With M2 growth in decline, Egypt looks to new investors

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CAIRO: The Central Bank of Egypt (CBE)Central Bank of Egypt (CBE) released data that annual growth in broad money supply (M2) fell from 9 percent to 8.6 percent from September to October this year.

M2 growth has fluctuated since May, and although the latest figures are not as worrisome as April's historic low of 6.8 percent, hopes for steady if gradual increases in M2 may prove futile as CBECBE attempts to regulate the financial waves that have characterized the past 18 months.

M2 growth spiked to 24 percent in March 2008. Analysis from investment bank Beltone Financial attributed the swell to "foreign currency inflows from abroad and higher growth in domestic credit." Therefore, the recent decline is also due to both the CBECBE's interest rates as well as foreign direct investment (FDI) levels.

FDI took a global nosedive in response to the financial crisis. Pre-crisis FDI levels in Egypt had grown steadily, but this year fell 39 percent despite the best efforts of the government and private sector to demonstrate Egypt's investment appeal. Last year the country only managed to attract $8.1 billion from gun-shy investors.

Despite Egypt's relative economic stability, former heavy investors have thus far focused on trying to strengthen their own economies. The UAE, for example, which poured over $3 billion into Egypt in 2006/2007, could only afford $726 million in 2007/08.

Analysts have predicted though that investors will take money out of Dubai and direct it into Abu Dhabi, Qatar and Egypt, which many see as safer investment havens.

China, despite economic struggles, has maintained its investments abroad, particularly in Africa. At last month's Forum on China Africa Cooperation in Sharm El-Sheikh, Premier Wen Jiabao reaffirmed China's commitment to the multitude investments it is pursuing all over Africa.

China and Egypt demonstrated their strengthening ties with the announcement of the Suez Economic and Trade Cooperation Zone, made by Premier Jiabao and Prime Minister Nazif in early November. Expected to open in 2018, the zone will need a total investment of $2 billion from around 150 businesses, largely Chinese producers of automobiles, appliances, textiles and petroleum equipment.

On Nov. 10, Egypt became the first country to host a representative office of the China Development Bank, the state-run bank for public works projects.

However, China currently remains the 23rd largest investor in Egypt, and although expectations abound for it to soon rank among the top 10 investors, Egypt cannot count solely on China to provide the capital needed for its domestic development agenda.

Director of Research at Pharos Holding, Hany Genena cautioned against overemphasizing China's role in Egypt's future, pointing out that China's agenda is resource extraction, of which Egypt has little to offer.

"It is premature to make judgments about China [investing in Egypt], as China remains one of Egypt's less significant sources of investment," Genena added.

In the first quarter of the fiscal year ending in June 2010, for example, the $1.7 billion Egypt received came entirely from the United States.

Genena worries more about Egypt's dependence on FDI revenues from the oil and gas sector, which are expected to decline as Egypt passes its petroleum production peak.

Genena also warned against over-emphasizing the role of FDI in the current decline in M2 growth, saying it results more directly from CBECBE monetary policy

"After lowered interest rates started to increase inflation, CBECBE is now more cautious about the expansion of credit and the money supply," Genena explained. "The direction has changed since the Nov. 5 meeting, after which banks raised interest rates aggressively.

"Due to increased confidence at the end of 2009, investors and developers who have been sitting on projects since the crisis began last year are now demanding credit. The banks have raised rates as a result, leading to the decline in monetary supply."

Over the next year as confidence hopefully begins to rise domestically and abroad, hopes are high that both FDI rates and interest rates will enable Egypt to return to the positive growth trajectory it enjoyed prior to last year, an outlier that Genena suggests be excluded from financial analysis.

By Annelle Sheline

© Daily News Egypt 2009