• Home
• Egypt
• News Article

Disputes between investors and government: Another nail in the coffin of the future Egyptian economy

By Mohamed Abdulzaher

Domestic investors to choose between the grip of law and market transparency

Disputes between businessmen and the Egyptian Government are increasingly considered commonplace; not a month passes by without a case pertaining to businessmen, both Egyptian and foreign, being filed before the Egyptian courts. Some view this issue as a factor which could significantly hinder Egyptian investment, particularly given the recent impact of judicial rulings against businessmen on sectors such as real estate and steel.

Will these disputes between businessmen and the Government persist after the revolution or will the Egyptian Government endorse free market economics, seek to lift restrictions on businessmen, and adopt a more flexible, investment-safe legislation in Egypt?

Domestic investment

Private domestic investment in Egypt is a significant contributor to the volume of the Egyptian economy. A report issued by the Egyptian Ministry of Investment documented an increase in private domestic investment in Egypt from EGP37 billion in 2003 to EGP135 in 2009, while foreign investment escalated from USD400 million in 2003 to USD13 billion in 2009.

The Central Bank of Egypt released a report on the country's Gross Domestic Product (GDP) which revealed that the contribution of the private sector to the economic growth rate is on the increase, rising from 3.8 points during the 2009-2010 fiscal year to 4.0 points in 2010-2011 (see chart 1).

Education, Health and Personal Services

- Real Estate-related activities
- Tourism
- Financial Intermediation and Auxiliary Activities
- Wholesale and Retail Trade
- Telecommunications
- Transport and Storage
- Construction
- Manufacturing
- Extractions
- Agriculture, Irrigation and Fishing



Chart 2: Contribution of the private sector to the total investment real growth rate between July and December

Source: Central Bank of Egypt

- General Provisions
- Other Services
- Sanitation
- Health Services
- Education Services
- Real Estate-related activities
- Restaurants and Hotels
- Financial Intermediation
- Wholesale and Retail Trade
- Information
- Telecommunications
- Transport and Storage
- Construction
- Manufacturing
- Petroleum Refining
- Natural Gas
- Crude Oil
- Agriculture, Irrigation and Land Reclamation

The report also highlighted the role of the private sector in the growth of total investment in Egypt by 12.2 percentage points in 2010-2011, compared to a negative contribution of 5.1 points in 2009-2010 (see chart 2). The majority of this contribution was concentrated in sectors such as construction, wholesale and retail trade, and tourism.

Metallurgy

The metallurgy sector has been highly affected both by disputes between businessmen and the Government, and by the revolution of January. The fall of Ahmad Ezz, the "emperor of steel", impacted negatively upon Ezz Steel shares, as well as on some affiliated companies, the three companies owned by Ezz - Ezz Steel , Alexandria National Steel Company (El Dekhela), and Ezz Ceramics and Porcelain Company -lost approximately EGP8.8 billion from their market value, amounting to 35% within the two months following the revolution according to that period related report issued by the Egypt Stock Exchange.

This, in addition to other judicial rulings issued at the beginning of the month, led to the withdrawal of steel manufacturing licenses that were delivered by former PM Nazif's Government before the fall of the regime to four companies: Ezz Steel Rebars, Egyptian Sponge Iron and Steel Co. (ESISCO), Suez Steel Company, and Taybah Steel. The withdrawal of these licenses is considered by some as a disastrous threat to the steel industry in Egypt, according to Mohammad Hanafi, Egyptian businessman and Egypt's Metallurgical Industries Chamber general manager. Hanafi has stressed that the increase in such rulings against businessmen in Egypt in the last period is a sign of instability and may become a factor which discourages investment in Egypt. The general manager had hoped for a more stable future after the establishment of legislative councils and election of a president. He asserted that the recent ruling by virtue of which the steel manufacturing licenses were withdrawn from six companies will not affect the steel prices unless metallurgical investment is hindered by a governmental decision. This, besides the ongoing recession, will ensure stability of prices.

Real estate market

The real estate market received repeated blows, especially in the wake of the fall of the ruling party and the Egyptian businessmen as well as all who were close to former President Mubarak some of whom were sentenced and others jailed. A recent study published by the Egyptian Real Estate Association indicated that the losses of the Egyptian real estate sector from the outbreak of the January 25 revolution through to the end of last April amounted to EGP15 billion (USD2.5 billion).

The first blow was probably received by Hisham Talaat Moustafa, chairman of Talaat Moustafa Group Holding , the largest real estate investment in Egypt in terms of market value, after his conviction of Suzanne Tamim's murder at the end of 2009. Real estate share value increased after this, then fall again and incurred heavy losses. The share value surged once again after the Supreme Administrative Court confirmed the invalidity of the land sale contract of Madinaty, which stretches over 8000 feddan, until the January revolution outbreak which led to the share price decline after Egypt's capital market closed. Indeed, the Talaat Moustafa Group Holding market capital fell after the revolution by about EGP7.7 billion or 47.6% from its market value before the revolution.

