CHAPTER 3

Egypt

THE RISE OF NORTH AFRICA

As Egypt goes so goes North Africa and likely the Middle East. When I visited the country, just a few weeks after the Tahrir Square revolution, Egypt was still not going anywhere.

The decision to visit Egypt so soon after the revolution was not an easy one. My job requires me to be on the cutting edge of market events anywhere in the world. And Egypt was and is in the midst of possibly the greatest revolution of our time: the transformation of the Arab world. If it fails, the world will be a worse place to live in, with uncertainty in natural resource supply, religious intolerance, and the affirmation of cultural backwardation for hundreds of millions of people—women especially. My publisher, colleague, and friend Robert Williams called me on my phone. “We need to go to Egypt,” he said. I answered, “Who’s we?” Of course I knew who “we” was, but it was funny nonetheless. I had some contacts in the region and our goal was to get a feel for the country and its investment outlook. Egypt’s proximity to major oil producing countries like Libya, Saudi Arabia, and other Gulf nations makes it the perfect place to visit to gather intelligence without having to wait a month for a visa or getting hit by an errant NATO shell aimed at a Libyan dictator.

Within 72 hours of our conversation I was at the airport. Then the problems began. Weather delays, mechanical problems, and two missed flights as a result, were going to put me on the ground in Cairo at close to 10 p.m.—not an ideal time to land in a country I last visited when I was 8 years old, not to mention the fact that a revolution was in full swing! The Egypt Air flight from Frankfurt to Cairo was nearly empty. I sat next to an elderly gentleman who was clutching his prayer beads tightly. I asked him his thoughts about what was happening. He was quite frank with his thoughts. Mubarak was a crook and Egypt is better off with his ouster. However, the only thing he was certain about other than that thought was the fact that he, his family, and his business faced only uncertainty for some time to come.

Egypt is one of a handful of countries in the area where you can purchase a visa on arrival. Signs are everywhere after you deplane and it’s a painless process. The Egyptian pound is easy to buy at the airport and rates are fixed by the government. There were no lines at passport control or at customs. Prices for transportation to and from the airport are all over the place and a private car will easily set you back US$100. I opted for the Cairo shuttle bus from the airport for about 100 Egyptian pounds or $20. (You can find out more about the shuttle bus at www.cairoshuttlebus.com/.)

My driver, Mohamed (a popular name in the region), spoke English very well and definitely knew his way around random checkpoints that were set up between the airport and the hotel. As we drove through Cairo I was surprised to see that the city was functioning, meaning that lights were on in major buildings, there was traffic on the roads, and many shops were open. Was this a revolution in name only? As we approached the hotel, I noticed an absence of people walking on the sidewalks. In a city like Cairo, with its reputation for a lively population, this was unusual. I checked into the hotel and was politely escorted to my room with a warning not to wander the streets at night, even around the hotel. I wasn’t going anywhere. My biggest fear, however, was unfounded—the hotel’s high-speed Internet access worked perfectly!

Not Your Mummy’s Egypt

When you think of Egypt you think of the pyramids, the Sphinx, the Nile, papyrus, an ancient civilization far advanced among its peers, a land of pharaohs buried in gold vaults, the Corniche at Alexandria overlooking the Mediterranean, the owners of the Suez Canal connecting the Mediterranean to the Red Sea—you think of a country that has unlimited potential.

Then you arrive. You see a country where 40 percent of the population lives in poverty, abject poverty. Walk around Old Cairo and you will see that donkeys still pull carts of fresh fruits through the streets. Pollution creates a cloudy haze, traffic is a nightmare, and corruption is a way of life. Not the most romantic scene and one that most tourists don’t witness.

My driver was a former driver for assassinated Egyptian President Anwar Sadat. He was in his 70s and knew the streets and side roads better than most, according to him. As a member of the older generation in Egypt he longed for the days of Sadat, “days filled with honor,” when you could trust the country’s leader. Days when the country’s leader was not afraid to be in public because he had nothing to hide. Then came Hosni Mubarak, the now-deposed president who took over after Sadat’s death. Mubarak looted and pillaged Egypt. He put friends and family in positions of power, lived a lavish lifestyle, and ruled with a dictatorial style using fear as his main weapon. The fear was generated by the actions of his secret police and intelligence service called the Amn Al-Dawla. Nothing really new here; it’s the same way most of the countries in the region and in the Middle East are ruled. The Shah had his Savak and Saddam his Mukhabarat. Mubarak just followed the same script with one major difference. He allied himself with the United States and that provided benefits like foreign and military aid.

Egypt today is a mess, as it should be after more than three decades of one party / one-man rule. The military is the real power, but it faces a repressed public that is ready to turn against it if provoked. None of this takes away from one important thing that Egypt does have going for it: potential.

It still controls the Suez Canal, a passageway that shortens the time for goods passing from the Mediterranean Sea to Asia. The canal was completed in 1869 and eliminated the need for boats to navigate the seas around the African continent. But, it comes at a price. Ships pay an average of $250,000 to traverse the canal, adding more than $5 billion to Egypt’s coffers annually. The strategic location of the Suez and the fact that many oil tankers cross it makes Egypt a strategically important country, as well.

