The Levant’s Return To Confidence

In the aftermath of revolution and civil war, the storied trading region seeks to convince investors it’s time to come back.

At first glance, the Levant—the mostly seaboard region spreading from Egypt in the west through Jordan, Syria and Lebanon in the east—offers little to cheer the inquisitive investor this year.

Syria’s grim civil war appears to be nearing its end, with the last major rebel force holed up in Idlib. But few have any illusion about the scale of rebuilding and resettlement that lies ahead, for either Syria—assuming it holds together—or its neighbors Lebanon and Jordan, which remain massively disrupted by huge refugee populations and the hemorrhaging of investment confidence due to their proximity to the conflict.

“Reconstruction costs will be huge, as will the effort needed to cope with the millions of displaced people, but political realities suggest efforts will be piecemeal and disjointed,” says David Butter, associate fellow and analyst of politics, economics and business at Chatham House’s program for the Middle East and North Africa (MENA). “It will be a long time before this region stabilizes.”

Butter is also ambivalent about Egypt. The region’s most-populous country has boosted growth—around 5.3% is expected this year and perhaps 5.5% next—while cutting unemployment to around 11%, inflation to less than 15% by next year, and the fiscal deficit from more than 13% of GDP in 2013 to around 9.5%—its lowest level since 2011. But ongoing political repression and the army’s vast economic role, which may be crowding out foreign and private-sector investment, cast a shadow.

“There are vulnerabilities, and therefore questions about long-term resilience,” Butter warns, pointing to recent net outflows of foreign investment in government debt, reflecting the ongoing global downshift of confidence in emerging markets.

The Good News

For those closer to the region’s business pulse, however, the positives are more notable. Hopeful signs appear in Lebanon, which joined the European Bank for Reconstruction and Development (EBRD) last year; and Jordan, where the bank held its annual general meeting this year; but especially within Egypt, which is now set to overtake Turkey as the EBRD’s largest overall country of operation. Major projects are underway in Egypt in energy (oil and gas), renewables, banking, tourism and infrastructure; and the EBRD is underwriting some 85 projects in the country, and a cumulative total of more than $4.8 billion worth of projects, almost all in the private sector.

Since the International Monetary Fund (IMF) approved a $12 billion extended fund facility for Egypt in November 2016 and the exchange rate was freed up, “investment has taken off, supported by new investment and bankruptcy laws and encouraged by macro numbers that continue to improve,” says Janet Heckman, managing director of the EBRD’s Southern and Eastern Mediterranean (SEMED) group, which comprises Morocco, Tunisia, Egypt, Jordan, Lebanon, the West Bank and Gaza. Based in Cairo, SEMED is now the bank’s largest area of operation.

“Since the pound’s devaluation, this has become a good value place to produce,” adds Rafik Selim, EBRD economist for the region. “Egypt is defining itself as a key part of the Levantine region, stressing its Middle Eastern culture and traditions, but also as a springboard to Africa, of which it is geographically a part. As with Jordan and Lebanon, things are on the move.”

Egypt: Investor Friendly

Questions abound about the new capital city under construction some 30 miles east of Cairo, not least about its name (New Cairo, perhaps?) and the final total cost of construction. What is not in doubt is the ambition of the project, aimed at shifting Egypt’s administrative and commercial heart away from crowded Cairo—by far the largest city in the Middle East, with a metropolitan population of over 20 million—or the government’s determination that as of mid-2019, the new city will be Egypt’s new capital. With a projected population of 6.5 million and covering over 270 square miles, it will transform a largely desert area between the Nile and Suez Canal.

Other megaprojects are in the works as well, including the new city at El Alamein (site of the famous World War II tank battle) on which construction started earlier this year in an attempt to ease the massive congestion afflicting Alexandria, Egypt’s second city. New Alamein City will include a national library, a national university, museums, an opera house and an eco-city, among other attractions.

Nor has national infrastructure been abandoned. “The government seems committed to making business easier at all levels,” says Selim. “So it is prioritizing road, rail and port investment, including such projects as the Suez Canal Industrial Zone, which seeks to attract manufacturing and other investment, rather like Dubai’s Jebel Ali Free Zone.”

Perhaps most important, Egypt the past few years has become far more investor-friendly, says Hisham El-Khazindar, co-founder and managing director of Qalaa Holdings, one of Egypt’s largest investment companies, which has stakes in energy, mining, transport and other industries. Since the new funding deal went into effect, he notes, “the government has embarked on difficult but much-needed reforms in collaboration with the IMF, including lifting subsidies, improving taxation and taking other steps aimed at improving public finances. The impact has been felt across our business as well as the wider economy, which has become much more competitive, especially in export-focused businesses.”

