Dr. Rainer Herret – CEO, German-Arab Chamber of Industry and Commerce, Egypt
Dr. Rainer Herret, CEO of the German-Arab Chamber of Industry and Commerce (GACIC), gives us his impression of the current national mood in Egypt following the economic reforms implemented by the government, the contributions of German oil and gas companies to Egypt, the opportunities that Egypt represent to German companies at large, and his reflections on his nine years as CEO.
Dr. Herret, you have been CEO of the German-Arab Chamber of Industry and Commerce (GACIC) here in Cairo for just about nine years now, during which Egypt has seen a period of political and economic turbulence. As we enter 2017, the country is poised to enter a new era of political stability and economic growth. How would you characterize the national mood in Egypt now?
“Those following the Egyptian reforms can already see the first signs of recovery, notably in terms of positive monetary policy changes leading to increased foreign reserves at the Central Bank of Egypt (CBE), and an increase in the quantity of financial instruments banks are offering to companies.”
Firstly, a distinction has to be made between the business community and the average citizen. For the business community, those following the Egyptian reforms can already see the first signs of recovery, notably in terms of positive monetary policy changes leading to increased foreign reserves at the Central Bank of Egypt (CBE), and an increase in the quantity of financial instruments banks are offering to companies. These measures are easing the situation in Egypt: for instance, it is already much easier to import raw or prefabricated materials into Egypt compared to six months ago.
For the average citizen, it is undeniable that they are getting impatient, because they have already been asked to make many sacrifices in the past few years. That said, the consequences of these recent economic reforms have been communicated to them. For instance, it was obvious that the flotation of the Egyptian pound would push inflation up. Moving forward, it would be very difficult to ask more of them.
However, what is so positive about Egypt as a country is its people: their heartwarming mentality and unshakeable optimism. You have to admire their ability to maintain a great sense of humor even under extreme stress. They never give up. This is how the country has managed to recover from the crises of the past and this is why they will inevitably work through this current crisis.
Overall, I would describe the feeling in Egypt as “carefully hopeful”. Egypt is facing a number of challenges as it embarks on its economic development program but I have no doubt things will improve.
What key challenges do you think Egypt is facing – and does the government’s reform program address these fundamental issues?
One challenge that Egypt has been facing for the past three decades is the chronic trade balance deficit, which reaches at least USD 40 billion every year. This imbalance stems from the structure of Egypt’s economy, which has traditionally been extremely dependent on the export of petroleum as well as real estate speculation. This sort of rent-based economy does not lend itself to the generation of sustainable local industry growth. In normal times when Egypt has a stable environment, this imbalance is offset by income from the tourism sector and repatriation from Egyptians working abroad, typically in the Gulf region. The 2011 revolution drove away these sources of foreign currency, depleting the CBE’s foreign reserves.
The easiest way to correct this trade balance deficit is by restoring the tourism sector, because the infrastructure already exists in terms of hotels and airports – and of course, the beaches, the cultural wonders and the perennial sun in Egypt have not disappeared! That said, I think Egypt is also suffering from a more global malaise surrounding tourism: tourists are now scared to travel anywhere, not just to Egypt. Many Germans, for instance, now prefer to stay home rather than travelling abroad at all.
The silver lining is that the local business community increasingly realize they need to find other ways of correcting this trade imbalance: either through increasing foreign investment or exporting Egyptian goods overseas. Previously, for instance, Egypt has had to import about 98 percent of its machines, even though there is no reason Egypt cannot have its own manufacturing base. This is a change in mindset that has followed the recent crisis. It helps that the government has also been encouraging more companies to export Egyptian products. The first steps for Egyptian companies in terms of reaching out to foreign markets are definitely not easy but Egyptians are showing a remarkable talent to adapt – particularly the younger generations, who have grown up with the Internet and are more enterprising and willing to take risks.
The recent Zohr gas field discovery will definitely help in this regard – and I believe there is much more to discover in Egypt in terms of oil and gas. These discoveries will not only help secure Egypt’s energy supply but also free up resources previously spent on importing gas to be invested in critical national infrastructure like hospitals and schools. Ultimately, I think the government’s recent policies and this attitude shifts within the local business community will contribute to Egypt’s ability to build a stronger and more diversified economy.
Egyptian-German bilateral trade has grown steadily, according to Minister of Industry and Foreign Trade Tarek Qabil, exceeding EUR 5 billion in 2015 and expected to increase to EUR 6 billion by end of 2016. What do German companies see in Egypt?
