Saudi deal offers hope for Egypt, but fundamentals must be addressed

Saudi Arabia was said to consider providing Egypt with billions of dollars for the petroleum sector but this is yet to become a reality, writes LeAnne Graves.

Solar panels at the Zafarana Wind Farm for Electrical Wind Generation in Zafarana, Egypt on the Red Sea. Victoria Hazou for the National

When reports came out last week about a potential financing deal between Saudi Arabia and Egypt, renewed hope of sorts emerged.

Saudi Arabia was said to consider providing Egypt with billions of dollars for the petroleum sector, with industry leaders surmising that such a deal would be a game-changer for the North African country’s economy.

“Something like this helps create a more positive investment environment and improves fiscal conditions – it will certainly help Egypt improve its access to capital and pay back the industry,” said Robinder Singh, investor relations director of Sharjah-based Dana Gas, which has exploration and production assets in Egypt.

Egypt has struggled to pay foreign oil com­panies with money owed by the government under contracts rising to $3.2 billion last month from $3bn at the end of last year. Some companies, such as Dana Gas, have agreed to alternative payment schemes with the government, but project development has been slow as a result.

“Egypt offers significant growth opportunities. We can consider enhancing our growth even beyond our current plans if the collections issue were to be resolved once and for all and pricing was better aligned with the changing risk reward dynamics,” Mr Singh said.

But it isn’t just the oil and gas sector that faces struggles. In fact, Egypt’s power sector should be regarded as a priority in improving economic conditions.

According to the Arab Petroleum Investments Corporation, a development bank of the Arab Opec countries, the power sector leads planned investments in the Mena region through 2020 at US$194 billion.

Investment in energy leads to more access to power, which affects the downstream sector, according to Mr Singh. And all of these factors combined have a large, meaningful impact in building GDP for a country.

Ziad Waleed, an economist for Cairo-based Beltone Financial, said that the main question was when financing will become avail­able. “Will Saudi Arabia commit to these targets in the next year or several years? If the answer is several years, it depends on how much. The timing is crucial.”

He pointed to the conference held in Sharm El Sheikh two years ago, during which many companies committed to investments, but very little follow-through has occurred. “If these investments had taken place, we wouldn’t have the foreign currency shortage right now,” he said.

Investments have been on shaky ground, with risks mounting over security concerns as well as a shortage of hard currency, leading to payback fears. Last month Egypt’s central bank devalued its currency by 13 per cent against the US dollar and said it would allow for a more flexible exchange rate in future.

The billions in Saudi funding – or any large capital injection – would give Egypt’s central bank a breather until investments begin trickling in. Mr Waleed said that funding could free up some room for the central bank to pay outstanding debts.

However, investment continues to sit on the sidelines, particularly in the area of renew­able energy. Mohamed El Sobky, the chairman of Egypt’s New and Renewable Energy Agency, said last year that Egypt was targeting 18,000 megawatts over the next five years, mainly through wind and solar power, requiring an investment of more than $20bn.​

Until investor confidence can be restored, or at least some of the risk mitigated, many deals may remain in a memorandum of understanding phase.

LeAnne Graves covers renew­able energy for The National