BMI View: The announcement by UAE-based developer Emaar Properties of a major new construction project in Cairo supports our outlook for a strong return to growth for Egypt's construction sector in 2013. Following the disruption of the revolution, we are expecting real growth in the sector to come in at -6% for 2012, yet see a rebound in 2013 as European funds leverage the development of new infrastructure projects and a host of Gulf investors look to Egypt to diversify their operations. We highlight that increasing political tensions pose a significant downside to our forecast.
|Tentative Return To Growth|
|Egypt - BMI's Construction Industry Forecast|
Emaar's Egyptian subsidiary, Emaar Misr, have announced that it is to construct Emaar Square, a US$500mn, 2.7mn sq ft mixed-use project in Cairo. Blueprints suggest that the development will offer the largest open mall in Egypt, hotels, offices, apartments and 1,200 family homes. The build will be located in the Uptown Cairo region, an area which when complete will consist of 11 villages, costing in excess of US$2.1bn. Emaar is also in the process of constructing the EGP10bn Marassi tourism and residential project and the EGP5.75bn Mivida residential project in New Cairo. The firm recently announced that they were to work on the construction of the largest mall in the world in Dubai in a joint venture with Dubai Holding ( see our online service, November 26, 'Sheik's City Emphasises Both New Potential And Old Threats').
Reflecting the increasing momentum of Emaar's diversification efforts, the developer also announced that its Turkish subsidiary is to construct a 721,000 sq. ft. mixed-use project named Boulevardi in Istanbul, which will include 1,000 luxury homes, shopping malls, a luxury hotel and various leisure facilities. Furthermore, Emaar recently announced that it had followed fellow UAE developer Damac in signing a Memorandum of Understanding with the Iraqi Ministry of Construction & Housing to construct a range of residential and non-residential projects in Iraq with its subsidiary Dawahi Development ( see our online service, November 21, 'Damac Strikes New Deals Following Kurdistan Pull-Out'). Finally, with the increasing liberalising of the Saudi mortgage sector, we expect Emaar to continue to make inroads into the Saudi residential market.
Courting All Sides
As shown by our forecast, we expect foreign direct investment and aid receipts to significantly bolster Egypt's construction industry outlook from 2013 onwards. Investment and cooperation between Egypt and GCC states has intensified markedly following the election of President Mursi, and we believe that this trend will deepen over the coming years. Representing an agreement that would have been unthinkable under the regime of Hosni Mubarak, a plan to build a bridge connecting Saudi Arabia and Egypt across the Gulf of Aqaba was announced this week ( see our online service, August 31, 'Mursi Election Helps Bridge The Gap With Saudi Arabia'). It is the view of our Country Risk team that exposure to the liquidity story in the Gulf should insulate Egypt against external shocks to some degree and keep growth positive, assuming a relatively quick recovery for the region from the current turmoil.
Indeed, the deals reflect a trend which we have long noted, that of Gulf investment in North Africa's construction space following the disruptions of the Arab Spring. We have previously noted how Qatar have pledged a huge US$18bn to Egypt for construction projects in the Suez regions ( see our online service, September 7, 'US$18bn Investment Kicks-Off Mass Suez Development Plans'). The involvement of Gulf firms reflects a wider battle between investors for a share of the lucrative North African infrastructure space as countries look to bolster residential and infrastructure capacity. Aside from Egypt, we expect Algeria, Morocco, Tunisia and Libya to continue reversing decade-long trends of underinvestment, and firms tacitly backed by sovereign wealth have been lining up to gain entry to these markets (see our online service, November 13, 'Qataris In For Largest North African Steel Plant').
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Gulf-based and Turkish firms are proving less sensitive to the elevated levels of political risk involved in investing in the region and, in our opinion, these firms are incredibly well placed to capitalise on the new socio-economic status quo if stability is maintained. The crisis has diminished the room for manoeuvre for domestic developers who have found themselves overexposed to the shock of the sector crunch following the Arab Spring. In Egypt, this is especially true of the construction arm of Orascom, whose role as premier developer is slowly being usurped (see our online service, April 5, 'Construction Majors Leverage Strength Outside Egypt').
In terms of aid, Egypt has been the beneficiary of a significant amount of GCC funds since last year's revolution. Egypt has recently received more than US$5bn in loans and grants, including US$2bn from Qatar, and loans from Saudi Arabia and the Islamic Development Bank. Representing the widening fiscal deficit and the rising costs of servicing debt, it appears likely that Cairo will soon receive US$4.8bn in emergency funding from the International Monetary Fund (IMF) (see our online service, November 28, 'IMF Agreement Set To Be Approved'). Most vitally, European development institutions appear to be spearheading the revival in Egypt's infrastructure sector, with the EU pledging US$5bn worth of loans (see our online service, November 20, 'Cairo Metro Loan Highlights New Momentum In Infrastructure').
Curse Of The Pharaoh?
Once the fog of revolution has cleared, we expect a young and growing population to support a strong 6.4% real growth between 2013 and 2017. However, with the above in mind, we highlight that the sheer breadth of projects currently under consideration will require a huge investment drive, and will be almost wholly reliant on FDI. As such, recent political developments which have seen President Morsi attempt to significantly consolidate his power pose a significant downside to our forecast by potentially causing investors to retreat over the medium term (see our online service, November 26, 'Volatility To Remain Elevated). Saying this, it is currently our core view that the country will continue to receive a significant amount of investment into its infrastructure space from the Gulf region over 2013.