Egypt: A Basket Case Economy No More

Mubarak's reforms draw deep-pocketed investors to Egypt

Mohamed Heikal, a well-known Egyptian journalist, made his reputation as an editor and spokesman for President Gamal Abdel Nasser, who held power from 1952 to 1970. But Heikal's sons, Hassan and Ahmed, are making names for themselves in a different way. They are key figures in a Cairo-based investment bank called EFG-Hermes, an institution that would have been anathema under Nasser's Arab socialism. As Egypt finally gets serious about developing a market economy, banks such as EFG-Hermes are thriving. International and local investors even ponied up $50 million for 40% of the bank's shares last year.

Egypt has long been considered a near basket-case economy kept afloat by billions of dollars in American aid. But that perception is changing now that President Hosni Mubarak has put Egypt's finances on a sounder footing, bringing the budget deficit down to 1% of gross domestic product and cutting inflation to about 5%. When adventurous investors look at Egypt now, they see a promising emerging market with pent-up demand and growth in the 5% to 6% range. That's why Glaxo Wellcome PLC paid $117 million for an Egyptian pharmaceutical business and French building-materials giant Lafarge paid $156 million for 76% of the Beni Suef cement company last December.

BUREAUCRACY. Cairo also seems a good jumping-off point to exploit the expected opening of other Arab economies. British investment bank Robert Fleming & Co. is putting up $50 million for 50% of EFG's main rival, Commercial International Investment Co. "We view the Middle East as the last serious liberalization play in the world," says Rupert Wise, head of Middle East business at Fleming.

Egypt is certainly not without risk. Although the government has clamped down on Islamic militants, who murdered 58 tourists at a temple in Luxor in 1997, few observers think the Islamic rebellion has been snuffed out. There is still bureaucratic resistance to reform. A slowdown in privatization last year contributed to a 27% drop in the Cairo stock market, as measured by the Hermes stock index.

But Mubarak seems solidly committed to reform, and growing confidence has lifted the Cairo market about 15% this year. The power sector, which could be worth $10 billion, is likely to be privatized by yearend, and the state-controlled telecom system looks likely to be sold off. One mobile-phone operator, Mobinil, is already listed on the Cairo stock market. And a joint venture of Vodafone Group PLC and AirTouch Communications Inc. has paid $517 million for a mobile license. "We have not seen this pace of development; it is snowballing," says Hazem Barakat, managing director of Miraco, Egypt's biggest player in air conditioning.

COMING HOME. A healthier economy is persuading some of the talented Egyptians who have emigrated to the West or the gulf to return. Two of EFG's principals, Hassan Heikal and Aladdin Saba, are alumni of Wall Street's Goldman, Sachs & Co. and Kidder Peabody. Mohamed S. Younes, another Kidder alumnus, has become Egypt's leading fund manager, with $950 million in Egyptian stock funds. "If you had told me 10 years ago that I would be back, I would have said you were crazy," says Younes, whose Concord International has an office in New York.

Executives say there is plenty of money around for deals. The market capitalization of the Cairo stock exchange is up about sevenfold since 1994, to $24 billion. And Egyptian finance is not merely a playground for fat cats--there are several hundred thousand small investors as well. Adel Ismail, a sales engineer at Miraco, says he now has about $10,000 invested. "I have to be sure that when I retire my family has enough money," he says. Such thoughts are a certain sign that Egypt is joining the world economy--good news for both Egyptians and outside investors.

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