But it also has a feature which is quite distinctive from other Arab countries: its abundance of human resources. That 75 million people, many of whom are young, provide a reservoir for market development that few other Arab or North African countries can emulate.

The economy has hitherto been 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 has, for years, suffered from low economic growth and high unemployment.

An economic changeling

Things have changed. Under a rigorous, long term direction to liberalise its economy, Egypt has gradually emerged as a lucrative market ready for Hong Kong companies to explore.

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

Then, Egypt 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).

To complement these changes drastic tax cuts have been implemented. Corporate tax rates, except for a few large organisations, have come down from a high of between 32% and 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 willing to spend, especially middle class consumers.

A more significant implication of these changes, however, lies in the fact that foreign investors can access the Egyptian market and make effective use of the country's resources.

Foreign capital can help modernise Egypt's oil and gas extraction and improve the country's tourism infrastructure to attract more visitors. New finance can create an opportunity to make use of Egypt's abundant supply of skillful and educated workers 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 exports to these markets increasingly accessible. This has further fuelled investment into Egypt itself.

Mid- to high-end opportunities for Hong Kong

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 it's 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 an 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: textiles 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 to these industries will have widening opportunities when 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, or in value terms from US$26 million to US$81 million.

With rising wealth, the Egyptian consumer market also looks promising. Demand for electronics, higher-end garments, gifts, premiums 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. 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 more 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.

Rising FDI and an enlarged 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 represent 7% of its GDP, more than twice as large as the contribution of the Suez Canal, at 3%.

Hong Kong's IRES suppliers have set their sights on the Middle East market recently, typically targeting some of the Gulf countries of MENA, to construct high-rise offices and residences. As Egypt becomes more attractive to foreign investment, Hong Kong companies would have an additional market to look at.

Risks in a slowdown

Although Egypt is 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, so with plunging oil prices, export receipts will likely dwindle.

In addition, the EU and the US, being adversely affected by the economic turmoil, together have accounted for more than 60% of Egypt's exports. No doubt, Egypt's exports sector is facing a tough time.

The economic slowdown is also likely to hurt Egypt's tourism sector, with related industries 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 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 in a minority.

With the global economic downturn, Hong Kong companies interested in diversification to the Egyptian market should study its characteristics and business dynamics. The medium-to-longer term prospects for this largest Arabian market (in MENA) look encouraging in the wake of its reforms-driven economic metamorphosis.

For more details, see the HKTDC Research report: "Egypt – A Promising Market in North Africa" (http://www.hktdc.com/bookshop).

(Image courtesy of Rieger Bertrand/hemis.fr)