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Egypt has had a troubled background for quite some time now. More recently, though, there were several headlines out that all interlink and bode well for the future of the country. Hence, the question: Is the investment plan unveiled by the UAE the centerpiece of Egypt’s rescue plan?
In recent years, the Egyptian economy has suffered from multiple issues, inflation has been high, and the Central Bank has de-valuated the EGP multiple times, though with little overall impact on the country’s economic situation, and more recently a lingering food crisis, among others. The country continues to suffer from economic imbalances and other hard-to-adjust shortages, which are in full swing across the region. The IMF, which is Egypt’s historic financial sponsor through special loan arrangements, wanted to see the Egyptian Central Bank to free float its currency before making any further disbursements. Was that a valid prerequisite? Probably, but with the UAE moving ahead with a big-ticket deal, the IMF couldn’t stand aside.
Based on the deal, the UAE will be investing in a coastal area called Ras El-Hekma to develop a Real Estate project for tourism and other services industries. Ras El-Hekma is on the Gulf of Aqaba coastline, west of the Nil Delta. It is a very pristine, undiscovered place by tourism, and overall, it is underdeveloped. For now, the region has limited resources and accessibility, the nearest international airport is about 80km away, and its infrastructure is somehow limited and outdated. The plan foresees an arrangement for about 8 million people.
With the idea to impress the world and showcase their wealth, Emirs are truly into mega projects in Real Estate. Saudi Arabia is to build Neom, this comes along with projects like The Line, Oxagon, and, believe or not, a skiing resort, among others. The UAE is pushing forward the extension of Dubai via the Palm Developments, while Qatar is promoting luxury real estate projects such as Al Dawoodia and Ariane City, among others. In essence, through these developments, they attempt to reduce the country’s reliance on oil revenues. Also, they seek to diversify their economies and improve public service sectors, such as health, education, infrastructure, recreation, and tourism. With the Ras El-Hekma project, Egypt is trying to catch up. The overall project is estimated at $150 billion, of which the UAE, via its holding company ADQ, is taking up a share of 35%. ADQ is not a newcomer to Egypt. The holding company has bought stakes in Egyptian firms across various sectors such as fertilizers, banks, payments companies, and tobacco, among others.
Historically, Egypt does not have the best track record for achieving urban development projects. And right now, it still suffers from a triple shock (COVID-19, war in Ukraine, and now war in Gaza). Egypt, while it has huge surfaces of arable land, is still a net importer of food, particularly wheat from Ukraine. Given the high level of administrative inefficiencies that still govern the day-to-day operation, an economic issue has turned up, i.e. the exchange reserves have diminished substantially. As of February 2024, it was just about $24 billion, which is much below the injected amount by the UAE. For the UAE, $35 billion is about 7% of its GDP, so it is a bold conviction call for MBZ. In contrast with traditional investment projects, which have multiple multi-year dispersion plans, this present investment plan will be made available within two months. For Egypt, this means there will be $24 billion in fresh cash and $11 billion will sourced at the expense of existing deposits.
Because it is key to the region’s development, let’s look once more at Real Estate and Urban development projects. In the Middle East, the market is rarely balanced, it is either a “buyer’s market” or a “seller’s market”. Pending global economic and geopolitical conditions, the market participants park the hot money in the region. In general, the success ratio for building megacities in the region from scratch is rather low. Egypt tried to build NAC, but it failed. The new project is in the southwest, close to the Whale Valley; the risks of failure are high as attention to wrong details and lack of commitment from the government are luring down the road of implementation.
Saudi Arabia had several city development projects too, such as the King Abdal economic city, but they didn’t go through as planned either. In all-purpose, the region has a low track record in building, developing, and expanding projects especially when the clusters of populations and existing trade aren’t present to start with. Some overarching principles need to interlink with the concept of the project such as easy “come-and-go” (visa on arrival), languages that are spoken, and economic ties and opportunities a country can offer for companies and expats.
Typically, the rise of Dubai was based on
Given the above list, we doubt that the Ras El-Hekma project will experience the same rise and success. Other projects are competing in the same league but with slightly better background conditions. More overarching considerations include competitiveness and internal dynamics. First, there is a credibility gap that needs to be filled. Secondly, we note that most economic activities are centered around one big player which is the army. The army is an administrative, bureaucratic, and slow-moving entity. It doesn’t need to be efficient in exports and more importantly, it is not promoting a service industry.
