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THE ROAD AHEAD
As the world emerges from an 18-month economic crisis, Egyptian government and business leaders are assessing the fallout and looking ahead with cautious optimism to a new beginning in 2010.
Compared to what has happened to the economies of the United States and some other western countries, Egypt came through 2009 in relatively good shape. The EGX 30 stock index, for example, on December 3 was 35.5 percent higher than it was at the beginning of the year. The broader EGX 70 and EGX 100 indices reflected similarly strong performances, up 38.9 percent and 38.3 percent, respectively.
Egyptian finance and banking institutions seemed insulated from the difficulties that plagued a US industry that required a massive government bailout and shouldered much of the blame for the downfall of America’s economy. “Our banking system was not plugged into the international system, so we didn’t see all of the mess that came out in banking abroad,” Minister of Finance Youssef Boutros-Ghali told The Financial Times newspaper. “All this about toxic assets, lack of supervision, unsupervised derivatives and credit defaults is completely alien here.”
Egypt’s financial sector did receive a reality check in late November when Dubai World asked to forego repayment of bonds and the Egyptian Exchange (EGX) suffered its biggest single-day drop in 18 months. While there was concern, no one was panicking. “The direct effect on the Egyptian economy is expected to be limited. The Egyptian economy and Egyptian institutions were not directly exposed to the debt of Dubai World,” said Minister of Investment Mahmoud Mohieldin at an AmCham Egypt special luncheon on December 8. Whatever anxiety existed quickly dissipated, and the Egyptian market soon was back on track.
Egyptian banks and financial institutions are known for portfolios that contain straightforward, uncomplex, low-risk instruments. While that stance helped the country’s financial sector to weather the global storm, it can indicate a lack of appetite for taking on the risks of consumer loans and extending credit to small and medium businesses, which are estimated to account for more than 70 percent of the country’s gross domestic product and half of its jobs. Availability of credit could be a significant engine for economic growth.
As reflected in the six snapshots of major sectors that follow, government and industry insiders alike are cautiously optimistic, both that the economic crisis has bottomed out and that Egypt’s economy can reattain pre-crisis levels of growth. The global falloff in trade is worrisome to the shipping industry and export-dependent sectors, such as textiles. In addition, creating meaningful employment opportunities will be necessary to sustain and grow domestic demand in sectors such as automotive and real estate.
On a whirlwind visit to Egypt in December, World Bank managing director Juan Daboub visited the Kureimat solar power plant and met with government officials, including Prime Minister Ahmed Nazif and Mohieldin. Daboub, who is responsible for World Bank operations in 89 countries, offered his assessment of the current economic situation and suggested some priorities for Egypt and other nations in the Middle East and North Africa (MENA) region.
He emphasized clean, renewable sources of energy, in particular solar: “Egypt has the potential to become the hub for the production of energy of this kind.” And he commended the government for instituting and maintaining an agenda of reform, which he identified as one of three priorities for any country, along with investing in infrastructure and establishing adequate social safety nets for the additional 90 million people worldwide made poor as a result of the crisis.
While Daboub agreed that “the worst is over,” he sees the biggest problem facing Egypt and other MENA countries as creating jobs. He noted that unemployment across the region is 15-25 percent greater than it was in 2007, and MENA countries face the daunting task of creating a total of 4 million additional jobs each year.
And the World Bank executive has no doubts about the best way to accomplish that: “A dynamic, in-competition private sector is the best way to create sustainable jobs.” He described job creation as “one of the best weapons to fight poverty.”
Daboub said that to attract foreign investment, countries must work to establish a level playing field with “clear rules of the game.” Public officials must be willing to strengthen institutions and fight corruption. “It’s not about privilege, it’s about open competition,” he said. “Government does have a role as referee, not as orchestra conductor.” Investors will be looking for “more information and more transparency” from governments.
As Egypt moves forward into a future full of uncertainties, one thing is sure: There will be no shortage of challenges.
Bertil G. Peterson
SNAPSHOT: AUTOMOTIVE
Staying upbeat after miserable year
BY SARAH MARQUER
Despite a constantly increasing number of cars clogging the streets, Egypt’s automotive sector suffered losses in 2009 comparable to those of western countries.
“2009 was a very bad year for the automotive industry, coming from 2008, which was the best year the industry has ever seen,” says Mohamed Abou Ghaly, CEO and managing director of Abou Ghaly Motors.
“During the last quarter last year – meaning October, November and December [2008] – the crisis had fully [taken hold] in the United States and Europe, which increased fear generally among people in the rest of the world, including Egyptian consumers,” says Rajeev Chaba, chairman and managing director of General Motors Egypt SAE. People refrained from purchasing vehicles, says Chaba, because they were afraid.