Egypt is home to several of the Wonders of the World including the pyramids at Giza, the Sphinx, and the Valley of the Kings, and many other tourist hotspots. Its tourism industry is very well developed and contributes a further $12 billion of GDP (officially). When I was there during the high season, occupancy at hotels in Cairo was below 40 percent. Of course, it allowed me to enjoy a beautiful room at the Nile Kempinski overlooking the Nile, complete with superb butler service from Mohamed, my butler. Unofficially, tourism probably generates twice that amount given the emphasis on cash transactions and tips. In fact, what bothered me the most about Egypt were the constant tip requests from everyone. Unlike many countries outside the United States and some places in Europe, where tipping is completely discretionary and often not accepted, in Egypt it is not only accepted, it’s almost a requirement regardless of the level of service and will usually be met with a look of disappointment regardless of the size of the tip. My advice is to ignore the looks and tip whatever amount you are comfortable with tipping—just know that you will receive the evil eye if you don’t. Oh, don’t drink the tap water. And, if you really want to indulge in a local delicacy, order the Oum Ali for dessert—especially at the Kempinski!

Egypt in general and Cairo in particular are relatively safe (except during revolutions, of course), and while I wandered markets and streets near the spectacular Al-Azhar Mosque and university alone, I would not recommend doing so without a guide during the current times. As for shopping, prices are cheap and your guide will undoubtedly take you to the shops that are the highest priced and offer him the greatest kickback, so be ready to bargain and don’t be shy about it. Things that are popular include fabrics, perfumes, and, of course, papyrus. But, beware, not all papyrus is created equally and if that is your interest, do some research about how to buy it before you go.

A Stock Market Dilemma

It was early on a Monday when my contact at the Egyptian stock exchange, Mohamed Saeed, called me at the hotel and confirmed my meeting with the new chairman of the exchange, Mohamed Abdel Salam. I won’t go over his background in depth other than to say he is an experienced market professional who has spent his time working in the industry. The EGX had just opened for trading after being closed for weeks.

My first impression of the exchange? Maximum security.

Submachine gun-wielding soldiers guarded the entrance, and an armored personnel carrier was parked ominously across the street.

My first question to Chairman Salam regarded the seemingly premature re-opening of the exchange just a few days earlier. He admitted being under extreme pressure to open, due to a deadline imposed by Morgan Stanley’s index, which tracks emerging market shares.

You see, if the exchange hadn’t opened that week, Egypt would have lost its spot in the index, triggering severe capital outflows. Given that inflows from foreigners have exceeded outflows since the exchange’s inception, nobody wanted such a favorable trend to end.

Investing in Egypt is not easy for foreigners. Direct investment by individual non-Egyptians is next to impossible. But, you can invest through mutual funds and exchange traded funds. My favorite one trades in the United States under the symbol EGPT. It holds most of the blue chip Egyptian companies. See table 3.1.

Table 3.1 EGPT

Source: ETF Database, www.etfdb.com.

The top 10 holdings account for 60 percent of the ETF and there are only 28 companies in the ETF. Before investing, be sure to visit the site or that of the fund manager Van Eck for current holdings: www.vaneck.com/page_mv.aspx?Group=ETF.

It’s important to remember, too, that while Egyptians are religious, the revolution was spurred by financial issues not religious ones. And until money starts flowing into the hands of Egypt’s citizens—away from corrupt policymakers—for infrastructure projects, education, and tourism, Egypt will underachieve.

It certainly won’t attain first-world status—an honor it held over 5,000 years ago when it dominated much of the civilized world—until this new government takes root. I left Cairo through Tahrir Square where the burnt out shell of Mubarak’s National Democratic Party was deserted, while across the street a new Ritz-Carlton was swarming with construction workers building Egypt’s newest wonder.

Strengths

The Suez Canal. Tourism. A youthful workforce. A strong movement toward democracy as evidenced by the relatively nonviolent (to date) popular revolution. Strong agricultural sector. Good supply of internal energy with strong reserves of natural gas and hydroelectric power. Adequate infrastructure. A history of commerce with the rest of the world. Religious tolerance. An established stock exchange.

Weaknesses

Education is not reaching the masses, which will result in a less skilled workforce. There is corruption at all levels and a lack of foreign investment as a result of the revolution. Lack of government policy aimed at development of infrastructure, education, and social welfare in general. Poverty.

Opportunities

Development of tourism. Advancement of agricultural technology. A young population that could be the best educated in the region. Continued religious tolerance and freedom will allow for investment from the international community. Technology. Egypt is poorly wired for Internet service, although cell phones and TVs are everywhere. Construction—for a country known for its architectural prowess, it suffers from a lack of habitable structures in areas surrounding the city. Companies in Egypt are undervalued because of the risk associated with uncertainty. With some clarity, the market will double overnight. The ability for foreign individuals to invest through ETFs and funds.

Threats

Religious intolerance could develop quickly if the religious parties gain power. Women’s rights could be diminished in such a scenario. The lack of a stable and established government could begin a trend of instability; the first government in power after a revolution is not always the best one. Human rights—the underpinnings are there, but the poor are treated very badly and they make up 40 percent of the population. Regional threats from unstable countries like Libya post Gadhafi. A break in ties with Israel, one of its neighbors, could sow the seeds of new conflict in the region. A closure of the stock exchange would be catastrophic for investors as any confidence built would be lost for much longer this time.