EXECUTIVE SUMMARY

• Egypt is the largest Arab market with over 75 million people. Privatisation since 1995 and economic reforms since 2002 have greatly improved the business environment, with rising foreign direct investment (FDI), particularly in areas of construction and garment manufacturing. Against this backdrop, the Egyptian market is becoming more accessible to Hong Kong products and services.

• Egypt is increasingly becoming an export hub for the US and EU markets because of its large pool of skilled labour and low utility rates, as well as trade agreements with the US and EU. Its garment industry has greatly benefited from this development, which in turn offers opportunities for Hong Kong to supply quality garment parts and components to Egypt.

• Egypt’s middle class is estimated at 5 million, or 6.7% of its population (India’s middle class is estimated at 5% of its population). Increasing FDI is seen as helping the growth of Egypt’s middle class. Real estate firms are bullish on middle-to-high-end retail, as reflected by the growing number of shopping malls in Cairo. Opportunities for Hong Kong products are emerging, especially electronic products, gifts and premium, garments and eyewear, though competition is also heating up.

• Increasing foreign participation has given rise to expanding demand for higher-grade offices, residences and shopping malls. The Egyptian government’s privatisation receipts are being spent on infrastructure to sustain economic growth. Opportunities for Hong Kong IRES companies await in Egypt.

• The Egyptian market is not without its challenges. Egyptian consumers have the general impression that goods coming from Asia (excluding Japan and Korea) are inexpensive and find it hard to differentiate between Hong Kong and mainland products.

Egypt: The Largest Arab Market in Population Terms

Egypt is situated at the centre of the Middle East and North Africa (MENA) region. The MENA region is characterised by its Muslim culture, and its plentiful natural resources, including oil, gas, and minerals. Apart from being a typical MENA country with its Muslim majority and oil and gas deposits, Egypt has a feature distinctive from other Arab countries: its abundance of manpower resources. Egypt is MENA’s largest market in population terms, with over 75 million people as of 2008, whereas most other Arab countries generally have only a few million people.

In terms of economic development, the economy was previously supported by such drivers as agriculture, the Suez Canal, oil and gas, and tourism. Egypt had high tariffs, fairly high personal and corporate taxes, and a stringent import and foreign exchange regime, rendering this large and populated market close to impenetrable.

Without sufficiently and effectively utilising its human resources, Egypt had suffered from low economic growth and high unemployment.

An Economic Metamorphosis

In recent years, things have begun to change. Under a rigorous long-term direction to liberalise its economy, Egypt has gradually emerged as a lucrative market ready for Hong Kong companies’ exploration.

First, the central bank relaxed control on foreign exchange in 2002, and now investors can freely repatriate their profits.

Second, Egypt has overhauled its import regime. Tariffs have been reduced from a weighted average of 14.6% to 6.9%, and surcharges that were inconsistent with international practices have been abolished. The tariff code has also been reformed, reducing tariff lines in accordance with the internationally adopted Harmonised System (HS).

Moreover, drastic tax cuts have been implemented. Corporate tax rates, except for a few large organisations, have come down from a high of 32-40% to an accommodating 20%. Personal tax rates have seen a similar fall, from 40% to a comfortable 20%.

These measures have reduced the burden on businesses and tax payers, especially the middle class, and encouraged them to invest and spend. Business associations have noticed that their members have increased their investment since the tax reductions, and modern shopping malls that are springing up in Cairo may well be an indication that more people are more willing to spend, especially the middle-class consumers.

A more important implication of these changes, however, lies in the fact that foreign investors can better access the Egyptian market and make effective use of the country’s various resources. Foreign capital can come in to help modernise Egypt’s oil and gas extraction, improve Egypt’s tourism infrastructure to attract more tourists, and create an opportunity to make use of Egypt’s abundant skilful and educated workforce to engage in manufacturing, as well as information technology and business processes outsourcing (ITO and BPO).

Moreover, Egypt has signed a number of trade facilitation agreements with its trading partners, including the EU and the US, which have made Egypt’s exports to these markets increasingly accessible. This has further fuelled investment into Egypt.

Opportunities for Hong Kong Companies

Foreign businesses are profiting from Egypt’s liberalisation, and their investment is helping Egypt reduce unemployment, as well as creating new demand for products and services. The middle class in Egypt has benefited from the liberalisation measures, and its size is expanding, thanks to the business and employment opportunities made possible by the continued influx of foreign direct investment (FDI). As an indication, the percentage of Egyptians with annual income of US$5,000 or more grew from 3.3% in 2005 to 6.4% in 2007.

Currently, Egypt’s major manufacturing industries include: textile and garments, building materials, electronics, chemicals and food. An enlarging manufacturing sector gives rise to demand for raw materials, parts and components, as well as machinery. Hong Kong companies supplying these industries will have widening opportunities in exporting to Egypt. For example, Hong Kong exports of electronics to Egypt rose at a strong compound annual growth rate (CAGR) of 32.9% between 2006 and 2008, from US$26 million to US$81 million.

With a gradual rise in wealth, the Egyptian consumer market also looks promising. Demand for electronics, higher-end garments, gifts, premium and houseware is on the rise. Previously, few modern shopping malls were present in Egypt’s retail market, with goods mostly sold in the traditional souks and bazaars. Thanks to economic reforms, foreign investors have come to Egypt to construct new shopping complexes to cater for consumers who are much better off and discerning. This also opens up opportunities for Hong Kong products, many of which are middle to higher end, for distribution in the burgeoning consumer market.

In addition, rising FDI and expatriate population create demand for higher-end shopping malls, offices and residences. Hong Kong’s infrastructure and real estate service (IRES) suppliers can consider participating in this rising market where real estate and construction represents 7% of its GDP, more than twice as large as the contribution of its vital Suez Canal, at 3%. In recent years, Hong Kong’s IRES suppliers have set their sights on the Middle East market, typically some of the Gulf countries of MENA, in constructing high-rise offices and residences. As Egypt becomes more attractive to foreign investment, Hong Kong companies will have an additional market to look at.

Risks and Challenges

Although Egypt is undoubtedly a promising market, it is not without its fair share of risks and challenges.

For one, the current financial tsunami is likely to dim Egypt’s economic growth. Half of Egypt’s exports are oil and gas, with plunging oil prices, export receipts will dwindle. In addition, the EU and US, being adversely affected by the economic turmoil, together accounted for over 60% of Egypt’s exports. No doubt, Egypt’s exports sector is facing a tough environment.

The economic slowdown is also likely to hurt Egypt’s tourism sector, the related industries of which are estimated to account for some 20% of the country’s GDP. Slower trade will hit Suez Canal revenues as well.

Although a middle-income class is emerging, living standards for most Egyptians remain fairly low at present, and the country has the lowest GDP per capita among North African markets. As evident from the many low-end Chinese products flooding the market, people who can afford middle or high-end brands are still a minority.

With the global economic downturn, Hong Kong companies interested in market diversification to the Egypt market may start to study the market and its business dynamics, as the medium- to longer-term prospects for this largest Arabian market (in MENA) looks encouraging in the wake of the reform-driven economic metamorphosis.

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