Chaba says that during the first quarter of 2009, “sales plunged 45 percent year-on-year across the entire automotive industry.” Industry sales were down 35 percent in the second quarter, an improvement over the first quarter. “Egypt’s banking sector was like the customers; there was relatively no effect on the banking/financial sector here, but the sector became cautious nonetheless [and] commercial and retail financing dried up,” says Abou Ghaly, noting that sales at his company hit “rock bottom in February, off 37 percent year-on-year.
Abou Ghaly points out, however, that sales then slowly began to pick up. Industry sales, for example, were off 15 percent year-on-year during the third quarter, though GM Egypt’s sales were down by only 7 percent.
Both Chaba and Abou Ghaly’s companies engaged in various strategies to help mitigate losses incurred during the crisis. GM Egypt made its operations “leaner” and “healthier,” increasing its market share despite experiencing lower sales volumes compared to 2008, says Chaba, noting that it forced “a recalibration and repurposing of our capacities.” He notes that the company’s strategies included launching new products, investing in the brand, laying off part-time and contract employees, and training employees to be more efficient and create flexibility in operations. Additionally, says Chaba, GM Egypt implemented liquidation programs to reduce inventory.
Abou Ghaly Motors, on the other hand, concentrated on after-sales services and in-house financing options. For example, customers might rent a car for a certain period of time and then purchase or return the vehicle, or they could opt for financing that allows balloon payments. Such programs, says Abou Ghaly, helped to keep cash flowing in the company. “We didn’t implement liquidation strategies too much because it is a little risky; customers might wait for the business to liquidate [inventory] again before buying another car,” he says, noting that all 602 employees at Abou Ghaly Motors were kept on the payroll.
One government measure designed to help the sector was the taxi initiative, a highly publicized program to replace cabs that were at least 30 years old with new, efficient models from GM Egypt and four other participating manufacturers. “Approximately 16,000-20,000 of the total number of automobiles sold in 2009 [in Egypt] (estimated to be about 202,000) are a result of the new taxi initiative,” says Chaba, who believes it was “the right move, at the right time.” But the program’s benefits did not occur across the board: Abou Ghaly says that his company and others that did not participate in the initiative received no government assistance during the crisis.
Chaba and Abou Ghaly agree that their industry was hit hard, but both remain positive about its future. Chaba believes the industry will grow 10 to 15 percent in 2010 and fully recover by mid-2011; Abou Ghaly expects full recovery, but not until at least 2012.
“I do believe a lot in this market, and in this country,” says Abou Ghaly. “We need some fine-tuning.”
SNAPSHOT: ENERGY
Focus on nuclear, renewable sources
BY RASHAD MAHMOOD
Fueled by domestic demand, Egypt’s energy sector sailed through last year largely unaffected by global economic troubles. As 2010 begins, many in the industry predict a bright future of increasing private sector involvement and decreasing reliance on fossil fuels.
Some experts, such as Khaled AbuBakr, managing director of TAQA Arabia, observed that slower growth in electricity demand gave suppliers a respite from the pressures of rapid increases in previous years. “We [Egypt] were consuming at a high tempo due to economic growth that started in 2005. In 2006-08, there was [insufficient] supply to provide energy to new projects. The economic crisis relieved that pressure and gave the market an opportunity to restructure,” says AbuBakr.
Overall, the energy sector is a big part of Egypt’s economy. The nation generates the majority of its electricity from natural gas, with the rest coming from a combination of coal, oil, hydroelectric and wind sources. According to statistics provided by the Egyptian Cabinet’s Information & Decision Support Center, as well as the Central Bank of Egypt, in FY 2008-09 Egypt produced 130 billion kilowatt hours of electricity and exported 898 million. Egypt’s fossil fuel exports significantly decreased in value, from $14.5 billion in FY 2007-08 to $11 billion in FY 2008-09, due to the dramatic fall in prices in late 2008. Natural gas production in Egypt is slightly more than 6 billion cubic feet per day, with proven reserves exceeding 77 trillion cubic feet. Egypt’s crude oil production continued its gradual decline, falling to 534,000 barrels per day in August 2009 from 622,000 in August 2008, according to the US Energy Information Administration.
Some of the most significant developments in the sector were regulatory changes. The government announced it will resume the gradual phase-out of electricity subsidies for industry in 2010. Reductions that had been planned for 2009 were delayed in response to Egypt’s lower growth rate. “The government announced their goal is to completely phase out subsidies by 2014,” said AbuBakr. “This is a gentle decline, since most other countries phased out their subsidies in five years, while Egypt is allowing seven or eight.”