For now, EPQ has made the first direct investment, which puts Egypt right back into the spotlight. If Egypt can’t get private investors to the project, so no other SWF, but from other players such as industrial groups, and project developers, then we doubt that the project ever really can take off.
When zooming out from the granular level and considering the success stories of other developments in the region, one can see that these places were built on excess petrodollars and that dividends ended up in Treasuries and Bund, amongst others. More recently, Petrodollars were spent for local purposes, and in particular focus was given to local infrastructure projects such as hosting the World Cup, the World Expo, and the Asian Games, among others. While there was an international aspect to the operation, the main benefits were domestic and that is truly fine.
With the Ras El-Hekma undertaking, the venture connects the interests of multiple countries, companies, and private individuals. This is a true game-changer as there is, for the first time, a regional project with a strategic long-term collaboration that could result in a win-win situation. More importantly, there is a clear shift, GCC governments are allocating a substantial part of their wealth towards riskier foreign infrastructure projects. In pure investment language, we would be talking about a pure high-alpha investment opportunity. However, the shift could also reflect another potential reality: a) The real lack of valuable direct investment for that size of money, or b) addressing the vacuum created by the process of decolonization and the partial political and economic withdrawal of the UK, France, and the USA from the region.
All across the country, traditional companies have existed for decades. Over the years, the impact of the army has increased, which in turn decreased the number of independent companies. Put in simple terms, the army benefits from unfair advantages such as cheap labor, administrative advantages, and cheap land, among others. Egyptian monopolies capture the domestic market, but not more. Given these state-controlled dominations, there is limited interest for foreign companies to invest in Egypt. At the same time, there is limited interest for army-influenced companies to sell internationally as their products and services are short of the international standards.
We would expect this vicious circle to continue as GCC Sovereign Wealth Funds may continue, now more than ever, to support the Egyptian economy. In plain vanilla, every interaction goes back to the political side of the economy.
Yes and no! Changing rules in a rigid structure is difficult, especially when the same people continue to kidnap the system. On the other hand, the international capital injection of over $50 billion is a vote of confidence - this is supporting change.
When comparing the economy in GCC with the rest of the world, which operates within an open and dynamic concept, one will not that different rules and standards apply across ME. When doing business in the region a company will virtually set to a different standard and it is more about a compromise and getting acquainted than pushing forward strategies and splashing out cash.
As referenced earlier, one of the major mismatches is the predominant rent system. Historic examples of rents included levies to cross a bridge, pass a canal, or enter a port facility, among others. That kind of system generates segregation, i.e. aka being admitted to the club or not, so it was a powerful tool for social and economic control. In other parts of the world, the cornerstone of a society is the tax system. It has at least two overarching aims: a) it is the dominant tool for the state to generate revenues to build and maintain its infrastructure and provide basic services to its population, and b) progressive tax policies are meant to help redistribute wealth. In contrast to the rent system, taxes are levied on profit achieved and charged ex-post.
These rent-seeking economies, though bend their own rules at some point. In the case of Jordan, plus some other cornered-out populations, the majority of the population relies very much on aid from abroad. In the case of Egypt, the major individual revenue stream is generated by the activities at the Suez Canal of which the construction started in 1854. At that time and through paying rent, the French company Suez Canal Company (Compagnie Universelle du Canal Maritime de Suez) obtained the right to operate the canal for 99 years. Adding another mega urban development project will most likely not change the overall situation, as the rent system is still predominant. However, we would expect there to be a meaningful economic acceleration in the region but to remain at a plateau at some point as the number of tourists able to visit the place and the number of yachts that one can moor in a marina is limited unless you keep extending forever.
To make Ras El-Hekma evolve and engage with a Dubai-like growth, the country needs a different format, ranging from the political set-up, the people’s mindset, to operational activities reaching out for international recognition with offerings meeting the highest standards. Insiders of the development of the UAE know that a large part of Dubai’s success needs to be attributed to Emirates Airlines which is exceeding the industry benchmark by offering daily excellence to about ¼ million passengers. Moreover, while the company is strongly intertwined with the Emirates of Dubai and its tier-one circle, its president, Sir T. Clark, a British national, was given a clear mandate and an unrestricted mandate to run and set up a Western-style company.
Developing real estate is a valuable thing, but it does seem to be tricky as relies on a complete and competitive international system of excellence and recognition.
Knowledge is power.
