At Cairo's largest shopping mall, Egyptians watch films from La-Z-Boy reclining chairs, shop for Escada handbags and sip coffees at Starbucks. Betting this is just the beginning of a spending boom, Gulf Arab and European companies are pouring money into the most populous Arab country, despite a global credit crisis and a slowdown in Europe, its main export market.
However, business analysts warn rising inflation could eventually curb consumer spending, stall reforms that have excited investors and anger the poor majority who have not yet seen the benefits of buoyant growth. Gulf Arab petrodollars, cuts in taxes and duties and a surging stock market have unleashed consumer optimism among the wealthier sectors of Egyptian society.
"When you've been in a bad state and things get a bit better, it feels great," said Sherif Idris, 41, while shopping at a glass-panelled mall overlooking the Nile. The Canadian-Egyptian, who moved back to Cairo a year ago to work for a private equity firm, said lower classes had yet to feel much benefit.
"Things could be ten times better than they are now." Spending on consumer goods is still limited to a small but growing middle class in a country where the United Nations says about one-fifth of the population of roughly 75 million lives on less than $1 per day, and most people do not have bank accounts.
"Because of the new government, you can feel the change in the economy," says Elhamy El-Kerdany, general manager of Citystars mall, opened in 2004 with funding from Saudi investors. "This is having a parallel impact on consumer spending."
Some analysts say inflation, which reached an 11-month high in the year to February at 12.1 percent, has not yet noticeably slowed spending in an economy that last year grew at 7.1 percent, the fastest rate in at least two decades. "Consumer spending has much farther to run despite the high inflation," said Angus Blair, head of research at the Cairo-based investment bank Beltone Financial.
"There is enormous momentum because of the growth in the economy and the tax cuts." Government officials have said Egypt is on track to match last year's growth, with foreign investment outweighing any negative effects from a global slowdown.
"If the government remains committed to reforms, you will see this growth continue," said Mary Nicola, Middle East economist at Standard Chartered Bank.
HEALTHY PICTURE: The rise in consumer spending spells record profits and rapid expansion for companies including banks, car makers, retailers and property developers. It also means Gulf Arab companies, flush with cash, are swooping on Egyptian assets for access to the country's large population.
Egyptian car distributor and manufacturer Ghabbour Auto said it was expecting net profit and revenue to grow by 50 percent in 2008 on brisk demand for vehicles. Lender Credit Agricole Egypt plans to double its network of branches by 2010 and estimates the number of Egyptians eligible for a bank account is growing by 25 percent a year. MasterCard says annual growth in the number of card users is among the highest in the world at more than 40 percent.
"Egypt is insulated from what is going on outside the region, like the subprime crisis," says Denzil Lawson, MasterCard's regional director. "The picture for Egypt is very healthy."
President Hosni Mubarak appointed a market-oriented government in 2004 and Egypt has outshone regional rivals in attracting investment, especially from the Gulf. The stock market jumped 51 percent last year and is up about 8 percent this year. Foreign investment surged to a record $11.1 billion last fiscal year.
Lebanon, a traditional destination for Gulf Arab investment, is locked in a political crisis, Morocco's economy stalled last year because of a drought and markets in Jordan and Tunisia are too small to lure much foreign cash. However, inflation remains a threat to the consumer boom.
RISKS: The central bank has already raised rates twice this year, saying inflation figures had exceeded its comfort zone. It said inflation had originally been driven by increases in food prices but had spread to other items.
"This is the great threat to the boom this year: that households are no longer able to afford discretionary consumer spending because of inflation," said Simon Kitchen, economist at EFG-Hermes, a Cairo-based investment bank.
Inflation could also make it politically more difficult to proceed with the free-market reforms, such as cutting expensive subsidies for products like petrol and diesel, that have helped the economy expand, some analysts say. Egypt has slashed income taxes and customs duties and has sold state companies, but higher inflation and rising food costs have aroused popular discontent with the liberalisation.
Thousands of workers have gone on strike in the past year, usually demanding wage rises and in some cases protesting against possible job cuts from privatisation.
Another possible worry for investors is what happens to these reforms if Mubarak, in power for a quybody is doing business in China," Khaled Oseily, businessman and mayor of Hebron, told Reuters. "The Chinese consul comes to Hebron and on one day issued some 600 to 700 visas to Hebronite businessmen."
China began to open up its economy around 30 years ago, using cheap labour to produce and export huge volumes of inexpensive goods that have undercut local industries in many developing countries.