Parliament is on the verge of passing a new electricity law that would allow private companies to sell electricity directly to consumers. According to AbuBakr, the new law would maintain government ownership of the transmission network while permitting private competition for government-owned suppliers. He said the law will also include a feed-in tariff for renewable energy sources, such as wind and solar, to encourage competition with other forms of generation. Feed-in tariffs usually oblige suppliers to buy electricity produced from renewable resources at a fixed price, most often over a fixed period, allowing them to compete with other forms of power generation.
In addition, nuclear power looms large on Egypt’s energy horizon. President Hosni Mubarak announced in 2006 that the country would pursue nuclear power generation, hiring the Australian firm WorleyParsons for about $200 million as consultants and planners on the project. Osama El Said, managing director of Masa Electro, expects that the announcement of the site of the first reactor will come in the first quarter of 2010, and that a nuclear power law will pass soon that includes provisions for the creation of a nuclear regulatory body.
In the long term, AbuBakr sees the potential for Egypt to produce solar energy and export it to Europe using new high-efficiency transmission cables, while taking advantage of carbon credits. The government has consistently stated a goal of having 20 percent of Egypt’s electricity provided by renewable sources by 2020. According to El Said, the Zaafarana wind farm has a capacity of nearly 400 megawatts, which the government hopes to increase to more than 500. “I think exporting to Europe is a long-term goal,” El Said notes. “We need to address our own transmission infrastructure before exporting to Europe will become viable.”
SNAPSHOT: REAL ESTATE
Largely intact, poised for resurgence
BY LOUIS M. WASSER
The origins of the global financial crisis can be found in overseas housing markets. But while many Egyptian industries have been hit hard amid flagging worldwide economic conditions, the country’s real estate sector has remained largely intact – a sharp contrast to counterparts elsewhere.
“The real estate market in Egypt has been resilient during the year of the crisis, while everything elsewhere was falling down,” says Jan Pawel Hasman, real estate analyst at EFG-Hermes.
However, deteriorating economic conditions did take their toll on the local sector to some extent, with sales suffering last year.
“[The] market was static. Nobody was selling or buying,” says Hisham Halaldeen, senior investment analyst at Naeem Holding.
Alongside damaged sales, cancellations blossomed – at least earlier in the year. Daniyah Darwish, EFG-Hermes real estate analyst, says residential “cancellations outpaced sales in Q1 2009 and probably Q2 2009, while sales outpaced cancellations in Q3 2009.”
Despite problems on the sales side, many developers have been pushing to speed up the execution of their projects in order to take advantage of low construction costs.
“You’ll find that a lot of developers are trying to finish their projects within [2009] or [2010],” Halaldeen says, citing reduced prices for construction materials.
Lower costs, primarily steel prices – plus government spending on infrastructure – actually pushed growth in the sector forward in 2009, says Malak Youssef, construction analyst at EFG-Hermes. “Surprisingly, the construction sector’s growth accelerated in 2009, and was the main driver for GDP growth [in that] year,” she says.
Although sales were battered in 2009, a large amount of unfulfilled demand remains in the market. Sales are expected to increase moving forward, although a return to pre-crisis boom times appears unlikely anytime soon.
“I think people realize that after a shakeup the demand still exists. The needs are still there,” Halaldeen says.
Halaldeen explains that the bulk of residential demand is in the class B and C segments – areas with the potential to fuel growth for developers. In recent years, much housing development activity has concentrated on the high end. For commercial space, Halaldeen says, the supply of high-quality properties in the market is lacking, but construction is ongoing.
“Companies are trying to make their offerings more affordable and more attractive to home buyers,” Darwish says. “Most of the developers have managed to maintain their prices per square meter while reducing the size of their [residential] offerings.”
Making housing options more affordable won’t automatically translate into an immediate and dramatic increase in supply where it is needed most: the low- and middle-income segments of the population.
“Eventually, where there is demand there has to be supply,” says Darwish, acknowledging that it won’t happen overnight. “It could take years before this supply-demand gap narrows down.”
SNAPSHOT: SHIPPING
Staying afloat in troubled waters
BY SARAH MARQUER
The shipping industry in Egypt is fairly small vis-à-vis other nations. Nonetheless it was dramatically affected by the global financial crunch.
Shipping is the first industry to suffer in an economic crisis, says Mahmoud Hamdy, managing director of Pyramid Navigation, an Egyptian company specializing in bulk cargo shipments and tanker lines, including chartering vessels.
“The shipping industry is the arm of international trade [and] carries more than 90 percent of the world’s trade,” says Mohamed El-Ahwal, CEO of International Associated Cargo Carrier (IACC) SAE, another Egyptian shipping company. The minute trade decreases, the shipping industry suffers, he says.
