Egypt — Investing in the Land of the Pharaohs

Egypt evokes images of the Great Pyramid at Giza , the Nile River and the vast expanse of the Sinai Peninsula. Egypt’s population of 83 million also makes it the Arab world’s most populous country. The Nile River is the lifeblood of the country, and most of Egypt’s population is concentrated within 20 miles on either side of the world’s second longest river. In terms of economic heft, Egypt’s Gross Domestic Product (GDP) of $452.5 billion in 2008 makes its economy roughly half the size of Turkey — and about as large as the state of Ohio.

Although Egypt is unlikely to ever take its place alongside dynamic economies like Indonesia, Mexico, and Turkey as the next BRIC economy, Egypt offers a good example of how the combination of deregulation, free-market reforms and generous financial support by the U.S. government can help nudge an Arabic country out of isolation into the global community of nations.

Personal Impressions

I have visited Egypt half a dozen times over the past decade or so, including the cities of Cairo, Luxor, the resort town of Sharm El Sheikh and the ancient city of Alexandria. My overall impression? Despite progress over the past ten years, Egypt remains a scruffy, haphazard place. Cairo’s bustling central market lacks the sophistication of the Turkish capital, Istanbul. You spend a lot of time fending off cries of baksheesh from local “guides” and beggars. Las Vegas-style real estate developments dot the outskirts of the capital city. Hand-painted billboards advertising preparation for U.S. college admissions exams line the highways. Surprisingly, my most lasting impression of Egypt wasn’t the pyramids of Giza, but the most recent incarnation of Alexander the Great’s ancient library of Alexandria, a striking piece of architecture that cost more than $220 million to construct. Although our tour guide’s assertion that the library was among the three largest libraries in the world proved to be an empty boast, the library’s censored collection of books is an impressive, though incongruous, monument to man’s spirit of inquiry.

Benefiting from U.S. Support

Politically, Egypt is a linchpin in U.S.-Middle Eastern politics. No wonder Barack Obama chose Cairo to deliver the first major speech of his young administration last June. That said, Egypt isn’t exactly a hotbed of U.S.-style democracy. President Hosni Mubarak is head of what effectively is a single party in an authoritarian state — though one that likes to present itself as a stable and reliable Western ally.

Economically, Egypt has benefited tremendously from huge amounts of U.S. foreign aid, trade and investment since Camp David Accords. In 2006, Washington provided $1.3 billion in annual military aid, equal to 80% of the Egyptian military’s budget. Two-way trade totaled $8.5 billion last year, having grown by 10-15% annually since 2004. U.S. foreign direct investment in Egypt amounts to about $7.5 billion. Only Israel benefits from more U.S. largesse.

…and Some Free-Market Reforms

Even if indirectly, U.S. influence has pushed Egypt toward free-market economic reforms. Beginning in 1991, Egypt has relaxed price controls, trimmed subsidies, reduced inflation, cut taxes and partially liberalized trade and investment. The public sector no longer dominates heavy industries. Construction, non-financial services, and domestic wholesale and retail trades are largely private. Agriculture is mainly in private hands.

The result? Egyptian GDP has grown steadily over the past three decades. Per capita GDP more than tripled from $1,355 in 1981 to an estimated $4,535 in 2006. As a result, the World Bank has graduated Egypt from the “low income” to the “lower-middle income” category.

Egypt also weathered the “Great Recession” fairly well, with economic growth slowing only to 4.5% in 2009. The economy grew a better-than-expected 5.1% in the fourth quarter. Just to make sure the country’s economic growth remains on track, the government plans to spend $2 billion on infrastructure projects in the coming year.

Making Money in the Land of the Pharaohs

As a mutual fund manager in London during the late 1990s, I invested in Commercial International Bank of Egypt — the first Egyptian stock that was available to foreign institutional investors. But Egypt is still a relative latecomer to the emerging markets game — and even more so for U.S. retail investors. Market Vectors launched an Egyptian ETF, the Market Vectors Egypt Index (EGPT), on Feb. 16. Since then, its performance has been choppy and mixed.

The largest sector allocation in the fund is financials, with a 42.4% weighting, followed by telecommunications (17.3%), industrials (15.9%) and materials (14.2%).

Bottom line? Egypt is an unlikely candidate for the title of the “next BRIC” economy. That said, a few years ago, the Arab markets, including Egypt and Saudi Arabia, were the top-performing stock markets on the planet. The addition of the Market Vectors Egypt ETF to your palette of investment opportunities will allow you to take advantage of the next boom in Arabic markets when it arrives.

Until then, there are bigger fish to fry in the world of the next BRICs.



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