Investors Bet on Egypt’s Revival Under New Leader

Egyptian President-elect Abdel Fattah Al Sisi faces a tangle of economic challenges, but many foreign investors are already betting his arrival heralds better returns after three years of political tumult.

Foreign investment in Egyptian stocks and in private companies has picked up in recent months, buoyed by hopes that the former military chief will bring security and stability after he is inaugurated in the coming days following Tuesday’s announcement of the official vote results. Yet this confidence underscores an increasingly glaring contradiction of Egypt’s economy.

While many investors are rushing into the Arab world’s most populous nation, there are already signs that some are pulling back. That is an indication the rosy climate could turn quickly if Mr. Sisi isn’t able to tackle the government budget deficit, weak currency, a large subsidies bill, double-digit unemployment and other defects that have fed discontent.

Cairo’s main stock index has risen more than 60% since Mr. Sisi deposed Mohammed Morsi, Egypt’s first freely elected president, in a coup in July 2013. That is higher than before the 2011 uprising that swept Hosni Mubarak from power, setting off the most volatile period in Egypt since the founding of the republic in 1953.

Another sign of reviving confidence was a $110 million IPO last month by Arabian Cement, the first listing in Egypt since 2010. It was heavily oversubscribed, bringing in $260 million of orders from Western institutional investors, said Hesham Gohar, head of investment banking at CI Capital, an Egyptian firm that helped to arrange the deal.

“These are people who are sophisticated and do the proper due diligence, and they are quite confident about the risks facing Egypt,” Mr. Gohar said.

Private foreign investors have been making further waves in post-Morsi Egypt. Saudi Arabia’s Aujan Coca-Cola KO -0.12% Beverages said in February that it would build a $100 million fruit juice factory in Egypt. Construction Products Holding, a unit of the regional construction giant Saudi Binladin, Co. paid $190 million in May to buy Sphinx Glass and its factory in Sadat City, 60 miles northwest of Cairo.

Faysal Alaquil, Construction Products’ head of business development, said the company wasn’t affected by recent political upheaval and was thinking about a long-term investment. “We see that there will be stability in terms of the political situation and the economy,” he said.

But Mr. Sisi’s ability to sustain the current tide of enthusiasm isn’t ensured. Fuel subsidies that cost the government $17 billion a year, as well as economic policies that have left millions in poverty, pose challenges.

The growth of Egyptian industry is stunted by a shortage of natural gas needed for power plants, cement plants, fertilizer producers, textile factories and other industrial players.

Meanwhile, the government has diverted natural gas and subsidized it for domestic consumption, while falling behind on payments to foreign firms for their energy products, jeopardizing future investment in the energy sector.

BG Group, BG.LN +0.53% a London-listed liquefied natural-gas firm that operates in the eastern Mediterranean, said in a recent earnings release that operations in Egypt were “increasingly at risk” because of diversions of energy to the domestic market and nonpayment by the government. Egypt owed BG Group a total of $1.4 billion at the end of the first quarter, the company said.

Overall, Egypt owes foreign energy firms $5.7 billion.

Other investors like Centamin, CELTF +3.03% a mining company listed in London and Toronto, have faced third-party lawsuits brought after the 2011 rebellion that contest Mubarak-era land grants and privatizations of state assets.

Foreign investors are hoping for some clarity from Mr. Sisi about his economic policies.

Investment thrived under Mr. Mubarak, who in the later years of his nearly three decades in power pursued market-friendly, open-door policies that boosted economic growth, if not raised living standards for most Egyptians.The presumed winner of the election as soon as he hinted at running,

Mr. Sisi never spelled out his economic agenda in detail during the campaign. He hinted in a television interview that he would carve out a larger role for the state, suggesting a break with the Mubarak era and perhaps the revival of some aspects of the socialist policies of former President Gamal Abdel Nasser, with whom Mr. Sisi is fondly compared by his supporters.

Mr. Sisi has also discussed ambitious plans to develop Upper Egypt and other impoverished areas of the country.

Foreign investors, however, are most concerned about the currency, the tax system, repatriation of profits and the new regime’s economic management—details of which still remain unclear.

A further decline in the Egyptian pound, which recently has been trading at all-time lows, would mean foreigners get less money in dollar terms when they liquidate assets in pounds.

The Finance Ministry’s plan to levy a 10% capital-gains tax on foreign stock-market investors raised more eyebrows. Cairo’s main index fell by more than 4% on Sunday, and trading was briefly suspended.

“I think if [Mr. Sisi] can solve the security issues and general unrest and bring back stability, that’s going a long way to restoring confidence,” said Ahmed Badreldin, a partner at the private-equity firm Abraaj Group, which has investments in Egypt’s health and education sectors.

“It’s a confidence game. If confidence comes back, you will see businessmen coming back and investment coming back, and you will see demand rising again.”

 Source: The Wall Street Journal