In January 2009, the Suez Canal saw the least amount of traffic in six years. For the month, 1,313 ships passed through the canal, 376 less than in January 2008. Correspondingly, canal revenue for January 2009 was $332.4 million, off $81.8 million year-on-year. In October 2009, revenue was up to $397.5 million, but that was still $70 million less than the year before.
Hamdy and El-Ahwal agree that their businesses were hurt early in the crisis, in the last quarter of 2008. Hamdy says that about four years ago, average daily hire for panamax ships (each with a capacity of 65,000 to 75,000 tons) ran $50,000 to $70,000. Between April and June 2008, he explains, the average daily hire for the same ships was $70,000 to $90,000. “The market was crazy, but unrealistic,” says Hamdy. In September 2008, however, average daily hires for the same ships were dropping quickly, and by January 2009 the average daily hires for panamax ships had sunk to $2,000.
Nor was El-Ahwal’s business immune to the crisis. “In 2008, we had a target to move 300,000 tons of steel from Egypt to Saudi Arabia; we actually reached 299,000,” he says. “In the first half of 2009, we only carried 20,000 tons.” Additionally, he says, most companies engaged in freight forwarding and other cargo services decreased rates 30 to 40 percent.
Despite substantially lower revenue, Hamdy and El-Ahwal’s companies were able to weather the crisis, thanks in large part to long-term contracts at fixed prices for 2009 and, in El-Ahwal’s case, the utilization and growth of container services. Neither company laid off employees. While IACC is still not breaking even on some of its services, El-Ahwal says, 2009 revenue was enough to allow the company to cover operating costs. Similarly, Hamdy says that though Pyramid Navigation’s year-on-year-revenue during the first six months of 2009 dropped 60 percent, the company will finish the year down 40 percent compared to 2008.
El-Ahwal and Hamdy say they saw several colleagues and other shipping companies forced to implement drastic cost-cutting strategies, such as laying up ships or selling them for scrap metal.
With regard to government support during the tough times, El-Ahwal and Hamdy say none was received by them or their counterparts in the industry. In fact, El-Ahwal notes that land rental charges in the ports his company serves increased fivefold in 2009.
On the bright side, Hamdy says, some stabilization has occurred, noting that the average daily hire for his panamax ships, for example, is up to $30,000. The worst may be past, but El-Ahwal is not convinced that the industry is headed for a full recovery anytime soon. “We’re not going to see normal shipping levels, especially in container services, before 2013,” he says.
Other than a weak global economy, Egypt’s shipping industry is burdened with other problems. Piracy, which has surged during the crisis along the East Africa coast, particularly in the Gulf of Aden, has caused some companies to avoid the region. “I don’t think there is a relation between the piracy and the crisis,” says El-Ahwal. “They are two standalone issues that unfortunately came together at the same time.”
Hamdy and El-Ahwal agree that a lack of modern regulation is a significant problem for Egyptian shipping companies and see a compelling need for the reestablishment of an independent ministry to handle maritime issues. Shipping matters currently are under the authority of the Ministry of Transport, Hamdy says, but an independent entity could facilitate processes and transactions, such as buying and selling vessels, as well as better regulate cargo claims and related court cases. Moreover, the laws that govern shipping in Egypt need to be modernized, he says.
Lastly, El-Ahwal points out that more investment must be directed toward training Egyptians as workers and seamen. “We have the manpower... and the institutes to teach [them],” he says, stating that the industry has the potential to employ a large number of Egyptians.
SNAPSHOT: TEXTILES
Exports offer unrealized potential
BY SARAH MARQUER
Egypt’s more than 80-year-old textile industry has suffered significantly during the past year and some see more government support and a better trained workforce as keys to future success.
“Worldwide, textile imports went down about 15 percent,” says Bassem Sultan, managing director at the Egyptian International Company for Knitting & Dyeing (DYETEX), who adds that total textile exports reached $913.8 million in 2008.
Part of the government stimulus package was a 50 percent increase in subsidies for textile and garment exports from January through June, according to Sultan.
Magdy Tolba, chairman and managing director of Cairo Cotton Center, believes the extra assistance was helpful, but notes the subsidy increases ended without notice in July. “It was a crisis for everyone because when we make our budgets, we make them for six months ahead of time,” he says.
There was, however, assistance on other fronts. “The government also made training available through the Industrial Modernization Center and International Training Center & Consultation for industry workers to help them become more productive [and] efficient,” says Sultan, though he believes the government could have done more. “Most other countries devalued their currencies,” he says, noting that the textile industry would have benefited if Egypt had done the same.