At the moment, German companies tend to see Egypt primarily as an export market. The reason for this is that Egypt has opened itself as a place for investment only since the 2000s. Prior to that, while it was possible to invest in Egypt, onerous local regulations made it a less attractive location compared to regional competitors like Tunisia, Israel and Turkey. German companies, in particular, do not like to be constrained by excessive regulations dictating, for instance, company structures. Egypt needed to go through a period of adjustment, which began in early-2000s.
Unfortunately, while the investment environment in Egypt has improved, it is harder to convince German companies to invest abroad because Germany’s economy is booming at the moment. It goes without saying that the large German MNCs are already present in Egypt; looking at the small- and medium-sized enterprises (SMEs), particularly family-owned enterprises, they are inherently more risk-averse – and with the booming economy at home, more reluctant to invest abroad at all.
Trade is a different story altogether. Egypt is considered the most important and largest market for German machines, factories and power stations, as well as an important market for cars. As a result, German companies are very happy to be present in Egypt, as evident in the fact that none of our member companies left Egypt during the crisis years. In fact, German exports to Egypt actually grew through the difficult years from 2011 onwards, sometimes in double-digit percentages. This is because there is a clear preference within Egypt for machines made in Germany because of the quality and long-term value they represent. Having been present in Egypt for decades, companies like German car manufacturers or pharmaceutical suppliers have adapted to the challenges of operating in Egypt like managing bureaucracy, and they are very happy to work in Egypt.
In terms of tourism, incidentally, Egypt is also one of Germany’s favorite travel destination; since charter flights have resumed, German tourists are the biggest segment of foreign tourists.
With this interest in increasing German SME investment into Egypt, how is the GACIC facilitating this?
We organize trade missions from Germany into Egypt. The focus in the last couple of years has been on renewable energy and energy efficiency. Energy efficiency, in particular, has grown more and more important within Egypt ever since the country increased its electricity tariffs. There is now increased understanding within our Egyptian clients that a machine needs to be evaluated not just in terms of its output but its input requirements.
I believe the next step is bringing energy efficiency to the Egyptian consumer market. Currently, Egyptians do not really care about the energy efficiency of their household and electrical appliances, but with the removal of fuel and electricity subsidies, I anticipate this will become more of a concern. We have therefore started to offer training for consumer companies within Egypt about the business opportunities available in promoting energy efficiency to their consumer base here.
Finally, we also encourage Egyptian companies to visit Germany and participate in trade fairs, exhibitions and press conferences there, which allows them to create contacts and gain exposure within Germany.
In terms of oil and gas, how active are German companies in this sector?
Only one company, DEA, is really involved in oil and gas exploration in Egypt – they are really one of the last oil explorers from Germany! German companies are more active downstream, for instance, with Linde Engineering working in gas processing and ThyssenKrupp Industrial Solutions working in process engineering. In general, I would say Egypt is considered a very profitable market for German oil and gas companies.
Given how different German and Egyptian societies are, how would you assess the cultural fit between German companies and Egypt?
I think Egypt offers a very ‘spicy’ environment for German companies. There is very strong mutual respect between the two cultures. In fact, we have eight German international schools in Egypt and German is taught as a foreign language in Egyptian primary schools. Egyptians actually love to send their children to German schools because of the discipline and work ethic they learn. The Egyptians that graduate from German schools and universities are said to have an Egyptian brain and the German engine: the perfect combination!
One a more personal note, you have spent most of your career in Islamic countries, from Tunisia to Saudi Arabia to Malaysia, and of course Egypt. What have you found to be special about Egypt?
These countries all have very different flavors despite being Islamic. Even within the Middle East and North Africa (MENA) region, you have differences – the Gulf countries are very different from the Mediterranean Arab and North African countries, for instance. Gulf business owners act rather as shareholders in their own companies, hiring foreign management and coming in just to collect the profit at the end of the business cycle. It is completely different in Egypt: the owner is very involved with his company and maintains control over it.
In terms of size, of course, Egypt beats the whole of North Africa. You have successful entrepreneurs in Tunisia, Algeria and Morocco but the big guys are found in Egypt, which has traditionally been the center of the Arab world.
I would like to point out that Egypt is also a unique culture on its own. Tunisia, Morocco and Algeria can be grouped as countries in the Maghreb with a similar cultural thread running through them despite differing national mentalities, but Egypt really stands alone as Egypt, perhaps because it has had such a long and illustrious history spanning five millennia.
As you are now leaving your position here in Egypt after nearly a decade, what sort of legacy do you think you have left here?
The country has treated me extremely well and I am very grateful for the experiences I have had here. Egyptians absolutely deserve much better than what they have had to experience in the past few years but I firmly believe that they will overcome the challenges ahead. If I could have had contribute even a little to the projects and initiatives the Chamber has undertaken in the past nine years to help this country and its people even a little bit, I would be very proud of that.