Dubai debt crisis: Why Egypt's economy may benefit

As Dubai’s market crumbled last week, the Middle East braced itself for the potential economic fallout. But Egypt might stand to gain more than it loses from Dubai’s troubles.

In Egypt, a country of 80 million, where roughly half the population lives on less than $2 a day, economic stability is critical to public support for 81-year-old President Hosni Mubarak’s regime. In recent years, soaring inflation coupled with the unpopular government’s reduction of food subsidies caused bouts of social unrest. The regime’s ability to deliver economic prosperity for its citizens remains a crucial element in maintaining public order and political stability, particularly now with an impending succession battle for the spot Mr. Mubarak has held for more than 25 years.

To be sure, the Dubai crisis will have a somewhat lasting impact on the country, with a shortage of direct investment and worker remittances coming from the emirate. But Egypt could end up attracting the foreign direct investment (FDI) and stock portfolios Dubai is set to lose.

“Other countries in the region are likely to gain on the FDI side due to the crisis in Dubai, because companies will still be interested in that region... Cairo’s strengths are probably based on a little bit stronger foundations than Dubai’s ever were,” says Courtney Fingar, editor of FDI magazine, a publication produced by the Financial Times. “After the global crisis, a lot of the investment is likely to be less speculative, more long term, and a lot of the investors are less willing to take risks than they did before, and I think that might point to them looking back at some of the traditional business and regional centers, like Cairo.”

Egypt’s economy is one of the more stable in the region, because its recent growth is driven largely by providing what Egyptians need – everything from groceries to property. Dubai’s appeal, on the other hand, was focused on catering to foreigners, who bought property and came to do business. Therefore, Dubai’s economic boom wasn’t organic and thus its growth was less sustainable.

Egypt: One of top 10 reformers in ‘Doing Business’ report
On Nov. 25, Dubai sent shock waves around the financial world when it requested a six-month delay on repayments of billion of dollars of debt borrowed by Dubai World, a government-owned conglomerate.

The announcement, coming before a five-day Muslim holiday that closed regional markets, fueled speculation about the effects of the crisis on Arab economies. When regional markets opened on Nov. 30, the Egyptian stock exchange recorded its biggest daily loss in 13 months, despite Egyptian banks’ limited exposure to Dubai’s debt. Since then, however, Egypt's markets have rebounded. Though Dubai's market has also recovered somewhat, its banks have taken a hard hit in ratings.

Egypt’s economy might look like an old, plodding farm horse next to Dubai’s shiny new tractor, but the country has been trying to revamp itself to keep up with the changing global economy.

Egypt has spent years reforming its banking sector and attempting to increase investment from companies abroad. The Central Bank has tightened banking regulations, while the government has cut red tape on trade. It has also embarked on massive infrastructure projects, such as building a modern international terminal to serve the Cairo airport and beginning construction on a third subway line.

The Egyptian stock market has unveiled new indexes, grouping different companies together to make their performance easier to track and to encourage trading.
The initiatives paid off. In 2008, the World Bank ranked Egypt as one of the top 10 reformers worldwide in their ease of “Doing Business” report.

The country’s economy grew 4.7 percent in the last fiscal year, down from 8 percent the year before. But that is still higher than many developing economies such as Turkey, which grew only 1.1 percent in 2008 and is expected to shrink 5 percent in 2009, according to the IMF. Egypt is predicted to grow another 5 percent this year.

“They’ve made a real effort to look at those doing business rankings and to improve their position, and they have. That’s something that companies and investors will notice,” says Ms. Fingar, the FDI editor. “If [Dubai’s] competitor cities and countries in that region could continue their reform efforts, and try to make it easier to get licenses, to do business, then you do take away a lot of the appeal of Dubai.”

Analysts predict benefit for Egypt
Analysts say steady or rising oil prices in the region will mean Egypt can expect continued foreign investment from Gulf countries, offsetting any direct loss sustained from Dubai’s potentially shrinking investment in Egypt.

“As long as there are current account surpluses [in the GCC economies], I think Egypt will continue to benefit from the flows,” says Ahmet Akarli, senior economist for Turkey and the Middle East at Goldman Sachs in London. “These flows could go into all sorts of different investment opportunities – they could be FDI, they could be portfolio inflows [investors buying stocks the Egyptian exchange] – it really depends on what Egypt can offer... It’s hard to say where the money will end up being utilized, but it’s clear that Egypt will be, among others, an important destination.”

Analysts also predict an increase in investments in Egypt’s stock market as regional investors flee Dubai.

“They need to put their money somewhere, so they’ll put it into alternative markets, including Egypt,” says Simon Kitchen, senior economist for EFG-Hermes, an Egyptian investment bank. Mr. Mubarak’s son Gamal, a potential successor, has in recent years served on the bank’s board of directors.

Why Egypt can’t rest on its laurels
Reham ElDesoki, senior economist at Beltone Financial, a Cairo-based regional investment bank, says that many foreign investors have been buying Egyptian stocks in the wake of Dubai’s announcement, though she can’t prove it came from Dubai.

“No one would have evidence that money left Dubai and went to Egypt directly, but there was a lot of foreign buying in Egypt,” says Ms. ElDesoki.
But she and other analysts disagree over where in the investors will take the bulk of their money.

“Western countries will continue to invest in the UAE, with maybe more focus on Abu Dhabi than Dubai in the short term,” says ElDesoki. “Investors weigh each investment opportunity separately, so while there might be competition, investors will not automatically go from one country to another.”

Few analysts see the Dubai crisis driving investors to abandon the region altogether.

But even if financial inflows pick up and Egypt’s past reforms appear to pay off, experts say the country can’t afford to rest on its laurels.

“I think [Egypt] can benefit from this and emerge as a major economic power in the region, but I think it will have to invest a lot more in technology, infrastructure, and human capital to become a center of attraction and another growth hub in the Middle East region,” cautions Mr. Akarli at Goldman Sachs.