Some say one positive result of the crisis is that it served as a catalyst to increase productivity and efficiency. Sultan explains that DYETEX, for example, conducted time and motion studies to reduce the time spent producing each of its products, and introduced new, “greener” machines that reduce water consumption and expenses.
While Egypt’s textile industry has gained some momentum in recent years thanks to trade agreements such as that for qualifying industrial zones, Tolba and Sultan say the global crisis highlighted and exacerbated some problems that already existed.
Tolba, who thinks Egypt’s textile industry missed an opportunity to profit during the crunch, says the lack of qualified and skilled employees, both for factory and management jobs, was a bigger problem than the crisis. “The official capacity [at my factory in Qalioubiya] is close to 4,000 workers. I have a shortage right now of at least 1,000 workers,” he says. “I have lines that have stopped production. I have more than 450 machines, many [of which] aren’t working.” He says the shortage of qualified labor has had a significant impact on orders from major clients, such as Gap and Calvin Klein: “More than 90 percent of the cancellation of orders is not because of the crisis, it’s because of the performance.”
Experts contend that more government assistance and better worker training are necessary if the industry is to return to normal growth rates and increase exports. “The government is interested in helping this industry grow,” says Sultan, “but the industry in general needs time to mature.” He predicts the global economy will worsen this year and the textile industry won’t stabilize until mid-2011.
What is certain is that it is in the interest of government and industry to work together to maximize the potential of the textile business. Tolba points out, for example, the US imports nearly $100 billion in textiles annually, and only $850 million of that is from Egypt.
SNAPSHOT: TOURISM
Industry avoids serious downturn
BY SARAH MARQUER
Tourism is one of Egypt’s most important sources of foreign currency, and many in the industry feared their business would suffer a serious setback because of the global economic crisis. By and large, those fears proved to be unfounded as Egypt’s tourism sector remained surprisingly resilient in 2009.
According to Omayma El-Husseini, media adviser and spokesperson at the Ministry of Tourism, Egypt saw 12.8 million tourist arrivals and revenues of $10.8 billion in 2008. “We hope that [for 2009] we’ll only see a decrease of somewhere between 2 and 2.5 percent [in arrivals],” says El-Husseini. “But until the end of November, our numbers totaled almost 11.5 million arrivals.”
She notes, however, that tourist arrivals were down 3.5 percent year-on-year for January through November and revenue is likely to decrease by 2-3 percent. Revenues in 2008 totaled $10.8 billion. This, she says, is much better than the 20 percent decrease the ministry originally anticipated.
Cesare Rouchdy, regional director of marketing, Egypt for Four Seasons Hotels, believes the number of tourist arrivals in 2009 actually was much lower, explaining that government figures include “day-trippers” and foreign residents.
The tourism industry first saw the effects of the crisis in December 2008 and January 2009, El-Husseini says, when the number of tourist arrivals dropped 4.5 percent and 13.5 percent year-on-year, respectively. “We were expecting... that our losses would come up to 20 percent,” she says.
Rouchdy believes “five-star hotels suffered the most.” Four Seasons Hotels did not feel the effect of the crisis until about April, he says, crediting the effect of advance reservations. Once the crisis set in, Rouchdy says, the booking window for his hotels went from three months to six weeks as cautious customers waited for last-minute deals. Occupancy rates also dropped about 10 percent, to 50-60 percent of capacity, at most of the Four Seasons hotels in Egypt. Rouchdy says the exception was the Four Seasons Sharm El Sheikh, where occupancy rates actually increased about 3 percent compared to 2008.
In reaction to the crisis, El-Husseini says Minister of Tourism Zoheir Garana increased its advertising with foreign tour operators and discouraged price-cutting. “He made it a point to not reduce prices,” she says, “because for the prices to be restored to their regular levels would take somewhere between four and five years.” Rouchdy concurs, noting that lowering prices would only dilute revenue from tourists who would have come to Egypt anyway.
Subsequently, says Rouchdy, value-added programs were implemented to encourage tourism among most of Egypt’s hotels and tour operators. For example, the Four Seasons offered packages such as “Stay longer,” which gave guests a third night free, and “Experience more,” in which guests who booked for three nights received $50 a day to spend in the hotel.
By the end of 2009, occupancy rates and the number of tourist arrivals began to increase, say both El-Huessini and Rouchdy. El-Husseini says stabilization won’t occur until the second half of 2010.
Moving forward, Rouchdy believes the Egyptian tourism industry is unlikely to return to its pre-crisis levels unless it pays more attention to the Persian Gulf market, which he says has been neglected for the past few years.
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