Palm Hills shares also decreased by 6.0% after a lawsuit was filed invalidating contracts pertaining to land owned by Palm Hills Developments ( PHD ), and co-owned by the former president's sons Alaa and Jamal Mubarak, the former Housing Minister Al-Maghrabi and the former Minister of Transport Mohamed Lotfi Mansour. Palm Hills Developments lost EGP9.3 billion or 63.1% of its pre-revolution value. The Six of October for Development and Investment Company (SODIC), chaired by Magdi Rassekh brother-in-law of Alaa Mubarak the former President son, lost 37.0% of its market value - EGP1.3 billion. The market value of the Crédit Agricole Bank, which is owned by Mansour and Al-Maghrabi company and is under the control of the former Ministers of Housing and Transport, decreased by about EGP930 million or 19.1% of its capital before the revolution. The Egyptian for Tourism Resorts, owned by one of the dissolved National Party leaders, businessman Ibrahim Kamel, lost 43.0% from its market value; a figure which amounts to EGP871 million.

The Deutsche Bank report revealed that Egypt's real estate sector will remain fragile throughout the current year due to political turmoil and legal disputes over some real estate companies' acquired lands. The sector consequently faces risks pertaining to project implementation, funding, slow sales, and weak consumer confidence. The report added that three major real estate companies in Egypt face lawsuits related to the illegal direct purchase of state-owned land through the previous governments of President Mubarak's regime without any bid; a factor which had a negative impact on the sector.

Another international report issued by the Credit Suisse Bank indicated that the real estate sector is currently the sector most affected by the political and economic instability being experienced in Egypt. The report predicted that the market will suffer from full sales recession this year and that developers will face an increase in the number of reservations being cancelled as a result of the ambiguity that surrounds developers' ability to deliver the agreed units in light of the legal disputes over land ownership.

Other sectors were affected after the January revolution, particularly after the rulings issued against some Egyptian businessmen, with the same scenario observed in agriculture, tourism, industry, and other sectors in which businessmen of the dissolved National Party were involved.

Setting the right track

Some experts have advised that the rulings issued against some businessmen from the previous period will not affect investment in Egypt, but are merely steps to correct and strengthen the investment track in Egypt. According to Dr. Hussein Juma'a, president of the Egyptian Society of Real Estate, these rulings were necessary due to the illegal seizure, under the previous regime, of plots of lands by some businessmen. He noted that these plots should be restored to the state before being revaluated and offered for sale to new investors; a step that will lead to the Egyptian economy's recovery according to fixed transparent rules. The Deputy Prime Minister and Minister of Finance, Hazem Beblawi, stressed in a statement of the Ministry of Finance that the issuance of such rulings against some investors or businessmen does not mean in any way that the Government is going to distance itself from free market economy, as it is an essential and integral factor of the Egyptian state policy.

Beblawi added that the Government supports a free market economy, the application of which requires a strong state which ensures compliance with the law, respect of contracts and commitments, competition protection, and prevention of harmful practices or deviations. He also stressed the importance of the Government's decision to protect investors as well as workers, and to fully meet the state's commitments as long as it abides by the law. Further to this, he expressed the Government's desire to preserve the stability of the stock market and protect shareholders' and stakeholders' rights in order to achieve economic stability.

Beblawi assured potential investors that all necessary measures will be taken in order to protect investors' and workers' rights with the aim of protecting the Egyptian economy from any further shock in these particularly delicate circumstances. He also emphasized the Government's desire to respect the sanctity, independence and provisions of the judiciary system, which allows all citizens to resort to justice in order to protect their rights through procedures defined by law.

In the same context, the Investment Contracts Settlement Commission of Egypt's Council of Ministers held last week under the presidency of the Prime Minister Essam Sharaf two meetings during which was addressed the settlement of some investment related problems that arose recently in an attempt to overcome the pertaining problems and obstacles in order to allow the normal economic activity of concerned institutions, to restore balance between the state's and investors' rights in a way that would support production and serve national interests, and to restore economic balance to investment contracts in question.

Negative fallouts

Nasser Bayan, President of the Egyptian Association for Investment in Libya and one of the businessmen against whom a judicial ruling was issued, pointed out that the same previous regime's laws still rule Egypt's investment climate after the revolution without any change; a situation that has negative consequences, particularly on domestic investment. Bayan added that the rulings issued against Egyptian and foreign businessmen are negatively affecting investment in Egypt and have, moreover, become a repellent factor to foreign capitals. He argued that Egypt's Government should strive to issue new, more flexible legislation which preserves investors' rights, in addition to providing investors with new advantages and incentives, and reducing the price of land, and bringing Egyptian manpower training in line with internationally adopted standards.

Positive impact

The chairman of the International Business and Investment Association, Ahmed Jalal Eddin, believes that issuing such rulings against some businessmen has a positive impact on Egypt's economic recovery, confirming the presence of fair and powerful judges who have the ability to preserve the rights of investors; a situation that gives a positive image to foreign investors, who rely on law enforcement before giving a potential investment any serious thought. Jalal pointed out that jailing corrupt businessmen will affect their companies' share value but will have no effect whatsoever on Egypt's economy as a whole.

Jallal added that the Egyptian justice system is fair, as all businessmen accused of corruption were tried before a civil court, whereas other countries, in the absence of a fair judicial system, seize corrupted businessmen's properties. This would suggest that the investment situation in Egypt is not as repellent as some may think. He stressed that the Egyptian economy will be strengthened once deterrent and final judgments are rendered.

Mohamed Abdulzaher
mohameda@zawya.com

© Zawya 2011