD investment in the SMEs sector in Egypt?
The loan to the National Bank of Egypt is €39m [$49.2m] and this has been, so far, the only SME loan we have extended to a local bank in Egypt. At the same time, EBRD has been discussing similar SME debt products with other local banks which discussions are continuing and we hope we will soon be able to announce new SME loans to other banks.
What is the total capital of EBRD bank?
EBRD is AAA graded by the three major credit rating agencies with a stable outlook. The total statutory capital of the Bank is €30bn [$37.9bn] and the banks’ real capital (paid-in capital plus reserves) is €15bn [$18.9bn]. Therefore the bank’s capital utilisation – comparing the real capital with the total assets of the bank – is about 57%, which underlines the financial strength of EBRD.