The EBRD reckons foreign direct investment (FDI) is up around 14% so far this year, with $11 billion targeted for 2018-2019 against $7.9 billion in the previous fiscal year, the aim being to reach $20 billion in 2021-2022. Tourism and the energy sector are two of the biggest magnets, with manufacturing FDI also increasing fast, driven by low costs, the cheap pound, Egypt’s large number of free trade agreements and a large and growing domestic market of some 100 million consumers. The more open investment climate, coupled with good economic news, prompted the IMF to release the fourth tranche of its loan package in early July, bringing disbursements so far to $8 billion. In an IMF Executive Board review in July, David Lipton, first deputy managing director at the IMF, praised the state’s “strong program implementation and generally positive performance, [which have] been instrumental in achieving macroeconomic stabilization.”

Ratings agencies, which generally give Egypt a positive sovereign outlook, agree. “The increase in FDI is a sign of increasing business confidence,” says Jermaine Leonard, director in Fitch Ratings’ sovereign group. “Net FDI flows became negative during the 2011 revolution and averaged 1.7% of GDP during 2012 to 2017, but we expect net FDI to reach $8.2 billion in 2018, or 3% of GDP. We’ve also seen an increase in private-sector credit growth, which signals improvement in the domestic economy.”

Growth is being driven by large government-led investment projects that should continue to support construction and services, according to Leonard; and the natural gas sector will continue to grow, with exploration starting in new fields and new pipeline infrastructure being built.

“The return of confidence has translated into capital inflows to both debt and equity markets,” says Mohamed Abou Basha, head of macroeconomic analysis at EFG Hermes Research. The latter “offers one of the cheapest valuations out there in frontier/emerging markets space, [with]increased investments in the oil and gas sectors and a gradual recovery in overall private-sector activity.”

So where are the best opportunities? For Aladdin El-Afifi, managing director and co-CEO of Pharos Holding, a Cairo-based investment bank, the most promising sectors have seen the most deregulation, including energy (fossil-based and renewable) but also tourism and mainstream consumer-driven businesses. “Infrastructure, education, health care and financial services also offer huge opportunities,” he says.

The Levant: Real GDP Growth (Annual % Change)






































































*Estimates. N/A—Not available. Source: IMF, 2018.

The IMF warns that reform momentum must be maintained to keep inflation and deficits under control. Other observers stress that the government must continue to improve the investment environment. New investment, industrial license and bankruptcy acts have been passed; and further new laws are being drafted, including legislation affecting the banking sector, customs and small to medium-size enterprises, but further rules changes may be necessary.

“Legislation is important, but the government needs to do more to tackle perennial economic problems and to attract long-lasting investments that create employment,” says El-Afifi. Echoing this view is Qalaa’s El-Khazindar, arguing that momentum needs to be maintained for the full benefit of the reforms to be felt.

“We’ve seen the reforms have a positive impact in terms of portfolio flows, but we haven’t yet seen enough FDI,” he says. “We need more direct investment and also more local private-sector investment.”

With the population continuing to grow—the Brookings Institution calculates Egypt could be home to 128 million people by 2030, up from about 100 million now—5% to 6% GDP growth per year will not be sufficient.

But El-Khazindar remains confident. “This is just the start,” he says. “Particularly given the vibrant entrepreneurial scene here, there is no reason at all why we cannot eventually experience 8% to 9% growth per year, every year.”

Lebanon: Untapped Resources

Compared with Egypt, the mood in Lebanon can best be described as subdued. The continued failure of the country’s ethnically split political class to form a government since the May elections has confounded even those long accustomed to explaining this complex country’s idiosyncrasies.

“Of course, it’s very frustrating. The lack of certainty is impacting GDP growth, which is currently just 1% to 2%, and so way below potential,” notes Freddie Baz, vice-chairman of the board at Bank Audi. “But on the other hand, we Lebanese are used to living in a political vacuum. It’s happened many times before. So life goes on.”

Comparing current growth rates with the 5% to 6% a year it regularly achieved before 2011, Baz reckons Lebanon’s political stalemate is costing it around $14 billion a year. The state’s credit profile is also deteriorating, with the national debt now topping 153% of GDP. But Baz doesn’t agree that Lebanon may face difficulties servicing its debt.