In Hebron, the largest Palestinian city famous for its leather and handmade ceramics, the wave of cheap Chinese goods was the last straw for businessmen already battling Israeli travel restrictions that inflate costs and hurt economic growth. Israel says its network of checkpoints and roadblocks that carve up the West Bank is needed for security reasons. Palestinians say they amount to collective punishment.
On Sunday, Israel said it would remove about 50 "dirt roadblocks" in the West Bank and open a "permanent checkpoint" that obstructs the flow of travellers to the town of Jericho. Western and Palestinian officials said Israel had pledged in the past to remove West Bank barriers but failed to do so.
Meanwhile, many Palestinians have turned to the import trade, travelling to China to buy cheap goods to sell at home. Increasingly, and amid doubts peace talks with Israel will yield a deal for an independent Palestinian state soon, they are opting to stay. "Economic conditions in Palestine are very bad," said Hazem Shyoukhi, a gift merchant from Hebron who moved to the eastern Chinese city of Yiwu in 2006 to start an export business.
"There (in Hebron) we conducted our business based on news reports," he told Reuters by phone from Yiwu. "I had to listen to the newscast to check if there was a closure ... I worked under pressure merely to survive, so I decided to leave."
"MADE IN CHINA" China, which since the end of the Cold War has turned to the Middle East for half of its oil imports, is not just linked to the region by trade. Beijing has sought a bigger political role in the Middle East and has appointed an envoy to the Arab-Israeli peace process.
Palestinian diplomat Ahmad Kayed, who lives in Beijing, said in the past 10 years, more than 200 Palestinian businessmen had settled in China, but thousands of other Palestinian and Arab businessmen were frequent travellers to Chinese cities for trade.
Arabic restaurants, mosques and schools have opened throughout the vast country, he said. "Palestinian imports of Chinese goods are (worth) more than $2 billion through direct trade by Palestinian businessmen or through Israel," said Kayed, head of Palestinian-Chinese trade relations at the Palestinian embassy in Beijing.
Competition from cheaper Chinese goods has all but destroyed the manufacturing industry in the Palestinian territories, where the "Made in China" label is a common sight in shops.
The popular Crocs leisure shoes, made by US-based Crocs Inc, sell for 280 shekels ($78) in Israel but in Hebron, the copycat Chinese-made version goes for just 13 shekels ($3.6).
For five decades, Yasser Hirbawi was the only Palestinian manufacturer of the national black-and-white keffiyeh headdress, the symbol of Palestinian nationalism worn most famously by the late leader Yasser Arafat. Now, he wipes dust and cobwebs from an old weaving machine in his small, dark textile factory in Hebron.
"Two years ago I had to close down my factory because I couldn't compete with Chinese-made Hattas (keffiyehs) that sell for 40 percent less," said the 76-year-old, who himself wore a keffiyeh.
Hebron mayor Oseily said competition from Chinese goods coupled with Israeli restrictions had forced about 200 shoe factories to close in the city, putting 17,000 out of work. He said more than 40 percent of people in the Hebron area were unemployed and called the 250 Israeli army roadblocks there a "huge impediment" to business.
WORK ETHIC: Thousands of miles away in Yiwu, a city of 2 million people in China's eastern Zhejiang province, 30-year-old Shyoukhi had a happier tale. "Palestinian businessmen import everything from China. I even get orders to send Chinese-made Palestinian flags and the Palestinian keffiyehs," said Shyoukhi, whose export office does business with thousands of Palestinian and Israeli merchants.
Yiwu has become a buzzing trading spot thanks to the influx of Middle Eastern money. It is now a hub for selling made-in-China Arabic products, like fashion clothing and religious artefacts. Every Friday, buyers from Lebanon, traders from Yemen and businessmen from Egypt, gather for their weekly prayers. At wholesale markets in the city, makeshift stalls are stacked with everything from toothbrushes to belts.
Businessmen in Hebron have their business cards printed in English and Chinese, and many have even adopted Chinese names. Professor Wilfried Vanhonacker, who taught a course "Doing Business in China" at the Kellog-Recanati School of Business in Tel Aviv in February, said Hebronites needed to adapt to globalisation or see their businesses die.
"Production has moved to China and it will be moving next to Vietnam. There are 1.3 billion people in China with an incredible work ethic ... This will continue," said Vanhonacker, dean of the Moscow School of Business Skolkovo and author of several books on China.
In Hebron, Shehadeh Sammouh, once a small-time merchant, now owns a large store selling Chinese shoes, clothes, toys and household goods. He sells Chinese shoes for 70 percent less than a Hebron-made shoe. "Customers demand the goods made in China because they look better and are cheaper," Sammouh said.
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