During the 1980s and 1990s, Egypt was considered an economic liability, dogged by bureaucracy, corruption and inefficiency. Now, however, the republic's drive to attract foreign investment is finally starting to bear fruit and foreign analysts are retracting earlier warnings about the market. Karen Thomas reports.

Egypt has turned the corner after a two-year slump in business and political confidence, and international analysts are increasingly confident that the republic is - finally - ripe for foreign investment.

With stocks having fallen sharply since the market peaked in February 1997, the new reformist cabinet's latest shake-up of Egypt's financial and business institutions is starting to make an impact on investors' confidence.

Last year, the country abolished taxation on Egyptian products destined for export, in a bid to improve its balance of trade. Next, Egypt is to privatise its key utilities, state-owned banks, and national gas and cement industries.

If the economy performs as expected, Egypt will double its market capitalisation by the end of 2000, adding between $7-$20 billion to its value, according to a new survey by city of London financial analysts ABN Amro.

In its latest strategy report on Egypt, ABN Amro has reversed its earlier caution about the republic's economic outlook and says that the Egyptian stock market is now ripe for investment. The report praised Prime Minister Atef Obeid's moves to devolve power to his ministers, expecting this sharing of power to reap new economic rewards.

Despite its unenviable reputation for red tape and inefficiency, Egypt is the third largest economy in the Middle East and North Africa and one of the strongest, blessed with a large and youthful population and with the potential to diversify its industrial base.

Economic reforms have focused on privatisation and other measures to attract foreign and private sector investment. Inflation has been eroded steadily, from 20 per cent in 1991 to 2.9 per cent by August 1999. Economic growth peaked at six per cent in June 1999 and ABN Amro expects growth of 6.5 per cent by June 2000, rising to seven per cent by June 2001.

ABN Amro analyst Angus Blair points to Egypt's cheap valuation levels, to the country's new political and business confidence and to the privatisation of major state utilities and new capital flows.

"Previously, ABN was neutral on Egypt; now, for the first time, we have come out in favour of the market," he said. "Egypt's new government has provided a major blip in confidence. It is more reform-minded and we expect new mission statements regarding privatisation.

"New flows of capital are coming into the market and this is pushing up the stock market. There is no turning back; a new Egypt is emerging. There are still problems of course, but a new generation is coming to the fore."

ABN Amro's report, Buy Into Egypt, highlights several positive indicators - real GDP growth of 5.7 per cent, 2.9 per cent inflation, rising non-oil exports and tourism receipts as this sector finally lays the ghost of the 1997 Luxor massacre to rest.

Other positive factors that ABN Amro highlighted include the new, pro-reform cabinet appointed last year and an oversold stock market that was set to generate dividend yields of 7.6 per cent in 1999.

This year will see Egypt embark on two major flotations, selling off the national telecommunications and electricity companies.

Egypt is also looking to invite greater private sector participation in sectors traditionally dominated by the state, such as transport. Last year, it awarded the contract to build and manage a new container port at Port Said to a consortium comprising foreign port developers and shipping companies, as well as local financial institutions.

There is speculation that Egypt will also seek greater involvement from foreign firms at key ports such as Damietta and Alexandria. However, there are still concerns about the lack of operating efficiency and low productivity levels at Egyptian ports. Private involvement might help to achieve this.

The government will almost certainly privatise national carrier Egypt Air at some point, and is reviewing its options for the national rail network.

Although Egypt's foreign exchange reserves fell in 1999, they remained at a comfortable level. Reserves stood at $17.6 billion by August 1999, down from $20 billion at the beginning of the year. Nevertheless, this gave Egypt sufficient reserves to cover nearly 12 months worth of imports.

ABN Amro warned that the fall in reserves highlighted a lack of flexibility in dealing with market demands at the Egyptian Central Bank.

"As a result, the informal peg against the US dollar - against which the Egyptian pound has been technically over-valued over the decade - has been called into question," it reported.

"The issue of the value of the pound and a steadfast exchange rate mechanism is one of the key issues for the government to resolve in the short term. The Ministry of the Economy has undertaken to restructure the Central Bank."

Other weaknesses include Egypt's export performance. The country's quarterly oil export revenues increased from $321 million to $196 million by the end of last year, but the performance of other sectors leaves much to be desired.

ABN Amro is advising institutions to overweight Egypt in their investment portfolios, preparing for an expected 20 per cent rise in the market during the first quarter of 2000, rising to as much as 60 per cent by November.

"There is little reason for the Egyptian stock market to languish at low valuations," its report argued. "We advise invest again in Egypt: the real change in the market is only now beginning to happen."

The three main reasons for this are that many stocks in the market have been set at a very attractive price; that, until the appointment of Obeid's new reformist cabinet, the stock market lacked a catalyst for growth; and, finally, the latest round of privatisations which is set to take the stock market into a new phase of development.

ABN Amro expects this year's sale of Egypt's national electricity distribution firms and telecommunications business to achieve cumulative market capitalisation of $12-$15 billion.

This would more than double Egypt's total capitalisation from $24 billion in November 1999 to some $40 billion, given the right market conditions.

Potential investors should be selective and stick to larger stocks and those that offer above-average earnings growth, ABN Amro has cautioned. A lack of transparency and hostility from some senior state sector officials means that investors must proceed with caution, or risk being stung.

Nevertheless, all indications point to a new lease of life for Egypt's stock market, the report maintains. ABN Amro expects Egypt to be included in the Morgan Stanley Capital Market Indices, giving a further boost to market confidence.

"We do not expect this to be a short-term phenomenon. There is the feeling in Egypt that [Obeid's government] is the right team to take the country and the economy forward with greater vigour and new momentum.

"There are now too many positive factors to ignore with regard to the stock market and its valuation levels. After the major downtrend in the stock market since February 1997, the market is now ripe for a significant rise.

"Egypt emerges as good value on a number of parameters when compared with other developing capital markets globally... Egypt has a serious developing capital market which is increasing in depth and breadth. It is also increasingly transparent and well-regulated."