“We are still seeing deposit growth of around 4%, or $7 billion to $9 billion a year,” he says. “That is more than enough to cover our financing needs. As long as we don’t get down to inflows of around $3 billion to $4 billion, we should be fine.” While Lebanon accounts for just 1.5% of MENA GDP, it is attracting capital inflows equal to 15% of regional GDP, he notes. Lebanon has vast state-owned resources, including land, ports and airports, none of which have been privatized and all of which could, if sold, provide short-term mitigation of deteriorating finances.

Baz’s view is echoed by Heike Harmgart, director of the EBRD’s Eastern Mediterranean region. The bank started operations in Lebanon last year, and one of its first steps was taking a stake in Bank Audi. Since then, however, it has held off further investments pending the formation of a new government.

“Once a government is formed and they get the legal side sorted out, there are lots of projects pending that could take off, with IMF support all but guaranteed,” Harmgart says. In the meantime, the bank has launched a new advisory program for SMEs, which constitute 90% of Lebanon’s private sector and are among the most dynamic in the Levant. Sectors which have the most potential include tourism, commerce, energy and of course infrastructure, though development of this last has been held back by Lebanon’s political uncertainties.

Nassib Ghobril, chief economist at Byblos Bank, also says some are overly pessimistic about the risk of a sovereign default. “There are plenty of rumors about the impending collapse of the Lebanese pound’s peg to the US dollar and that we are heading toward a Greek scenario,” he says. “But this is very far from the reality on the ground, as Banque du Liban [Lebanon’s central bank] has the necessary tools, buffers and experience to maintain the stability of the currency.”

Ghobril notes that the country’s eurobonds maturing in 2018 are covered, and “upcoming maturities for 2019 are at a manageable $2.65 billion,” but that the fiscal deficit, which widened this year, remains a challenge.

Jordan: Emphasis on Renewables

The demonstrations that led to the fall of the government in June highlighted the strains afflicting this small economy. Jordan has suffered badly from its proximity to the fighting in Syria—and previously in Iraq—and the influx of around 1.4 million refugees compounds already high local unemployment and falling living standards. “The recent protests and the difficulties in fiscal consolidation within the IMF [austerity] program are raising serious concerns,” says EFG Hermes’ Basha.

Others are more sanguine, including Capital Economics, the UK-based research firm, which in a note to clients in late September highlighted the government’s tightening of fiscal policy and the IMF’s past lenience with slippages, given tough local realities. In mid-October, Prime Minister Omar al-Razzaz announced a cabinet reshuffle. Al-Razzaz, a former World Bank economist, had been appointed only last June to restore trust—after his predecessor resigned to defuse outrage over IMF-led plans.

Harmgart finds good reasons for confidence, despite other worries. Those include the slower-than-expected pickup in trade with Iraq since the border reopened last year, and sluggish GDP growth, currently around 2.3%, according to the IMF. That’s way below what is needed to make a dent in high unemployment levels—and particularly youth joblessness, which currently stands at over 30%. Once parliament passes a new income tax package, the authorities can focus on other matters such as reducing bureaucracy and improving Jordan’s appeal to foreign investors.

“The government is performing well, despite the pressure it is under,” Harmgart says. “It is trying to communicate to the public the difficult reform choices the country faces, whilst working closely with IFIs [international financial institutions] and keeping a close eye on the debt ceiling.”

Next year looks good for a number of sectors, she adds, including tourism—Jordan offers sun and sand at the Dead Sea, desert exploration at Wadi Rum, and the world-famous archaeological site at Petra—which has been boosted by direct Ryanair flights from Europe. EasyJet is also said to be in negotiations about starting service. Meanwhile, a number of projects in Aqaba, including the LNG terminal; the $1.4 billion Ayla Oasis waterfront development; and the Saraya Aqaba resort, residential and convention complex, have helped transform the port town into Jordan’s investment magnet.

The great hope for Jordan, however, is energy, including solar and wind, which Amman has been prioritizing for the past decade. A Bloomberg report earlier this year ranked Jordan first in the MENA region and third in the world for renewables growth. The industry has already attracted some $1 billion, including for a dozen projects the EBRD is helping finance.

“Jordan is attracting an increasing number of bids from global renewables companies, including some of the biggest names,” says Harmgart. “The potential here really is very significant.”

Harmgart and others predict that many of the biggest opportunities across the region will be funded through public-private partnerships, reflecting a widespread desire to keep state spending down, while tapping the region’s dynamic private sector.

Lebanon enacted a PPP law last year, and in March endorsed a $23 billion capital investment program to upgrade its infrastructure with the involvement of the private sector. Other countries are pursuing similar approaches.

“The main opportunities in the Levant have to lie with current and future PPP projects,” says Ghobril of Byblos Bank.