FDI determinants in the Egyptian Market

Attracting FDIs will require major reconstructions in the Egyptian ecosystem

Amid the current economic crisis that has been described as worse than the 2008 global financial crisis, and even anticipated to be worse than the great depression of the 1930s, the Egyptian economy is faced by a huge challenge posed by a large and sudden outflow of foreign currency from the market. Being pegged to the USD, the Egyptian pound has lost almost 4% of its value since the beginning of the global outbreak in March. The uncertainties of the situation around the globe, affected by nationwide lockdowns and the slowdown in most market sectors has resulted in an outflow of foreign currency and a decrease in foreign currency inflows to the economy. The decreasing of interest rates as part of the COVID rescue stimulus makes the Egyptian economy less attractive for interest rate differential gains. Also, the downtrend in the stock market has resulted in foreign investors conducting bulk selling transactions to exit the market and decrease their foreign exposures. Last but not least, the decrease in foreign remittances and slow down of international trade has reduced foreign currency inflows and exerts pressure on the Egyptian pound.

The above sources of foreign currency inflows are all highly volatile and were quickly and heavily affected by the threats and uncertainties the pandemic outbreak has posed. The investments that quickly move in and out of the economy such as investment in the stock market or in certificate of deposits is termed as "hot money." The danger of hot money lies in its volatility that makes exchange rates equally volatile. Sudden inflows may result in high inflation rates, while sudden outflows may lead to the collapse of the home currency.

In opposition to relying on hot money, countries like Egypt are required to work on attracting foreign direct investments (FDIs) that secure stable retention of foreign currencies within the economy. Usually, an FDI is when a foreign investor establishes a business in the country. This investment will always require this investor to have responsibility and ownership in the country. For example, start a business, acquire an existing business or invest in a joint venture with a local business. By such ownership and control, the foreign currency will enter into the economy and get into circulation with a reduced risk of its sudden outflow.

Determinants of FDIs

When foreign investors are considering conducting FDIs there are various determinants that influence their decisions on where to invest and where to avoid. These determinants vary from political and economic stability to quality of infrastructure, ease of doing business and other determinants such as market competitiveness or tax benefits. The following are the most prevalent determinants but in no means are a full and conclusive list as determinants will always vary from time to time and from one sector to another.

Political stability

The Egyptian government will have to make sure that its regional conflicts with Ethiopia and with the Turkish presence in Libya are settled because in presence of such conflicts foreign investors are expected to drift away towards safer and more stable countries. In addition to political stability, the new normal imposed by the global pandemic adds another aspect of security that will be taken into investors considerations. The government will have to prove that it has a strong medical plan and precautionary measures in place to appeal for foreign investors.

Economic Stability

Part of the economic stability that always affects the choice of foreign investors is the stability of foreign currency exchange rates. Egypt has done a great effort in terms its foreign currency exchange systems by the major reform it has conducted in 2016 by floating the Egyptian pound to land a realistic and competitive value of the Egyptian Pound. The other economic determinant are interest rates. The government must resume its efforts in decreasing interest rates to levels that make it less appealing for deposits and more appealing for investment. This should be done with extreme caution because the easier and cheaper it is to borrow the higher is the probability of inflation due to the increased availability of money.

Infrastructure

One major determinant of FDIs is the quality of infrastructure and the availability of efficient and cost effective logistical services in a country. With thousands of kilometers of roads and the continuous improvement in railroads and ports Egypt is placing itself at the top of the competition when it comes to infrastructure quality. The improvement in my point of view may be through designing subsidizing programs that provide cheaper sources of energy for FDI projects.

Market Competitiveness

In my point of view, market competitiveness is the most challenging determinant when it comes to FDI determinants. Egypt still has a long way to go when it comes to imposing anti trust regulations and laws. Anti trust laws or competition laws are laws that guarantee free competition and provide safety to both competitors and consumers from unfair practices. Authorities such as the Egyptian competition authority and the consumer protection authority should undergo major reconstruction to be more effective in providing protection to all the market players.

Ease of doing business

The ease of doing business index is an index produced by the World Bank Group ranking a total of 190 economies based on 10 factors as shown in the above figure maintained from the 2020 Country Report by the World Bank Group. For this article, a quick review of those factors where Egypt falls int the lower half of the economies shows that more effort is needed in registering properties, paying taxes, trading across borders, enforcing contracts and resolving insolvency. To overcome the problems related to registering property the government must work on eliminating bureaucracy through upgrading the services of the Egyptian investment authority and the centralization of investment services through one stop shops. Similarly, the tax system is a huge challenge due to the complexity and the long time of the tax payment procedures in Egypt. Full digitalization of the process and e payments are no longer an extra but has rather become a necessity. Also a clear and easy to digest tax system is required to decrease the number of tax disputes. Trading across borders is the factor where Egypt scores the worst. This factor is mainly concerned with the documentary requirements for international trade as well as the process times of importing and exporting. The Egyptian government does not have the luxury to no longer ease and facilitates its border controls in relation to products being imported and exported. Also, the efficient and swift implementation of trade agreements will play a role in increasing competitiveness in this regard. Increasing competitiveness in enforcing contracts requires improving times to file and serve cases as well the time to obtain judgements and enforce them. Special investment courts that swiftly process any legal procedures are a must have if Egypt is looking to become an investment destination for foreign investors. The last factor of the ease of doing business index where Egypt falls in the lower 50% is resolving insolvency. A business in insolvency is a business suffering from financial distress making it impossible to conduct business and meet financial obligations. The ability to resolve insolvencies is how easy it is to deal with insolvency issues. The Egyptian economy is extremely inefficient when it comes to collecting debts from insolvent debtors. The cost of recovering debt is high and the cost and time needed for legal procedures is worse than the global average. This aspect must be addressed and improved for better foreign investment appeal.

Tax Benefits

Aside from the upgrades and improvements needed in the tax systems, tax benefits are required to attract foreign investors. Foreign investors tend to invest more in countries that offer little or no tax rates, known as tax havens. The Egyptian government should consider new investment areas and sectors that are granted benefits of lower or zero tax rates.

In conclusion, this very long article is a very short representation of the FDI determinants and how Egypt can improve such determinants to attract more FDIs. FDIs are a more stable source of foreign currency in opposition to hot money. Also FDIs create jobs aiding systems to decrease unemployments rates. One last determinant that was not discussed above is the quality of human capital. The Egyptian government will have to exert maximum effort in providing the job market with employees that have the needed skills and education. As long as the Egyptian government is aware and proactive regarding the above it will succeed in placing the Egyptian economy among the most lucrative for investment. I highly recommend going through the ease of doing business report than can be found in the following link https://www.doingbusiness.org/content/dam/doingBusiness/country/e/egypt/EGY.pdf